The Desirability of Economic Growth.

GCSE Business Studies

Edexcel AS Economics Unit 3 Economics Growth

The Desirability of Economic Growth

The Benefits of Economic Growth

Economic growth means that real GDP has increased and therefore leads to an improvement in the material standard of living. This means that individuals have higher levels of real purchasing power enabling them to buy a greater volume of goods and services - increasing economic welfare ( bearing in mind individuals have unlimited wants ). For instance, as western economies have grown over the decades consider the changes in ‘material ownership’ of products such as ownership rates of cars, dishwashers, housing, the number of foreign holidays taken - all of which have continued to increase as real spending power has grown.

Higher real incomes have enabled individuals to have greater access to leisure time / activities. People can now satisfy their basic wants more easily, with less time worked and hence devote more time to leisure as they do not have to work as long to afford the basic necessities for life.

As the economy grows, governments are able to collect more tax revenues without increasing tax rates. This allows more resources to be put into merit and public goods such as education and health services, as well as funding more social security provision. Thus better social services can emerge with the population gaining better access to medical treatment or enjoying better education – helping to improve living standards generally. Individuals will also have more confidence that the state will have the resources to look after them if they become unemployed or in need or support in the community.

( It could even be argued that those economies which have high levels of real GDP command more political influence and status on the world stage. They have therefore more powerful voices on the international stage in organisations such as the United Nations, G8, or the World Trade Organisation. )

The Costs of Economic Growth

Pursuing economic growth policies can have some drawbacks, affecting the quality of life. Individuals will be required in a growing economy to learn new skills, be more flexible and often be more occupationally and geographically mobile ( ie prepared to ...

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The Costs of Economic Growth

Pursuing economic growth policies can have some drawbacks, affecting the quality of life. Individuals will be required in a growing economy to learn new skills, be more flexible and often be more occupationally and geographically mobile ( ie prepared to move from one type of job to another, as well as be prepared to move location). The pace of work is thought to be likely to increase, all combining to add stresses to the individual. It has often be claimed that the desire for faster economic growth is creating a more hectic lifestyle – possibly offering less leisure time rather than more !

With economic growth comes a growth in consumption, more resources are needed reducing the remaining supply of non-renewable resources such as fossil fuels ( oil, gas and coal ), metal ores and other natural resources. As these are used up at a faster rate, there are fewer supplies left for future generations. Thus the finite pool is more rapidly becoming exhausted. The growing affluence of consumers has led to for instance, the ever increasing rates of depletion of rain forests across the world.

With growth comes the creation of new, and expansion of, existing businesses. These produce a number of so-called external costs or negative externalities. These are the wider spill over costs imposed by firms on society and individuals. Areas of natural beauty such as the country side may be destroyed in the name of economic progress. Pollution in the atmosphere may be increased, as well as in rivers and on land as production levels increase to meet higher global demands for goods. ( However, with more affluence firms and government are likely to have more resources to invest in developing more pollution efficient technology ).

A typical example of negative externalities being created reducing the quality of life can be illustrated by examining the growth in car ownership. This is usually seen as a sign of growing affluence. However, as car usage rates have increased, air pollution has worsened, global warming worsened and dramatic climatic change stimulated. For example more airborne pollution is blamed for increasing asthma rates. Further examples include road traffic congestion is slowing down journey times adding to stress and adding costs to firms.

Individuals may well have more access to material possessions improving their living standards, but may at the same time have a reduced quality life in terms of the destruction of country side, more pollution and congestion.

The Problems of Economic Growth that is ‘Too Fast’

If economic growth is too fast then apart from the problems outlined above, the economy may also suffer from the prospect of overheating. This is where the supply of goods and services cannot keep pace with the growth in demand and the economy overheats – ie inflationary pressure is generated. This is especially the case when the negative output gap is very small and there is little spare capacity – meaning that there are few spare, unemployed resources left to be used. If inflation creeps up relative to other countries then the country can begin to lose some of its competitiveness and struggle in export markets – whilst sucking in more imports. Thus the current account on the balance of payments could begin to worsen. If exports suffer and imports penetrate the country – then unemployment may increase in these sectors.

( Evaluation: a country will not necessarily lose its competitiveness straight away. It may take some time before the inflation differential between itself and its trading partners starts to make a difference – so we must be realistic !! )

Fast economic growth, irrespective of the impact on inflation will worsen the balance of payments, as imports are increasingly purchased.

However, if inflation does creep-up then the problem that arises is the corrective action taken by the Monetary Policy Committee ( in the UK’s case ) in raising interest rates. This is the automatic trigger that follows inflationary rises, as interest rates choke off excess demand. The problem is that higher interest rates depress economic activity, and can lead to firms having to lay-off workers as sales in the economy fall. Thus, the overheating economy may trigger a harsh period of high interest rates to cool inflation in turn imposing unemployment on the economy.