2.5.4 Impact of economic growth

Question 1

Explain the benefits of economic growth

Answer 1

1. Higher living standards – i.e. Real GNI per capita – helps to lift many people out of extreme poverty and
   improve development outcomes (e.g. rising HDI)
2. Employment effects – sustained growth created jobs and contributes to lower unemployment which is turn
   helps to reduce inequality, poverty and social problems
3. Fiscal dividend – higher economic growth raises tax revenues and allowing the government to spend more
   on public and merit goods or help cut a fiscal deficit
4. Accelerator effect - rising growth stimulates new investment e.g. in low-carbon technologies and it provides
   profits that fund research and innovation
5. Greater business profits – stimulates further investment, R&D, innovation
6. Additional income can be used for savings – this provides protection against future loss of income due to
   sickness / lack of demand, can support retirement, deposits for houses etc – or can be used to pay for more
   leisure time

Question 2

Explain the costs of economic growth

Answer 2

1. Risks of higher inflation and higher interest rates
   a. Can lead to demand-pull and cost-push inflation
   b. Central bank may decide to raise interest rates to control inflation
   c. Rising consumer spending might lead to an increasing trade deficit
2. Environmental effects
   a. Negative externalities such as pollution & waste
   b. Risk of unsustainable extraction of finite resources – causing a long-run depletion of natural resources
3. Inequalities of income and wealth
   a. Rapid growth can lead to a higher level of inequality and social divisions, the distribution of gains
   from growth are often unequal
   b. Many of the gains from growth may go to only a few people; growth might be at the expense of
   hours worked and increased stress

Question 3

What does the impact of economic growth on an economy depend on?

Answer 3

o The cause of the growth
o Actions taken by the government / central bank to prevent excessive growth
o Consumer and business attitudes
o The rate of growth
o Legislation in place to protect the non-working, the environment etc