5. Use production possibility curve diagrams to explain the differences between actual output and potential output and between economic growth and economic development.



B

A

PPF


Showing increasing actual output in the PPF

Text Box: Consumer Goods
Text Box: Consumer Goods

Capital Goods
















The graph above illustrates actual output in an economy. This is shown but point A moving upwards and expanding to point B. This occurs when the economy has increased the production for capital goods and consumer goods while PPF still remains the same. The economy has grown while using its available resources meaning there are many factors such as longer workdays, using more raw materials, or increasing land use which results in higher productivity. But since the PPF has not shifted outwards, any increased use of production factors must take into consideration that all other circumstances remain the same.







A

PPF1

PPF


Showing increasing potential output in the PPF

Text Box: Consumer Goods
Text Box: Consumer Goods

Capital Goods














An increase in potential output is when the PPF shifts outwards. This shows that the present out has not changed but the conditions for increasing future output has been improved. In other words, the economy has incurred more favorable conditions for the production of goods and services. IN the graph above, the economy was initially at point A and for certain reasons, the economy have increased its potential output, shown by the PPF shifting outward to PPF1. However, point A still remains at the same place. The factors that could cause the PPF to shift is a change in the quality and/ or quantity or the factors of production. Some factors that could change the quality of the factors of production is an improvement in the quality of labor such as education, training which will result in the ability of workers to improve their skills.









Economic growth is when the economy has an increase in national income during a time period which is measured by GDP and GNP per capita. Economic development is a wider concept which aims to reduce poverty, income inequality and unemployment. Economic growth is a quantitative concept whereas development is a qualitative concept which looks into the quality of life rather than how much money the economy is producing.
In detail, economic growth does not necessarily mean the economy’s development has improved. Growth usually leads to pollution and negative environmental consequences. This is because to increase the GDP in an economy, it will usually increase it levels of productivity and the use of factories and machines as well. With all the chemicals used, this can cause air pollution which decreases the standard of living. Also, increase in GDP can increase the income inequality of the economy. In other words, the rich gets richer and the poor become poorer. This can occur because not everyone’s income will increase when the economy is growing, therefore with higher prices for goods and services; some consumers are not able to consume more or even the same amount they did before the growth.
In the other hand, economic development is a broader concept which looks into factors such as standard of living, education and health care services, and environment. What would be ideal for development would be increasing real GDP per capita while lowering poverty levels and increasing equality in distribution of income. Also, development can improve if the health care and education has increased its quality which provides better life for consumers. Another way for economic development to occur is if employment opportunities increase across a broad section of society giving more chances for everyone in the population to get employed.