2.5.4 Consequences of Economic Growth

Question 1

what are the benefits of economic growth

Answer 1

• increased living standards for households
• reduced unemployment
• firms generate higher profits
• improved government budget position

Question 2

explain how economic growth causes increased living standards for households

Answer 2

• 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

Question 3

explain how economic growth reduces unemployment

Answer 3

• increased real GDP as firms increase output
• derived demand for workers is likely to increase
• reduction in unemployment (cyclical)

Question 4

explain how economic growth causes firms to generate higher profits

Answer 4

• 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

Question 5

explain how economic growth causes an improved government budget position

Answer 5

• 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

Question 6

what are the drawbacks of economic growth

Answer 6

• inflationary pressure
• income inequality
• current account deficit on the BoP
• environmental effects

Question 7

explain how economic growth causes inflationary effects (demand pull)

Answer 7

• if AD is rising faster than AS, firms may increase prices
• they do this to maximise profits
• demand pull inflation, eroding purchasing power

Question 8

explain how economic growth causes inflationary effects (cost push)

Answer 8

• 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

Question 9

Explain how economic growth can cause income inequality

Answer 9

• 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

Question 10

Explain how economic growth can cause a current account deficit on the BOP

Answer 10

• 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

Question 11

Explain how economic growth can cause environmental effects

Answer 11

• 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

Question 12

Give examples of the environmental effects of economic growth

Answer 12

• resource depletion
• climate change
• biodiversity loss
• water scarcity

Question 13

What can be used to reduce the environmental effects of economic growth

Answer 13

The environmental Kuznets curve

Question 14

What does the EKC suggest

Answer 14

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

Question 15

What are the three stages of the EKC

Answer 15

• low income stage
• middle income stage (peak)
• high income stage