2.5.4 The impact of economic growth Flashcards
What is the main contributor to improved standards of living?
Economic growth
Benefits of economic growth
- Increased demand for labour, leading to a fall in unemployment and higher incomes for individuals. This will also produce a rise in the standard of living, as long as prices don’t rise more than the increase in wages.
- Firms are likely to earn greater profits when there’s economic growth, as consumers usually have higher incomes and spend more.
- Firms can use these profits to invest in better machinery, make technological advances and hire more employees – causing an increase in the economy’s productive potential.
- As firms are likely to produce more when there is economic growth, then this can** improve a country’s balance of payments** because it will sell more exports.
- Increased wages and employment levels will increase the government’s tax revenue and reduce the amount it pays in unemployment benefits. The government can use this extra revenue to improve public services or infrastructure without having to raise taxes, which raises standards of living.
- Economic growth will improve a government’s fiscal position because if it receives greater tax revenues and spends less on things like unemployment benefits then this will reduce the government’s need to borrow money.
- There might be some benefits to the environment brought about by economic growth, e.g. firms may have the resources to invest in cleaner and more efficient productive processes.
Costs of economic growth
- Economic growth can create income inequality as low skilled workers may find it hard to get the high wages that other workers are benefiting from.
- Higher wages for employees are often linked to an increase in their responsibilities at work (e.g. if they’ve been promoted). This can increase stress and reduce productivity.
- Economic growth can cause demand-pull inflation because it causes demand to increase faster than supply. It can also cause cost-push inflation as economic growth increases the demand for resources, pushing up their prices.
- A deficit in the current account can be created because people on higher incomes buy more imports. Furthermore. Firms may import more resources to increase their production to meet the higher levels of demand.
- Industrial expansion created by economic growth may bring negative externalities, such as pollution or increased congestion of the roads, which harm the environment and reduce people’s quality of life.
- Beautiful scenery and habitats can be destroyed where resources are overexploited.
- Finite resources may be used up in the creation of economic growth, which may constrain growth in the future and threaten future living standards.
Impacts of a recession
- A recession will usually cause many firms to close down, with many people losing their jobs – leading to an** increase in unemployment**.
- Other firms may stop hiring new employees – which young people are often particularly badly hit.
- Government spending tends to increase – for example, due to increased unemployment benefit payments. At the same time, the amount of tax a government receives falls. This leads to increased government borrowing and a budget deficit.
- Levels of investment fall – e.g. firms might reduce the amount they spend on research and development. This can have consequences for the long run productive potential of the economy.
- However, some firms can benefit at times of recession – e.g. discount retailers can often attract more customers when consumer confidence is low.
- Recessions can also force firms to become more efficient. In periods of economic growth, firms might be able to get away with being inefficient in some areas. But they may need to cut costs to survive a recession. This can benefit the firm in the long run if it emerges from the recession more efficient than it was before.
The Easterlin Paradox
A theory created in 1974 by economist Richard Easterlin. It states that once a developed country passes a threshold average income, more growth doesn’t increase average reported happiness. For developed countries, higher levels of a country’s GDP per capita did not related to a higher level of happiness reported by citizens.
- Easterlin noted that rising GDP per capita in the US did not relate to any increase in happiness levels.
At some point, the increase in the standard of living from economic growth outweighs the sacrifice to achieve it.
When is developed, developed enough?
Key question used to measure the Easterlin paradox: Does everyone benefit from economic growth?
An example of this question is seen in South Korea, which has very high academic performance with most students working for over 15 hours per day. However, it has the highest suicide rates for under 18s in the world. Is it worth it?
What is the distribution of wealth in a country like?
How does improved standards of living negatively impact the environment?
A question was raised during COP26 as to how developing countries should be expected to develop and improve standards of living without the use of fossil fuels. This is why India and India alongside other NEEs are hesitant to move toward renewable energy – because there is a chance it will have an impact on their development.
It is hypocritical that HICs are criticising NEEs for using fossil fuels to aid development, when current developed countries did the same in the past.
- Climate groups like Extinction Rebellion argue that current economic growth is unsustainable.
Countries can attempt to get around this problem by innovation and sharing of technology which is not yet economically viable in developing countries. Also to allow the sharing of patents and reassess regulations/laws/taxes to disincentivise the use of fossil fuels.
