What drives long-run economic growth, and how is it shown in the models?
Topic 5.6 Economic Growth: define economic growth, identify its determinants, and show it as an outward shift of the production possibilities curve and the long-run aggregate supply curve.
A focused answer to AP Macroeconomics Topic 5.6, covering the definition of economic growth, the role of productivity and the determinants (physical capital, human capital, technology, and resources), and how growth appears as an outward shift of the PPC and LRAS, with a worked question.
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What this topic is asking
Topic 5.6 is economic growth: the long-run expansion of an economy's productive capacity. The College Board wants you to define growth, identify its determinants (especially productivity), and show it in two models, the outward shift of the production possibilities curve and the rightward shift of long-run aggregate supply.
What economic growth is
The engine of long-run growth is productivity, output per unit of input (often output per worker). An economy grows when it has more resources or uses them more productively.
The determinants of growth
Growth in the two models
Note the link to investment and saving: building physical capital requires investment, which is funded by saving in the loanable funds market. When deficits crowd out investment, capital grows more slowly and so does the economy, which is why growth, deficits, and crowding out are taught together in Unit 5.
Try this
Q1. Name two determinants of long-run economic growth. [2 points]
- Cue. Any two of: physical capital, human capital, technology, natural resources (or rising productivity).
Q2. How does economic growth appear in the AD-AS model? [1 point]
- Cue. As a rightward shift of the long-run aggregate supply curve (higher potential output).
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2019 (style)1 marksMultiple choice. Which of the following would most likely increase an economy's long-run rate of economic growth? (A) An increase in aggregate demand. (B) A fall in the price level. (C) An increase in investment in physical and human capital. (D) A cut in interest rates only. (E) A rise in consumer spending.Show worked answer →
The answer is (C). Long-run economic growth comes from increases in productive capacity: more and better physical capital, more human capital (education and skills), improved technology, and more resources. Investment in physical and human capital raises productivity and shifts LRAS and the PPC outward.
(A), (B), (D), and (E) are demand-side or price-level changes that affect short-run output, not the economy's long-run capacity to produce. Only (C) raises potential output, so it is correct.
AP 2021 (style)4 marksFree response. (a) Define economic growth. (b) Identify two determinants of long-run economic growth. (c) Draw a correctly labelled production possibilities curve and show economic growth. (d) Explain how the same growth would appear in the AD-AS model.Show worked answer →
A 4-point definition-and-graphing FRQ.
(a) Definition (1 point): economic growth is an increase in an economy's real output (real GDP), or in real GDP per capita, over time; equivalently, an increase in potential output.
(b) Determinants (1 point): any two of more physical capital, more human capital (education and skills), improved technology, more natural resources, or higher productivity.
(c) PPC (1 point): draw a PPC and show it shifting outward (to the right), representing an increase in the economy's productive capacity.
(d) AD-AS (1 point): the same growth appears as a rightward shift of the long-run aggregate supply curve (and SRAS), raising full-employment output.
Markers reward the increase-in-real-output definition, two valid determinants, an outward PPC shift, and a rightward LRAS shift.
Related dot points
- Topic 3.4 Long-Run Aggregate Supply: explain why the long-run aggregate supply curve is vertical at full-employment (potential) output, and identify what shifts it.
A focused answer to AP Macroeconomics Topic 3.4, covering the vertical long-run aggregate supply curve, full-employment and potential output, the natural rate of unemployment, the link to the production possibilities curve, and the determinants of long-run growth, with a worked question.
- Topic 1.2 Opportunity Cost and the Production Possibilities Curve: use the PPC to illustrate scarcity, trade-offs, opportunity cost, efficiency, and growth, and explain constant versus increasing opportunity cost.
A focused answer to AP Macroeconomics Topic 1.2, covering opportunity cost, the production possibilities curve, efficient and inefficient points, the law of increasing opportunity cost, and how growth shifts the PPC, with full worked calculations.
- Topic 5.7 Public Policy and Economic Growth: evaluate how supply-side and growth-oriented public policies, such as investment in capital, education, infrastructure, and research, raise long-run potential output.
A focused answer to AP Macroeconomics Topic 5.7, covering the public policies that raise long-run growth, including investment incentives, education and human capital, infrastructure, research and development, and supply-side tax policy, and how each shifts LRAS, with a worked question.
- Topic 5.5 Crowding Out: explain how government deficit borrowing raises the real interest rate and reduces private investment, using the loanable funds market.
A focused answer to AP Macroeconomics Topic 5.5, covering the crowding-out effect, how government deficit borrowing raises the real interest rate and reduces private investment in the loanable funds market, the long-run growth consequences, and the contrast with monetary policy, with a worked graphing question.
- Topic 4.7 The Loanable Funds Market: draw the loanable funds market, explain the supply of saving and demand for borrowing, and show how shifts determine the real interest rate.
A focused answer to AP Macroeconomics Topic 4.7, covering the loanable funds market, the supply of saving and demand for borrowing, the real interest rate, the determinants that shift each curve, and the contrast with the money market, with a worked graphing question.
Sources & how we know this
- AP Macroeconomics Course and Exam Description — College Board (2023)