Revise Economic growth and sustainability for Cambridge 9708 (9.2)

Economic growth is defined as the increase in the potential output of an economy over time, commonly measured by the annual percentage change in real Gross Domestic Product (GDP). It is crucial to distinguish between nominal and real GDP. Nominal GDP measures the value of output at current prices, meaning it can increase due to either a rise in output or a rise in the general price level (inflation). To get a true picture of whether the volume of goods and services has increased, economists use real GDP, which is adjusted for inflation. Real GDP is calculated by valuing output at constant prices from a base year, thereby isolating the change in quantity produced from the change in prices.

Long-run economic growth is represented graphically by a rightward shift of the Long-Run Aggregate Supply (LRAS) curve or an outward shift of the Production Possibility Frontier (PPF). The LRAS curve is vertical at the full employment level of output, indicating that in the long run, output is determined by the economy's factors of production, not the price level. A rightward shift signifies an increase in this potential output. This is caused by improvements in the quantity or quality of factors of production, such as net investment in capital goods, technological advancements, an increase in the size or skill of the labour force, or the discovery of new natural resources. Visual tools like GeoGebra can be used to model these shifts, demonstrating how changes in investment or technology expand an economy's productive limits.

Sustainable development is a crucial concept that challenges the traditional pursuit of economic growth at all costs. The most widely accepted definition, from the Brundtland Commission (1987), is "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." This implies a balance between economic, social, and environmental objectives. It recognises that the natural environment is a finite resource and that its degradation can undermine long-term economic prosperity. Sustainable growth, therefore, is a rate of growth that can be maintained without creating significant economic problems, such as resource depletion or environmental damage, for future generations.

A significant conflict often exists between maximising short-run GDP growth and achieving long-term environmental sustainability. Industrial production and increased consumption, which drive GDP, frequently generate negative externalities like pollution and carbon emissions, contributing to climate change. The extraction of non-renewable resources (e.g., oil, gas, minerals) boosts current output but permanently depletes the stock available for future generations. This process of resource depletion and environmental degradation represents a running down of 'natural capital', a cost not accounted for in conventional GDP statistics. Consequently, a high GDP growth rate may mask a decline in long-term potential welfare, creating a fundamental trade-off for policymakers between current prosperity and future viability.