Economic Growth Takes Place when

  1. There is Increase in the national Income of a Country
  2. Or Increase in Country’s Productive Capacity

To understand the concept of Economic Growth, we use many tools like that of the  Production possibility Curve. Let us first describe this simple concept :

Production Possibility Curve

The PPC represents a Boundary in  the sense that it shows the current availability of resources and technical knowledge, a country cannot produce beyond its potential capacity. So the PPC is therefore a Short Run Diagram; in the long run the PPC can be increased. So it is shifted forwards or rightwards. It is generally considered that country’s PPC curve Shifts forward but there are certain possibilities that it may go leftwards.

For Example: Countries that are going through warfare, Lets take Afghanistan whose Aggregate Demand decrease to a very high level during the war period and even after the war. We can also take another example of Revolution as in the country of Iran during the Khomeini revolution which flew a lot of foreign investment and a decrease Aggregate Demand during his regime. Such factors of war, natural disaster or war basically affects the factors of Consumption, Investment and Government Expenditure that as a consequence affects the Aggregate Demand which slows down the economy.

Graphically describing the PPCPPC

The Above Graph shows all the possible combinations of two goods which can be produced at any one time, given existing resources. If all resources are devoted to producing Good X, than ON units can be Produced. If however, all resources are used to produce Good Y, than OM units can be produced. If a combination of X and Y is desired than all possible combinations are shown by the line MN which is drawn convex to the origin.

This line shows both factor combination and factor substitution.  It shows how a country’s factors of production can be combined in different ways in order to vary the pattern of Output. It also shows how factors can be substituted for each other in order to produce less of one good and more of another. We also see a shift in the PPC that couldn’t possibility be the Increase in the potential capacity of country’s production. For example : Technological Factor, Increase in Capital etc showing the shift as N1M1.