The Impact of Economic Growth
Specification Coverage: Edexcel unit 2.5.4 - The
Impact of Economic Growth. Students should be able to understand
and explain the benefits and costs of economic growth, evaluate
the trade-offs involved, and discuss how growth can conflict with
other macroeconomic objectives such as low inflation,
environmental sustainability, and greater equality. These notes
also cover rising inequality, environmental degradation and
sustainable development.
The Controversy of Growth
Economic growth is a major macroeconomic objective, but it involves important trade-offs.
Much of the modern debate focuses on whether governments should prioritise growth itself or broader measures of societal well-being.
Benefits of Economic Growth
| Benefit | Explanation |
|---|---|
| Higher Living Standards | Higher real incomes allow people to consume more goods and services. |
| Lower Absolute Poverty | Growth can raise average incomes enough to lift people above subsistence levels. |
| Higher Employment | Expanding output creates jobs and reduces unemployment and its social costs. |
| Higher Government Revenue | Rising incomes and profits increase tax receipts such as income tax, corporation tax, and VAT. |
| Lower Government Spending | Lower unemployment reduces spending on welfare benefits. |
| Higher Business Investment and Profits | Higher demand and confidence encourage investment, increasing future productive capacity. |
| Potential for Better Environmental Technology | Higher incomes and profits can fund research and development into cleaner technology. |
Costs of Economic Growth
| Cost | Explanation |
|---|---|
| Inflationary Pressure | Rapid growth can cause demand-pull inflation, which reduces purchasing power, especially for those on fixed incomes. |
| Worsened Income Equality | The benefits of growth may not be evenly distributed, so the rich may gain faster than the poor. |
| Environmental Damage | Increased production and consumption create negative externalities such as pollution, depletion of resources, and biodiversity loss. |
| Worsened Work-Life Balance | A growth culture can lead to longer working hours, stress, and less leisure time. |
| Current Account Problems | High domestic demand can increase imports and worsen the trade balance, while inflation can reduce export competitiveness. |
| Congestion and Urban Problems | Concentrated growth may create overcrowding, higher house prices, and greater strain on infrastructure. |
| Higher Consumption of Demerit Goods | Higher incomes may also be spent on goods with negative externalities, such as tobacco or unhealthy food. |
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