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The Causes and Consequences of Economic Growth - Why do some countries grow faster than others?

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Introduction

The Causes and Consequences of Economic Growth (a) Why do some countries grow faster than others? (20 Marks) In order to analyse why countries grow at different rates, we must be aware of the determinants of growth. Short run growth is determined by cyclical changes in both aggregate demand, AD, and short run aggregate supply, SRAS. The makeup of AD is of the factors: consumption, investment, fiscal changes, and overseas trade. These can therefore be changed by fiscal and monetary policy changes. The changes in AD therefore result from the governing economic policy makers of that specific economy, and so will not have a huge overall effect on the differing rates of growth. SRAS is altered by fluctuations in raw material cost, labour costs, and government intervention using taxes and subsidies. These however are likely to affect most economies, albeit that some countries are more industrial than others are and so will be more affected by fluctuations in raw material costs. SRAS is therefore unlikely to be a major cause of the differing growth rates. We must therefore look to the long run aggregate supply, LRAS as the major factor affecting growth rates. As highlighted The Causes of Economic Growth1, economic growth is determined by changes in land, labour, capital and innovation. These of course will vary from country to country. One of the biggest causes of global divide are the natural resources. ...read more.

Middle

This shows that without a starting point(A?), no change in growth is possible. Further to this, the greater the starting point, the greater the potential rate of change of growth. (b) Evaluate the argument that the benefits of economic growth might be outweighed by the costs of growth to the environment (30 Marks) In general, I feel that environmental cost far outweigh the environmental benefits, however, there are of course other benefits to growth. However, here I shall highlight the reasons for and against growth in terms of its effect on the environment. At this point, it must be noted that many environmental issues are hard to measure, and so normative statements should also be looked at. In order to analyse whether benefits of growth outweigh cost, how growth effects the environment. Most of these effects stem from a rise in consumption that is caused by growth. The theory of consumption, as highlighted by Keynes, is that as disposable income rises, consumption rises. When growth takes place, as shown in the first part, the most likely cause is an expansion in the long run aggregate supply, LRAS. As this happens, inflation is likely to stay low, because there is an expansion along the aggregate demand, AD curve. Even if there is rise in AD, the rise in the average price level is compensated for in the outward and downward shift of the LRAS curve. ...read more.

Conclusion

Finally, possibly one benefit to come out of a rise in growth is that many people see that a generally cleaner environment is possible, and so they demand it. There are many pressure groups that are campaigning for less pollution, such as Friends of the Earth and they feel that if improved quality of the environment is achievable, then it should be done, no matter the financial cost. As it happens, I do not agree with this mentality, but I do feel that if there are small costs, an improvement in the environment is a large benefit, and so should be achieved. Even though it seems that growth is not in the long term interests of the environment, there are of course other benefits to growth, other than those mentioned above. Although many costs come out of growth, not least the argument of equality, I feel that these cost are outweighed by the potential benefits of growth. Here I say potential, because I feel that there is still some way to go in order to achieve these gains, aside from growth. An increase in growth on its own will not end in advantages such as a rise in employment, increased living standards and international competitiveness. Other factor can of course influence these, and these must be encouraged as well to ensure than the optimum long-term benefits are met. 1 The Causes of Economic Growth - Bized http://www.bized.ac.uk/virtual/dc/copper/theory/th16.htm 2 UK Economic Growth by Nicholas Fawcett N. Henderson 04/10/03 1 ...read more.

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