Analyse the effects of a rise in the UKs economic output

        Rising GDP will also benefit the government. Increased spending will boost demand for labour by firms, which will reduce the requirement to spend so much on benefits by the government as well as increasing income tax revenues. Extra government revenue helps to reduce the budget deficit and consequently lead to more sustainable government finances. Higher output raises tax revenue without having to increase tax rates, and some of this extra revenue can also be used to improve public services, such as education and health care.

Although incomes are rising, if the cost of living is rising at a faster rate due to inflation, it will have a negative effect on people’s standard of living. This is particularly true for certain parts of the UK. If essential commodities such as fuel rise faster than incomes then people for whom this is the greatest part of their expenditure will find they can’t afford them. High inflation is caused by strong economic growth. If Aggregate demand in an economy faster than aggregate supply, we would expect to see a higher inflation rate. If demand is rising faster than supply this suggests that economic growth is higher than the long run sustainable rate of growth. With high growth, demand rises faster than firms can keep pace with supply; faced with supply constraints, firms push up prices. Similarly, if aggregate demand does not increase in line with production, higher output may be accompanied by higher unemployment. If, for example, workers’ productivity increases by 5 per cent, firms will be able to produce more output with fewer workers.

If real GDP per head rises, the population can enjoy more goods and services. Of course, whether they all do so will be influenced by the distribution of income. Growth enables poverty within a country to be reduced without having to redistribute existing income. Higher output raises tax revenue without having to increase tax rates.