2.5.4 - Impact of Economic Growth Flashcards
Explain Fall in unemployment for workers
Benefit of Economic Growth
. Labour is a derived demand, derived from the demand for good and services
. As the demand for goods and services is high, firms will need more workers to produce extra output so they aim to increase their productive capacity by increasing employment
. As a consequence,incomes will rise in the economy, which increase the marginal propensity to consume, thus increasing consumption, which increase AD. This also means the standard of living of workers improve as they can spend more disposable income on necessities such as food and water, which means economic development.
Explain Higher Profits for Firms
Benefit of Economic Growth
With more demand due to increased households incomes in the economy and consumer confidence, firms will be able to sell more goods and services, thus increasing their revenues and profits.
This means firms will have higher retained profits to finance investment increasing both short run and long run economic growth through the accelerator process thus enabling growth to persist over time. This means an shift in AD to the right and further economic growth in the long run.
However, since economic growth results in demand - pull inflation, which could result in workers demanding higher wages. This would increase the cost of production for firms, reducing the level, which would shift the SRAS to the left.
If further inflation and costs to production is anticipated, it would affect business confidence (‘animal spirits’), thus reducing the marginal propensity to invest. This result in a shift in AD to the left and result in economic decline in the long run
Explain Tax revenue for government
Benefit of Economic Growth
With greater levels of economic growth through consumption and investment, tax revenue (e.g. VAT, income tax, corporation tax) should increase
The government will have more money to spend on important public services in the economy, such as education and healthcare and welfare benefits, which improves living standards and reduces inequality through the redistribution of income.
Explain ‘Increase Inequality’
Costs of Economic Growth
. When there is economic growth, firms tend to benefits more than the workforce
.This is as the revenues from high economic growth tend to be greater than the pay rise of workers
. At higher levels of income, the marginal propensity to consume decreases as a person’s wants and needs become satisfied.
This means that if there is a higher level of inequality, there will be less consumption in the economy. This results in an shift in AD to the left, resulting in less economic growth in the long run.
Furthermore, this an increase in equality would lead to an increase in relative poverty as more households fall significantly below the median income. This would reduce RELATIVE standard of living, thus reducing economic development.
Explain ‘Economic Growth does not necessarily mean incomes are increasing for all of society’
Costs of Economic Growth
. Increases in Real GDP per capita, may only benefit the elite or small part of the population
. This is because such growth may have been generated from one dominant sector in the economy, which income earned going only those who work in that sector.
For example, the most dominant sector in Saudi Arabia, is the oil sector, which account for over 50% of economic growth
. Corrupt government may prevent the effective redistribution of income from higher levels of GDP and increases in tax revenue, resulting in income inequality. This will result in the low income families seeing little to no increase in their standard of living, with their relative poverty increasing
Stakeholders of economic growth
. Consumers
. Firms
. Government
. Current and future living standards
. Workers
Explain impact of economic growth on current and future living standards
Economic growth could benefit living standards as it could have a short run effect. For example, tax revenue generated from high levels of economic growth caused by an increase in AD would lead to increased government spending in public goods such as healthcare and education. There will also be increased innovation and investment by firms as risk taking will increase due to increased business confidence (‘animal spirits’) in a boom.
A more educated and healthier workforce means that the human capital of workers increase, resulting in greater employment opportunities, reducing unemployment rate. This means more disposable income can be used on necessities of life, thus reducing absolute poverty.
This would increase the standard of living in the long run and increase life expectancy, leading to a higher HDI score and thus economic development. This means that economic growth will improve standards.
However, economic growth may not be sustainable in the long run. Economic growth is likely to increase the demand for non - renewable resources (e.g. oil), which would increase the price assuming supply stays the same [Show shift in demand curve from D1 to D2, whilst supply stays the same].
This results in an increase the average price level (inflation), because oil is a commodity and a complementary good. This means that the purchasing power of consumers fall, resulting in less disposable income for goods and services. This reduces consumption in the economy, shifting AD to left and leads to economic decline. This would also mean job losses and a increase unemployment, since labour is a derived demand of goods and services. This would lower standard of living and result in a fall in economic development
Define Sustainable Economic Growth
. Growth in the productive potential of the economy today, which does not lead to a fall in the productive potential of the economy for future generations
Impact on economic growth on consumers
Short run : Economic growth will increase wages and job security, as firms will see an increase in profit. This increases consumer confidence, resulting in a increase in the marginal propensity to consume, thus increasing consumption. This shifts AD to the right, thus resulting in further economic growth.
Long run : Prices will increase due to demand - pull inflation, which reduces the purchasing power of consumers.
This means more disposable income needs to spent on a amount goods and services to make up for the loss, which increase the opportunity cost in doing so and reduces the number of good and services bought, thus reducing demand and consumption, shifting AD to the left and causing economic decline
This leads to a fall in standard of living and increase in absolute poverty as low income households won’t be able to afford necessities such as food, which would lower economic development.
