If there is an increase in output there will ultimately be many more jobs available. This means that unemployment levels will decrease and there will be a positive feeling towards the economy. People will have more money and may use this to improve their living conditions by buying consumer goods. This then produces a cumulative effect because, the more consumer goods that are demanded, the more will be made and the larger the output. If less people are unemployed then more people will be contributing towards tax and therefore government spending can increase, improving living standards. The government will not be forced to pay heavy sums of money to people who claim benefit. This means they will have more money to spend on more valued services for the community, e.g. education system.
Another aspect of economic growth is that the government will have much more money to spend because there will be more firms paying higher taxes and more spending would mean more taxes from goods. More people will also be in higher paid managerial jobs, therefore they will come into the higher tax bracket and income tax will increase.
Adverse consequences of rapid economic growth.
There is an inequality of income. Growth rarely delivers its benefits evenly. It often rewards the strong, but gives little to the economically weak. This will widen the income distribution in the economy. Pollution (and other negative externalities). The drive for increased output tends to put more and more pressure on the environment and the result will often be increased pollution. This may be water or air pollution, but growth also creates significantly increased noise pollution. Traffic growth and increased congestion are prime examples of this. Loss of non-renewable resources. The more we want to produce, the more resources we need to do that. The faster we use these resources, the less time they will last. Loss of land. Increased output puts further pressure on the available land. This may gradually erode the available countryside. Lifestyle changes. The push for growth has in many areas put a great deal of pressure on individuals. This may have costs in terms of family and community life.
How do aggregate demand and aggregate supply affect the rate of economic growth?
Aggregate demand is the total level of demand in the economy. It is the total of all desired expenditure at any time by all groups in the economy. The main groups who spend are consumers (consumption), firms (who spend on investment), government (government expenditure) and overseas (exports).
The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a given time period. Aggregate supply, relates the economy's price level, measured by the GDP price deflator, and aggregate domestic production, measured by real gross domestic product.
A shift in aggregate supply
The diagram below shows what is likely to happen. AS shifts outwards and a new macroeconomic equilibrium will be established. The price level has fallen and real national output (in equilibrium) has increased to Y2.
Reasons for a shift in the aggregate demand are things such as land. If a country has a great deal of natural resources e.g. coal, it is able to exploit this and sell it for high profits in other countries. This leads to economic growth. Labour also shifts the aggregate demand curve because if there is an increase in the number of people working, then there will be a higher demand for goods and services and more jobs will become available thus increasing the economies potential. The workforce may increase due to immigration or a higher retirement age.
A shift in aggregate demand
The diagram below shows what is likely to happen. AS shifts outwards and a new macroeconomic equilibrium will be established. The price level has fallen and real national output (in equilibrium) has increased to Y2.
A rise in aggregate demand is due to things such as increased government spending. If the government spends more in the economy this will almost certainly lead to an increase in aggregate demand. Higher real incomes will also do this because if peoples real incomes are higher, then they will feel as if they have money available to spend on consumer goods which increases the economies potential. Lower interest rates is also a componentl. If lower interest rates were introduced, then this may lead to increased expenditure because many people will feel confident and want to spend, not save, whilst they don’t have to pay that much interest. They may wish to re morgage their house etc. Lower tax rates may also be a factor.