Question: Assess the benefits and costs of economic growth.
Economic growth occurs if the economy produces more output. Economic growth is the percentage change in real GDP over a given time period.
We will assess the main benefits and costs of economic growth.
Firstly, economic growth should lead to a rise in income. Economic growth means GDP and incomes rise, consumers can buy more goods and services, consumption rises and living standards rise. Additionally, economic growth may mean that assets generate a larger income flow, so consumption rises and living standards rise further.
But, the rise in incomes may be cancelled out by inflation. Economic growth may mean AD increases and shifts right and, if there are bottlenecks (i.e. the AS curve is inelastic), inflation rises. As inflation occurs, workers cannot afford as much as before, workers demand higher money wages, firms’ costs rise, firms’ prices rise, workers demand higher money wages and the spiral continues.
Another benefit of economic growth is an increase in employment. Jobs are created because firms produce more, and because labour is a derived demand, firms must employ more workers. The government are closer to achieving their target of full employment.
However, inequality may also rise. The workers may benefit from higher wages but the rich members of society (the owners of machinery and firms) may benefit from even higher profits. So the rich get richer faster than the poor get richer and income distribution becomes more unequal.
Additionally, economic growth may help the government to raise tax revenues. Economic growth means incomes and profits are rising, consumers pay more income tax and firms pay more corporation tax so the government’s tax revenue increases. Also, firms are producing more and hiring more workers so unemployment benefits fall. The government then has more to spend on health and education.
On the other hand, the magnitude of the rise in tax revenues may be small. The extent of the rise in economic growth determines how much tax revenue rises by. A small increase in economic growth will only increase the government’s income tax revenue and corporation tax revenue by a small amount.
Lastly, economic growth may lead to a rise in exports. If growth is due to export-led growth then exports are rising rapidly, AD is rising and real GDP is rising. The government are closer to achieving their objective of a current account surplus.
Although, economic growth could lead to a current account deficit. Real incomes rise, domestic consumers may buy more luxury imports so imports rise and the current account moves towards a deficit. Also, domestic firms may sell more goods to domestic consumers rather than sell to foreign consumers who may have a lower income, so exports fall and the current account moves deeper into a deficit.