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Causes and Effects of Economic Growth

By shauna868 Nov 06, 2008 1084 Words
“Discuss the Causes and Effects of Economic Growth”

Economic Growth is where goods and services maximise in value over a period of time. This is measured by Real Gross Domestic Product (GDP) which is defined as “The total market value of all final goods and services produced in a country….equal to the total consumer, investment, and government spending, plus the value of exports minus the value of imports.”( In turn this is measured by the level of aggregate demand in the economy using the equation: AD = C + I + G + (X – M).

The diagram above indicates how real GDP grows over the years.

The diagram above shows that in 2006 GDP grew by 0.7%, 2.7% higher than in 2005. •Output in production grew by 0.1% where as manufacturing grew by 0.6%. •Growth in the service sector declined to 0.8%, as it was previously 0.9%. •Distribution sector also slowed to 0.2% as a cause of weaker growth in retailing and wholesaling. •Government’s final consumption expenditure rose by 1.0% and is now 2.5% above its figure in 2005. “A rise in the trade deficit in real terms acted as a drag on GDP in 2006.” (

There are many advantages and disadvantages of economic growth. Improving living standards is one of the main advantages because as the economy is growing there are more jobs available, stimulating higher employment levels, therefore people have more money to invest into buying houses. Disadvantages are that as the economy is growing so fast there may be the possibility of inflation. There is also the worry that because people are earning more they have more money to spend on cars therefore there is pollution being emitted into the atmosphere.

Economic growth is normally measured over the long term and is an indicator of how an economy is growing. “Economic growth is caused by improvements in the quality and quantity of the factors of production that a country has available, i.e. land, labour, capital, and enterprise.” (www.Biz/ Economic decline may occur if any of these factors in production fall.

There are many causes of economic growth which tend to focus on the supply side of the economy such as the economic resources available. These include, as mentioned above, Land, Labour, Capital, and Enterprise. In order to ensure that these factors of production don’t fall measures are taken in order to improve them, such as: •Improving the Quantity and Quality of Land Resources: This is done by, investing in better equipment and technology, improving irrigation, fertilisers and pest-control. •Improving the Quantity and Quality of Human Resources: This refers to an increase in Labour and population. As the population increases more young people are therefore entering the labour market which in turn can cause an increase on economic growth. As with the amount of labour there is also the quality of labour to think about when describing the causes of economic growth. This depends on the amount of education within certain countries. “Improving the skills of the work force is seen as being an important key to economic growth…. As more and more capital is used, labour has to be better trained in the skills to use them, such as servicing tractors and water pumps, running hotels and installing electricity.” (www.Biz/ •Improving the Quantity and Quality of Capital Resources: There are two main types of capital; 1.Directly Productive Capital: This is capital which is used for such things as, plant and equipment. 2.Indirectly Productive Capital: This is used for building work e.g. construction. “The process of acquiring capital is called investment, If production moves from being labour intensive to capital intensive, unemployment and poverty increases.” (www.Biz/ Economic growth is effected by the level and quantity of investment in a country. An increase in capital goods is known as Capital Accumulation. •The Quantity and Quality of Enterprise resources: This is mainly to do with organisations and company’s. In order for them to improve they must ensure that there is room in they’re company for innovation and new inventions. Employees therefore must be well educated, but many organisations offer training. Increasing education is known to increase the workforce of a company, which in turn increases there capital and productivity. “Economic growth can be caused by massive growth in consumer spending. This is because if the government lowered interest rates to try and make people buy more and spend less. People will go out and borrow money to buy houses and cars, which they would normally not be able to afford. This results in massive economic growth.” ( Unemployment is a huge factor in economic growth. The unemployment rate is the number of unemployed people divided by the total labour force which includes both employed and unemployed who are willing to work. Unemployment has an impact on society and the economy and “Some of the likely costs of unemployment for society include increased poverty, crime, political instability, mental health problems, and diminished issue in economics. A low rate of unemployment usually helps prevent mass poverty and violence.” ( Unemployment leads to low GDP as opportunities of producing more goods and services are wasted. In 2006 the unemployment rate was 5.5% and the unemployment level stood at 1,677,000. ( It has since then rose to 5.6%, according to the labor force survey (LFS) 28.99million people were in full time employment, this remains on of the highest figure ever. (

Overall GDP has a lot to do with economic growth, it is the cause of many cause and effects. It is also caused by many factors which include, land, labor, capital and enterprise. As stated above there are many advantages and disadvantage of economic growth which are all to do with the communities in which we live in. Economic decline may occur if these factors of production fall at any time. I believe that in order to keep the economy growing we all must work together to ensure that all needs of the economy are met.


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