2.5.4 Consequences of Economic Growth Flashcards
what are the benefits of economic growth
- increased living standards for households
- reduced unemployment
- firms generate higher profits
- improved government budget position
explain how economic growth causes increased living standards for households
- increased real GDP and GDP per capita
- higher average incomes and greater financial stability for households
- households can consume more goods/services and potentially of a higher quality (normal/luxury)
- improved living standards and reduced poverty
explain how economic growth reduces unemployment
- increased real GDP as firms increase output
- derived demand for workers is likely to increase
- reduction in unemployment (cyclical)
explain how economic growth causes firms to generate higher profits
- increases in AD could result in higher revenue and profit for firms
- the firm can use retained profits to reinvest into productive capacity (accelerator effect)
- this will further benefit the firm and the economy through positive multiplier effects ie job creation
explain how economic growth causes an improved government budget position
- increased real GDP as firms increase output reduces unemployment due to derived demand for workers
- increased tax revenues (e.g income)
- less spending on welfare as fewer people unemployed
- improved position due to automatic stabilisers
- potentially more funds for gov spending to improve public services and pay off national debt
what are the drawbacks of economic growth
- inflationary pressure
- income inequality
- current account deficit on the BoP
- environmental effects
explain how economic growth causes inflationary effects (demand pull)
- if AD is rising faster than AS, firms may increase prices
- they do this to maximise profits
- demand pull inflation, eroding purchasing power
explain how economic growth causes inflationary effects (cost push)
- as firms increase output they may hire more workers
- wage costs increase and may be passed on in the form of higher prices for consumers
- this results in higher cost-push inflationary pressure
Explain how economic growth can cause income inequality
- rapid growth doesn’t always guarantee equitable distribution of wealth as GDP per capita is an average
- benefits of growth may disproportionately accrue to certain segments of the population
- growth may be at the expense of more hours worked and increased stress
- increased inequality and poorer living standards
Explain how economic growth can cause a current account deficit on the BOP
- rising average incomes
- higher spending on consumer durables, many of which have to be imported
- worsening the trade balance on the current account on the BOP
Explain how economic growth can cause environmental effects
- increased output could lead to higher pollution and increased congestion
- non renewable resources used up- reducing environmental sustainability
- negative externalities which can reduce living standards
Give examples of the environmental effects of economic growth
- resource depletion
- climate change
- biodiversity loss
- water scarcity
What can be used to reduce the environmental effects of economic growth
The environmental Kuznets curve
What does the EKC suggest
A non-linear relationship between environmental degradation and economic development
As a country grows, environmental degradation initially worsens, but after reaching a certain level of economic development, it starts to improve
What are the three stages of the EKC
- low income stage
- middle income stage (peak)
- high income stage
define sustainable economic growth
aims to achieve long-term prosperity while also considering the wellbeing of current and future generations, as well as the health of the environment
give possible policies the government could use to promote sustainable growth
- carbon taxes
- tougher environmental regulation
- subsidies for scaling up clean energy
