Actual economic growth refers to the real increase in a country’s GDP over time. It reflects the output of goods and services produced. Potential economic growth is the maximum output an economy can sustain over the long term without triggering inflation. It shows the economy’s full capacity to produce goods and services. All resources must be fully used. This prevents overheating or excessive inflation.

A negative output gap happens when actual economic output is lower than potential output. This situation indicates under-used resources like labour and capital. Governments can close a negative output gap by employing demand-side policies. These include increasing government spending, lowering taxes and reducing interest rates. These measures stimulate consumer demand and business investment, boosting overall economic activity and closing the gap.

A positive output gap happens when actual economic output exceeds the economy’s potential output. This often occurs when demand for goods and services exceeds the economy’s capacity to produce, leading to inflationary pressures. Various factors can contribute to a positive output gap. These include excessive consumer spending, high levels of investment, or a booming economy. These conditions result in rising wages and prices.

Supply-side policies focus on improving the productive capacity of the economy. Examples include:

• Investment in education and skills training to enhance human capital.
• Tax cuts for businesses to encourage investment in capital and innovation.
• Deregulation to foster competition and improve market efficiency.
• Improving infrastructure to reduce bottlenecks and increase productivity across sectors.

These policies aim to increase the economy’s efficiency. They make it capable of sustaining higher levels of output in the long term.

Technological advancements play a critical role in driving economic growth by improving productivity and creating new industries. Innovations allow businesses to produce more goods and services with fewer resources, lowering costs and boosting efficiency. New technologies also open up new markets and opportunities for investment, leading to increased economic activity. For instance, advancements in automation and artificial intelligence have significantly transformed manufacturing and service sectors, driving economic growth globally.