JC Economics Essay Series #101 – Internal & External Sources of Economic Growth

JC Economics Essay Internal & External Sources of Economic Growth Model Answers 

US-China decoupling:
If the decoupling between the world’s two largest economies were to continue gradually, China may find herself needing to rely more on her internal sources of growth rather than external. In fact, it is almost as if China is decoupling herself from the rest of the world.

Will this be sustainable for the Chinese economy? This essay finds out.


According to macroeconomics, the sources of economic growth can be internal or external. For China, she will need to prepare for a future in which it relies more on the strength of growth at home rather than on the strength of growth in the rest of the world. 

Discuss this assertion. [25]


Internal & External Sources of Economic Growth for China

Economic growth: Potential growth, and Actual growth

→Measured by a rise in real GDP (per capita)

Potential growth
Percentage annual increase in the economy’s capacity to produce or the speed at which the economy can grow.

– caused by a rise in quantity &/or quality of resources
– outward shift of the AS curve (or outward shift of the PPC)


Actual growth
Percentage annual increase in national output as a result of using previously speed at which the economy could grow. unemployed resources; the rate of growth in actual output.

– caused by an Increase In AD in the economy in the short run, in a less than fully employed economy

(or a movement of a point inside PPC to a point closer to the PPC/to a point on the PPC)



What are the Internal sources of growth

Abundant natural resources
Inputs into production of goods and services
. E.g., huge land area, abundant mineral deposits

Abundant human resources of high quality
Utilise natural resources and turn them into products
Quantity → larger population size + longer work week = higher growth
Quality better education + health + mobility of workers higher growth

High rate of capital formation
Stock or inventories of equipment and structures that are used to produce goods and Services
Quantity more capital = more production = more growth
Quality: up-to-date
Depends on rate of savings which determines the rate of Investment

Advanced technology
Given amount of resources to result in larger output E.g., new production techniques, improvement in performance of machines, better organisation and management, more efficient transport and communication systems, etc


Supply side factors alone is insufficient must have increase in AD to “absorb” the extra goods and services produced. Depends on changes in the components of C, I and G, which in turn may depend on many other factors, e.g. expectations, affluence, government policies, etc.

Other non-economic reasons
o Political stability
o Social harmony


What are the external sources of growth

Foreign talents abroad may move into the domestic country
Might be due to low wages in foreign countries (push-factor)
Augments(strengthen) the quality and quantity of labour
Possibly also reduces labour cost in the domestic country

FDI Inflow (Investment from overseas)
Might be due to political instability in home country (push-factor)
May bring in transfer of technological knowledge

Strong growth in the region or globally
Improves external demand for exports from domestic country (X-M) affected
Especially relevant for open economies


NOte; Government policies in domestic countries may Influence domestic sources of growth
– Due to relaxed domestic immigration laws →pull-factor for foreign talent. o Due to domestic tax incentives for MNCs pull-factor for FDI
– Due to domestic export subsidies that lower price of exports to foreigners → induces X



Discuss whether internal growth or external growth is more important for  China

Thesis: Internal growth is more Important for China

SS-side issues:
China has a huge land size and abundant mineral resources
China has a huge population higher growth
Asian virtue of thrift →high savings rate high rate of investment

Growth in aggregate demand
Huge domestic market
Able to sustain growth to some extent just on domestic demand alone

– Other non-economic reasons
Nationalistic feelings support local brands


Antithesis: External growth is more important for China

Limitations of simply depending on growth at home
Exhaustion of natural resources →→stunts sustained growth
Educational and health facilities still need much improvement + “brain drain” due to lure of higher wages abroad reduces quality of labour → stunts sustained growth

China’s comparative advantage (at least in the short term) still seems to be in cheap labour technological advancement still lacking compared to large economies around the world →limited long-term growth

Domestic demand may switch to imported goods rather than home-grown products due to change in tastes and preferences with growing affluence

– Need to maintain external demand
Not just for China’s exports to stimulate growth, but also to tap on China’s relatively cheap labour resource in so doing, may bring In FDI and foreign talent sustained growth

(sketch the various AD-AS framework diagrams as an exercise.)


Make a stand and justify Ultimately, internal and external growth sources are complementary.

Eg; As long as China aims for sustainable growth, without damaging the environment, and exhausting FOP quickly, they may be able to decouple successful and rely on domestic engines of growth.


Note: This is one of the predictions for 2021 GCE A-Level H2 Economics exams.
(This is also the last essay sample for this series.)

All The best for your A Levels!

Happy Revision!