At this stage, it is useful for us to understand the difference between economic growth and cyclical fluctuations.

Economic growth refers to the positive trend in the nations’s real output or GDP over the long-run. It causes a gradual but continual rise in potential GDP. Every economy desires to accelerate the rate of economic growth because it means increase in real GDP year by year. Increase in GDP is the main source of raising the standard of living of the people over the long-run.

LRAS curve, which is vertical, represents the potential GDP (Y*) where all the available resources are fully utilized. Economic growth causes rightward shift in the SRAS cure, indicating that the actual GDP which converges into potential GDP keeps on rising year by tear. Here the long-run is to a period in which everything settles down, because growth is a continuous process. The movement in LRAS causes a continuing movement in potential GDP (Y*)

Cyclical fluctuations or business fluctuations are the frequent changes in the level of business activities which repeat themselves after regular intervals. Cyclical fluctuations in GDP are caused by the demand and the supply shocks which cause shifts in the AD and SRAS curves. As a result of the demand and supply shocks, the actual GDP deviates temporarily from the potential GDP.

We have already discussed that the demand shocks are caused by changes in the private consumption spending. government expenditure and taxes, net exports, etc. The supply shocks, on the other hand, are caused by changes in the input prices, including the wages of the workers and technological changes, which influence the productivity and efficiency of resources. The period for the cyclical fluctuations varies from one country to another and also from one year to another.

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