2.5.4 - The impact of economic growth Flashcards
What are the benefits of economic growth and the impact on Consumers ?
● Consumer income – An increase in economic growth causes unemployment to decrease. This is show on the graph as there is an increase in real GDP (Y1 to Y2) which reduces the amount of spare capacity within the economy. Therefore, the economy moves closer towards the full employment output (YFE). As a result of this, the amount of cyclical unemployment within the economy decreases. This is shown by the reduction in the negative output gap (from Y1 – YFE to Y2-YFE). The reduction in unemployment can be explained by the fact that the demand for labour is derived from the total demand for goods/services within the economy (AD). Therefore an increase in AD will cause an increase in the demand for labour, thus reducing unemployment.
● Additionally an increase in economic growth causes incomes to rise. This can be shown by the following formula: National output = National expenditure = National income. Therefore, if national output increases, so do incomes. One reason for this is that that firms have less people to choose from when hiring new employees due to reduced unemployment. As a result of this, in order to attract certain people in the job market to work for them instead of another firm, they will have to pay them a higher wage so consumers will benefit from higher wages and therefore they will have higher incomes. This may improve their Standard of living as they are now able to afford more and better quality goods/services e.g Private healthcare, gym memberships, healthy foods
What are the cost of economic growth and the impact on Consumers ?
● Cost of living/high inflation – An increase in AD (AD1 to AD2) causes an increase in the general price level of goods/services within the economy (P1 to P2) as a result of an increase in the pressure on existing factors of production. This causes the purchasing power of money to decrease, meaning that the same amount of money cannot buy the same quantity of the same goods/services as before.
What are the benefits of economic growth and the impact on Firms ?
● Increased revenues and profits for firms – The increase in the demand for goods/services within the economy means that firms are likely to experience an increase in sales revenue. This often causes an increase in the amount of profit that firms receive. Therefore, an increase in economic growth often benefits firms through increased revenues and profits.
● Increased investment – The increase in business confidence and ** business profits** that is caused by economic growth often leads to higher levels of investment by firms. This is because they are more confident that they will continue to do well as a business and therefore they’re able to reduce the amount of retained profit. The increase in investment will benefit firms in the form of increased efficiency/productivity, which in turn will lower their costs. This is due to the technological advancements that come from investment.
● The accelerator effect - When an increase in national income (GDP) results in a proportionately larger rise in capital investment spending. This is when firms increase their investment due to the fact that they believe there will be an increase in the demand for their goods/services in the future; which is signalled through an increase in the economic growth rate.
What are the Cost of economic growth and the impact on Firms ?
● Decrease in the amount of labour to choose from – As the unemployment rate decreases, firms have less people to choose from when hiring new staff. This is because the amount of people that are currently looking for work has decreased. Therefore, it may be harder for firms to fill job vacancies and they may have to offer higher wages in order to attract more people to the job. This will increase cost of production for firms which may affects their profits
● Menu costs – Increases in inflation caused by the reduction in spare capacity that occurs during economic growth will result in menu costs. As they will have to increase the price of their good/service in order to account for increases in inflation. This as a result may lead to the wage spiral.
What are the benefits of economic growth and the impact on Government ?
● An improvement in the government budget balance – An increase in economic growth is often spurred by** increased consumer expenditure**. This increase in consumer spending will cause an increase in the amount of tax revenue the government gain from VAT. Furthermore, economic growth causes a reduction in unemployment. Therefore there will be a reduction in government spending on welfare benefits and the revenue they gain from income and corporation tax will increase. As firms will see an increase in revenue. This means that firms will have to pay more corporation tax, thus increasing government tax revenue further. Overall, this will lead to an improvement in the government budget balance. The gov can also re-invest the increase in tax revenue in other areas of the economy that need support e.g healthcare or they could use it to help subsidies agricultural market, and renewable energy market.
What are the cost of economic growth and the impact on Government ?
● A worsening in the current account of the balance of payments – As consumer incomes increase, so will the demand for goods/services. However, some of the goods/services that domestic consumers demand are made in countries abroad. As a result of this, the demand for imports will increase as consumer spending does. This leads to an increase in import expenditure, thus worsening the trade balance and therefore the current account deficit too (or reducing a current account surplus).
● In addition to this, the increase in inflation that is associated with an increase in economic growth causes an increase in the general price level of goods/services within the economy. This makes domestic goods/services less price competitive in relation to other countries. Therefore, the demand for exports and revenue gained from exports is likely to decrease. Overall, this will lead to a worsening of the trade balance and therefore the current account of the balance of payments. However, as net trade is only a small part of the aggregate demand value (around 1 or 2 percent) the government may not be too concerned about this.
● Macroeconomic instability – High levels of inflation often lead to boom and bust cycles. This is because unstable inflation levels cause uncertainty for firms, consumers and foreign investors.
● Increase in Negative externalities - As consumer incomes increase, so will the demand for goods/services.If these goods and services demerit goods then increased consumption of these Demerit goods will lead to an increase in negative externalities.
What are the cost of economic growth and the impact on Current and future living standards ?
● Decreased future living standards due to environmental exploitation- As a rise in income means more people have access to gas electricity. This causes depletion of non-renewable resources as if they are producing gas and electric via using non-renewable resources then these scarce resources willl be used up, this increase the concern
about sustainability of growth for future generations as there will beincreased levels of pollution/waste/congestion**. Additionally if there is an the increase production of goods and services due to economic growth then this may lead to more carbon emission by firms into the air and they may be releasing chemicals into rivers near by them. Polluting the water.
● On the other hand, it could be argued that people with higher incomes are able to
buy cleaner fuels and richer countries can devote resources for research and
development of cleaner resources and greener’, more efficient technology. Also increased gov rev may mean that the gov can subsidies more wind farms, Solar energy hydroelectric energy markets to increase the production of energy through these resources.
What are the benefits of economic growth and the impact on Current and future living standards ?
● A decrease in absolute poverty rates – An increase in economic growth causes a reduction in unemployment and an increase in income. As a result of this there is an increase in the number of consumers that have stable and regular incomes. Therefore, the people living in absolute poverty (those who don’t have the minimum amount of income to sustain a basic standard of living) will decrease.
● Health also tends to increase: not only does life expectancy rise but people have a
higher quality of life in their old age.
Increased government spending will lead to improved living standards both now
and in the future, as the gov an invest more in the healthcare sector as well as in research and development
