2.5.4 - The impact of economic growth

Question 1

What is economic growth?

Answer 1

An increase in the real value of goods and services produced as measured by the annual % change in real GDP.

Question 2

Name 2 benefits of growth.

Answer 2

• Increases living standards for consumers
• Increased profits for firms
• Improvements in th budget for firms

Question 3

Explain how increased living standards is a benefit of growth.

Answer 3

• Increased income allows people to spend more on necessities at lower levels of income and more on luxuries at higher levels on income
• As real wages increase labor can substitute work for leisure and see dramatic changes in their level of income
• At some point, they might wish to substitute leisure for work as, at higher levels of income they satisfy their financial requirements
• Increased incomes allo workers mroe free time and the ability to retire , and enjoy the quality of their life at an ealier age

Question 4

How are improvements in the budget for government a benefit of growth?

Answer 4

• As more people are working this means that there’s an increase in tax revenue
• At the same time, more people working means that that less people will be claiming benefits
• This will give teh government scope to pay off public sector debts
• The government can aslo use the improved budget to deliver some of its policies. For example, increased spending on infrastructure.

Question 5

Does an increase in income mean that there is an increase in living standards?

Answer 5

Yes and No

• Increased income provides households with greater purchasing power. However, if this increased income is paired with increasing inflation then it doesn’t really mean anything
• On the other hand, this allows them to increase the range and quality of products that are available to them
• Thus, economic growth can be said to increase the standard of living of people within an economy

Question 6

Name 2 things that can be used to measure the standard of living.

Answer 6

• Quality and availablity of employment
• Income inequality
• Quality housing at affordable pricing
• Life expectancy

Question 7

How is life expectancy a measure of the standard of living?

Answer 7

• As people become richer they have more money available for essential servieces. For example, quality healthcare
• Those on higher incomes tend to have a more discerning lifestyle as they look to enjoy the rewards of their position
• This leads to increased spending on health and fitness including access to better quality foods and drinks. For example, organic foods
• This will lead to a higher life expectancy

Question 8

How is quality and availability of employment a measure of the standard of living?

Answer 8

• Much of income of the growth in the economy has come from low-skilled jobs and a lot of these jobs have been filled with immigrants
• Although this increases the productive capacity of the economy, as there is an increase in labor as a factor of production.
• In fact, ir could be argued that increased competition for jobs means that these people actually lose out

Question 9

Name 2 costs of growth

Answer 9

• Effects on the environment
• Balance of payments problems
• Income distribution can lead to inequalities

Question 10

How are the effects on environments a cost of growth?

Answer 10

• Inrcreased pollution - as output increases so does the use of pollutants
• This has a detrimental effect on health and therefore lowers the standard of living
• Increased congestion - growth puts strain on infrastructure and roads, railways and air travel are affected by increases use and the disruption caused by the building of transport networks
• Non-renewable resources are used up and the search for replacements sees us enroaching ever further into the environment, destroying the habitat of people and wildlife

Question 11

Explain how the problems of the balance of payments can be a cost of growth.

Answer 11

• Economic growth leads to higher incomes, some of which we spent on imports
• This is measured by the marginal propensity to import
• Increased impmorts leads to a balance of payments deficit on the current account
• The deficit has to be financed, often through borrowing
• This can lead to a country having problems servicing its debt
• Foreign investors might withdraw thier money and the currency depreciates, leading to problems such as inflation due to higher import costs

Question 12

What is opportunity cost?

Answer 12

This is the next best alternative foregone

Question 13

How does opportunity cost link into the impact of economic growth?

Answer 13

• Actual growth will lead to increases in real GDP in the economy and people will benefit today
• Whereas, potential growth will lead to increases in capital goods in the economy of the future; future generations will beneift
• Potential growth requires investment in productive capacity
• Therefore, the opportunity cost of investing in capital goods to see growth in the future is the benefit lost of spending on consumption goods today.

Question 14

Do the benefits of economic gorwth outweigh the benefits of the costs of economic growth?

Answer 14

Improved living standards, people living their best life, poor people acquiring a lifestyle and people getting basic needs.

VS

Greater levels of congestion and pollution, people are more stressed out due to working long hours, climate change is causing havoc around the world, excessive demand placing strain of the Earth’s resources and an increase in global population could lead to severe water and food shortages in the near future.

Question 15

Why is it hard to measure economic growth?

Answer 15

• The black market where people buy and sell products illegally, is difficult to measure due to a lack of transparency
• Other economic activity is not measured. For example, housewives and husbands
• Different quality of measurement will occur between countries meaning that results are inaccurate.