economic growth
ECONOMIC GROWTH is the long term expansion of a country’s productive potential
Short term growth is measured by the annual % change in real national output – this is mainly driven by the level of aggregate demand (C+I+G+X-M) but is also affected by shifts in SRAS
Long term growth is shown by the increase in trend or potential GDP and this is illustrated by an outward shift in a country’s long run aggregate supply curve (LRAS)
Key drivers of growth
There have been numerous research studies in what determines long term GDP growth
Every country is different, each factor will vary in importance for a country at a given point in time
Advantages of Economic Growth
1. Higher living standards – i.e. an increase in real income per head of population
2. Employment effects - growth stimulates more jobs to help new people as they enter the labour market
3. Investment - the accelerator effect - rising demand and output encourages investment – this sustains growth by increasing long run aggregate supply
4. Consumer and business confidence - growth has a positive impact on business profits & confidence. A stronger economy will help to persuade consumers that the time is right to make major purchases
5. Growth can also help protect the environment such as low-carbon investment, innovation andresearch and development, resulting in more efficient production processes to reduce costs.Ethical consumerism and corporate social responsibility has become important in recent years.
Disadvantages of economic growth
There are economic and social costs of a fast-expanding economy.
Inflation risk: If demand races ahead of aggregate supply the scene is set for rising prices. Many fast growing developing countries have seen high rates of inflation in recent years, a good example is India
Working hours – sometimes there are fears that a fast-growing economy places increasing demands on the hours that people work and can upset work-life balance
Structural change – although a
Short term growth is measured by the annual % change in real national output – this is mainly driven by the level of aggregate demand (C+I+G+X-M) but is also affected by shifts in SRAS
Long term growth is shown by the increase in trend or potential GDP and this is illustrated by an outward shift in a country’s long run aggregate supply curve (LRAS)
Key drivers of growth
There have been numerous research studies in what determines long term GDP growth
Every country is different, each factor will vary in importance for a country at a given point in time
Advantages of Economic Growth
1. Higher living standards – i.e. an increase in real income per head of population
2. Employment effects - growth stimulates more jobs to help new people as they enter the labour market
3. Investment - the accelerator effect - rising demand and output encourages investment – this sustains growth by increasing long run aggregate supply
4. Consumer and business confidence - growth has a positive impact on business profits & confidence. A stronger economy will help to persuade consumers that the time is right to make major purchases
5. Growth can also help protect the environment such as low-carbon investment, innovation andresearch and development, resulting in more efficient production processes to reduce costs.Ethical consumerism and corporate social responsibility has become important in recent years.
Disadvantages of economic growth
There are economic and social costs of a fast-expanding economy.
Inflation risk: If demand races ahead of aggregate supply the scene is set for rising prices. Many fast growing developing countries have seen high rates of inflation in recent years, a good example is India
Working hours – sometimes there are fears that a fast-growing economy places increasing demands on the hours that people work and can upset work-life balance
Structural change – although a