Economic growth refers to the growth of production, seen in terms of actual and potential production capacity. Actual economic growth, also known as short term growth, is commonly measured in terms of a percentage change in the real Gross Domestic Product (GDP). The Production Possibility Curve (PPC) illustrates the resource and production capacity an economy can attain with the given amount of resources and level of technology.
The increase in government expenditure, such as the provision of subsidies to consumers, raises consumption and investment, so as to raise aggregate demand, production and national output. Consequently, production level contributes to an increase in the actualized production of goods and services, thus achieving higher actual economic growth.
Economics Tuition – National Income Accounting and Economic Growth – Diagram
As seen from the PPC, the increase in government spending contributes to the shift of the production level from point A to point B, thus attaining actual economic growth.
