Gabriella Jackson

"High saving promotes faster growth. So having more savers in the global economy should be good for our long run prosperity."
Long-term economic growth is the expansion of the productive potential of an economy. Therefore, to ensure such growth, aggregate supply must continually shift outwards as shown in the diagram below.
AS

AS

Price Level

1

2

P 1

P 2

AD

Figure 1: Long-term economic growth

1

Real Gross Domestic Product

Y

Y

1

2

The diagram shows aggregate supply shifting outwards from AS to AS and consequently the price level falls from P to P and real gross domestic product rises from Y to Y .
1

1

1

2

2

2

Saving refers to the income of a household, firm or government that is not spent but set aside for future consumption or investment. It is vital to an economy because it provides finance for capital investment. Investment refers to the purchase of capital goods, which are used to aid further production, meaning the productive potential of the economy increases.
Without such investment, aggregate supply and the productive potential of the economy would remain static. If this were to be accompanied by aggregate demand increasing at a fast pace, overheating in the economy would be the likely result.
AS

Price Level

1

P P 2

1

AD 1

Real Gross Domestic Product

Y 1

Y 2

AD Figure 2: Economic overheating 2

1

Gabriella Jackson

As shown in Figure 2, if aggregate demand increased from AD to AD , despite real gross domestic product increasing from Y to Y , it would be coupled with inflationary pressure, since the price level would increase from P to P . Long term, this is