Economic growth means the economy can produce more than before. On a graph, the production possibilities curve (PPC) shifts outward and long-run aggregate supply (LRAS) shifts right. Use the sliders to change what drives growth and watch both graphs respond together.
Dashed grey lines show where the economy started. Solid lines show where it is now. Potential real GDP starts at an index of 100.
Two countries start with the same PPC. Country A puts most of its output into consumer goods. Country B gives up some consumer goods now to build more capital goods. Move the sliders to see whose PPC grows more over the next 20 years.
Both economies start with real GDP per capita of $20,000 (a made-up example). Change the growth rates and the year marker. The Rule of 70 says an amount doubles in about 70 ÷ (growth rate in percent) years.
Actual real GDP rises and falls with the business cycle. Potential GDP is the smooth trend underneath. Growth policy is about raising the trend line, not about smoothing the bumps.
An increase in potential output over time. The best measure is the percentage change in real GDP per capita, because it adjusts for both inflation and population.
Output per worker per hour. Living standards rise mainly when each worker can produce more, thanks to more capital, more skills, or better technology.
Growth shifts the PPC outward and the LRAS curve to the right. Both mean the same thing: the economy can now produce more at full employment.
Moving from a point inside the PPC to a point on it means putting idle workers and machines back to work. Output rises, but capacity did not change, so the PPC does not shift.
Producing more capital goods now means fewer consumer goods now. The payoff is a larger outward shift of the PPC in the future.
Doubling time ≈ 70 ÷ growth rate. At 2% growth, real GDP per capita doubles in about 35 years. At 7%, it doubles in about 10 years.
Each determinant raises what the economy can produce, so each one shows up the same way on both graphs.
| Determinant | PPC | LRAS | Example |
|---|---|---|---|
| More physical capital | Shifts outward | Shifts right | Firms build new factories and buy better machines |
| More human capital | Shifts outward | Shifts right | More workers finish college or job-training programs |
| Better technology | Shifts outward | Shifts right | A new process lets each worker produce more per hour |
| More natural resources | Shifts outward | Shifts right | Discovery of a new mineral deposit |
| Larger labor force | Shifts outward | Shifts right | Population growth or immigration adds workers |
| Loss of capital or resources | Shifts inward | Shifts left | A natural disaster or war destroys factories and roads |
| Lower unemployment (recovery) | Movement from inside toward the curve | No shift | Idle workers are rehired after a recession |
AP-style multiple choice. Pick an answer to see the explanation.
The vocabulary for topic 5.6. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 5 terminology guide.