Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What defines potential economic growth?

1. The actual economic performance in a given year

2. The growth rate attainable when resources are fully utilized

3. The maximum economic output achievable only during boom periods

4. Growth based solely on consumer demand

The correct answer is: The growth rate attainable when resources are fully utilized

Potential economic growth is defined as the growth rate that an economy can achieve when all of its resources, such as labor and capital, are fully utilized in the most efficient way possible. This concept reflects the economy's capacity to produce goods and services when operating at full employment and optimal efficiency, without causing inflationary pressures. This means that potential growth is not about short-term fluctuations or actual performance in a specific period but focuses on the long-term trends facilitated by factors such as investment in technology, education, and infrastructure, which enhance productivity and ultimately lead to sustainable growth. The other options diverge from this definition. For instance, actual economic performance in a given year can fluctuate due to a variety of short-term factors and does not reflect the long-term capacity of the economy. Similarly, economic output only during boom periods does not account for potential growth during normal or recessionary times, and growth driven solely by consumer demand may not be sustainable without corresponding increases in the economy's productive capacity.