Costs and Benefits of Economic Growth

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A2 Macroeconomics / International Economy
Costs and Benefits of Economic Growth
 
The advantages and disadvantages of economic growth are fiercely debated by economists, environmentalists and other commentators. In this note we consider some of the economic and social costs and benefits from expanding levels of production and consumption. In particular we focus on the idea of sustainable growth. The Benefits of Economic Growth

According to the UK government, ‘a healthy economy leads to higher living standards and greater prosperity for individuals. It also helps businesses to be profitable, which generates employment and income’. This quote highlights some of the benefits of growth – developed further below: Improvements in living standards: Growth is an important avenue through which better living standards and lower rates of poverty can be achieved. This is particularly true for countries who regard growth as a key route for poverty reduction among their population. According to a report published in August 2004 by the Asian Development Bank (ADB), rapid growth in many of the countries in the Asian region has reduced the number of people living on less than $1 a day fell to 22% of the region's population in 2002. That compares with 34% in 1990 and shows "considerable progress in the fight against poverty." Rising Employment: Growth stimulates higher employment. As we can see from the chart below, the sustained growth in the British economy since 1993 has helped to bring about a large rise in total employment, the number of people in work has risen from 2.53 million at the start of 1993 to nearly 29 million thirteen years later. This is a very impressive employment creation record, much better than most other countries in the European Union.

The accelerator effect of growth on capital investment: Rising AD and output encourages investment in capital machinery – this helps to sustain growth by increasing LRAS. Greater business confidence: Growth has a positive impact on company profits & business confidence – good news for the stock market and for the growth of small and large businesses. The “fiscal dividend” to the government: Government finances are cyclical in nature because a growing economy boosts the tax revenues flowing into the Treasury and it also provides the government with more money to finance spending projects. Potential environmental benefits – richer countries have more resources available to invest in cleaner technologies. And, as nations move to later stages of development, energy intensity levels start to fall. Much depends on how many resources an economy is willing to devote to environmental improvement and protection. Over the last thirty years, the ratio of energy consumption per unit of GDP has fallen quite significantly. The reduction in energy intensity is a reflection of improvements in production technologies and also a gradual switch towards a low carbon economy. Much more progress needs to be made. Organisations such as the Carbon Trust sponsor research into low carbon technologies and many environmental groups believe that greater investment should be made in alternative sources of energy.

“We now expect to live on average 30 years longer, to work almost half the amount of time we used to every year, and to enjoy an array of new goods and services, including air travel, antibiotics, computers and televisions. Economic growth and rising living standards has also meant a cut in rates of carbon emissions and natural resource depletion never possible in the 20th century” Source: Professor Nick Crafts, 2002 Royal Economic Society Public Lecture, December 2002 The Disadvantages of Economic Growth

Economic growth does not come risk-free. Although our material progress can be measured in part by the growth of national output, income and spending, if the economy grows too quickly, it can bring about short and long-term problems. Inflation risks: There is the danger of demand-pull...
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