Cambridge IGCSE Economics: Causes, consequences and policies of economic growth (0455) – Revision Notes

These notes condense sections 4.6.4 to 4.6.6 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026: causes of growth, costs and benefits of growth, and policies to promote growth. They are for the final weeks. For full explanations and longer worked examples, use the study guide. Economics 0455 is not tiered. The figures are made up for illustration. Check your knowledge with the practice questions, find your weak spots with the free diagnostics, and tick off topics on the printable checklist. The course home is the Cambridge IGCSE Economics hub.

4.6.4 Causes: the key distinction

Move	Diagram	Cause	Speed
Closer use of existing resources	Point moves from inside the PPC toward the curve	A rise in total demand	Can be quick
More capacity	The whole PPC shifts right	Investment, technology, quantity of factors, quality of factors	Usually slow

Definitions to learn

• PPC: a line showing the most of two kinds of output an economy can make from its resources when none are wasted.
• Total demand: all spending on the economy’s output (households, firms, government, foreign buyers).
• Potential output: the most the economy can produce with its resources fully used.
• Net investment: gross investment minus depreciation. Only net investment adds to the capital stock.
• Productivity: output per worker (or per unit of any input).

Chain: demand to growth below capacity

Higher total demand → firms sell more → firms hire idle workers and use idle machines → output and employment rise → real GDP rises → unemployment falls → the economy moves toward the PPC.

Limit: at the curve, more demand only raises prices.

The four causes of a PPC shift

1. Investment: more capital goods, so each worker produces more.
2. Technology: better methods give more output from the same inputs.
3. Quantity of factors: more land, labour or capital (new resources found, a bigger working population, immigration).
4. Quality of factors: better trained, healthier workers; more advanced machines.

Method: utilisation and growth

1. Utilisation (%) = actual output ÷ potential output × 100.
2. Spare capacity = potential − actual.
3. Growth (%) = (new − old) ÷ old × 100.

Worked reminder. Potential output is 1,000 and actual output is 800. Utilisation = 80%; spare capacity = 200. Demand rises and output reaches 950. Utilisation = 95%. Growth = (950 − 800) ÷ 800 × 100 = 18.75%. No new resources were needed.

Method: net investment

Gross investment 120, depreciation 80 → net 40. Capital stock 1,000 → 1,040, a rise of 4%. If gross investment equals depreciation, the stock does not grow.

Method: productivity and labour

Output per worker = output ÷ workers. If output per worker rises 5% and the labour force rises 2%, potential output rises by 1.05 × 1.02 = 1.071, which is 7.1% (not 7%). Multiply the changes.

PPC table reminder (Country A, invented)

Consumer goods	0	40	70	90	100
Capital goods	100	90	70	40	0

A point (50, 50) lies inside the curve. A 10% rise in capacity shifts every point out: (70, 70) becomes (77, 77). Opportunity cost rises along the curve: going from 70 to 90 consumer goods costs 30 capital goods, that is 1.5 capital goods per extra consumer good.

Link to opportunity cost: investing more now means fewer consumer goods now, but a PPC further out later.

4.6.5 Costs and benefits of growth

Benefits	Costs
Higher living standards	Pollution and resource depletion
More jobs	Congestion, housing pressure
More tax revenue for public services	Wider inequality if gains go to the rich
Less poverty	Structural unemployment as industries decline
More choice	Inflation if demand outruns capacity
More investment and exports	Consumption given up to invest
	Imports rise with incomes, which can worsen the balance of payments

Match the weight to the economy

• Low-income, farming-based: benefits are escape from poverty and funds for basic services; costs are lost farmland, crowded cities, forest loss.
• Fast-industrialising: many jobs and exports; costs are heavy pollution and regional gaps.
• Rich, service-based: funds for research and services; costs are high resource use per person and congestion.
• Resource-rich exporter: large export income; costs are depletion and dependence on one product.

Method: tax revenue and the gap between groups

• Tax revenue = GDP × tax rate. At 25%, GDP of 400 gives 100; GDP of 428.4 gives 107.1.
• Share = group income ÷ total income × 100. If total income rises 10% but the poorest gain only 3%, their share falls (4.0% to 3.7% in the study guide example).

Evaluation checklist: Is the growth sustainable? Who gains? What is given up? Make a judgement for the named economy.

4.6.6 Policies and effectiveness

Policy	Promotes growth by	Main limit
Higher government spending on infrastructure	Demand now, capacity later	Larger budget deficit, delay, waste
Lower taxes	More spending and incentive to invest	Lost revenue; may be saved
Lower interest rates	Cheaper borrowing for investment and spending	Weak if confidence is low; inflation risk; lag
Lower exchange rate	Cheaper exports	Dearer imports of raw materials
Education and training, other supply-side measures	Better quality of labour and capital	Slow and costly
Attracting foreign investment	Capital, technology, jobs	Profits leave; local firms squeezed
Trade agreements	Larger export markets	Some home industries lose
Stable laws, property rights, low corruption	Investor confidence	Hard to achieve quickly

Supply-side measures have their own unit in section 4.5. In growth answers, link them to a shift of the PPC.

Method: judging effectiveness

1. Is there spare capacity? If yes, demand policy can work quickly. If no, only supply-side policy raises output.
2. How long is the delay?
3. What does it cost, and what is the opportunity cost?
4. What are the side effects (inflation, debt, imports)?
5. Does it suit the economy’s circumstances?

Worked reminders

• Deficit = spending − revenue. Spending 160, revenue 140: deficit 20, which is 20 ÷ 400 × 100 = 5% of GDP. Extra 10 of spending: deficit 30, 7.5% of GDP.
• Return on a project = yearly gain ÷ cost × 100. A road costing 60 that adds 9 a year returns 15%; payback = 60 ÷ 9 = 6.7 years.

Must-know distinctions

• Movement within the PPC versus shift of the PPC. A rise in demand uses spare resources. Investment and technology create capacity.
• Gross versus net investment. Gross is all new capital spending; net subtracts the capital that wears out.
• Quantity versus quality of a factor. More workers is quantity. Better trained workers is quality. Both can be named as separate causes.
• Demand-side versus supply-side growth policy. Demand policy (spending, tax cuts, rate cuts) fills a gap below capacity. Supply-side policy raises capacity itself.
• Short-run versus long-run effect. Spending on a road boosts demand while it is built and raises capacity once it is open.
• Growth versus development. A rise in GDP does not guarantee better health, education or fairness, so always ask who benefits.

Quick self-test

1. A country’s potential output is 700 and actual output is 630. State its utilisation rate and its spare capacity.
2. Total demand rises and actual output reaches 665. Find the new utilisation rate.
3. Does the rise in question 2 shift the PPC or move the economy within it?
4. Gross investment is 150 and depreciation is 90. Find net investment.
5. A capital stock of 800 rises by a net 60. Find the percentage increase.
6. Output per worker rises 3% and the labour force rises 1%. Find the percentage rise in potential output, to one decimal place.
7. Name the four causes of a rightward shift in the PPC.
8. GDP of 90 is taxed at 20%. Find tax revenue.
9. Give one cost of growth that falls mainly on future generations.
10. Spending is 312 and revenue is 300 on GDP of 300. Find the deficit as a percentage of GDP.
11. Give one reason why a rate cut may fail to raise growth.

Answers

1. Utilisation = 630 ÷ 700 × 100 = 90%. Spare capacity = 700 − 630 = 70.
2. 665 ÷ 700 × 100 = 95%.
3. It is a move within the PPC toward the curve, because capacity has not changed.
4. 150 − 90 = 60.
5. 60 ÷ 800 × 100 = 7.5%.
6. 1.03 × 1.01 = 1.0403, so 4.0%.
7. Investment, technology, quantity of factors and quality of factors.
8. 90 × 0.20 = 18.
9. For example resource depletion or climate damage.
10. Deficit = 312 − 300 = 12; 12 ÷ 300 × 100 = 4%.
11. For example low business confidence, so firms do not borrow; or time lags.

Where marks are usually lost

• Drawing or describing a rise in demand as a rightward shift of the PPC.
• Saying growth is caused by “more money” instead of naming a specific cause.
• Forgetting depreciation when explaining how investment raises the capital stock.
• Adding percentage changes (5% + 2%) when they should be multiplied.
• Giving a list of costs and benefits with no reference to the type of economy asked about.
• Writing that growth always reduces poverty, when the gains may reach few people.
• Naming a policy without explaining how it leads to higher output.
• Evaluating with a generic “it depends” and no stated factor, such as spare capacity, delay or cost.
• Leaving out units or the percentage sign in a calculation.

Official syllabus

Aligned to the Cambridge IGCSE Economics 0455 syllabus for examination in 2026, published by Cambridge University Press & Assessment (Cambridge Assessment International Education), sections 4.6.4 to 4.6.6.