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In chapter 8 the textbook says that
there are TWO DEFINITIONS of EG, but in chapter 1 (Lessons
1b and 1c) we learned another definition. So actually there
are THREE DEFINITIONS of EG.
I believe the best way of
understanding the difference between them is to discuss
whether the growth is ACHIEVING THE POTENTIAL of the economy
or INCREASING THE POTENTIAL of the economy. Both of these
increase RDO (real domestic output) and it is an increase in
RDO that is the COMMON DEFINITION of EG. But this everyday
definition of economic growth, the one you hear on the news
broadcasts, doesn't tell us if the economy is achieving
its potential by producing more OR whether the economy
is has increased it potential and therefore is ABLE
to produce more.
Why is this distinction important?
Why do we care? Well, there are different CAUSES and
POLICIES for each approach to growth and both approaches
increase output and therefore reduce scarcity and increase
society's satisfaction. As we should remember from lesson
1b, reducing scarcity and increasing society's satisfaction
is the goal of economics.
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