2.5.4 - The Impact Of Economic Growth

Question 1

What Are The Benefits Of Economic Growth?
(4 Points)

Answer 1

~ Households will be earning more disposable income -> due to firms making higher profits or existing workers becoming more productive -> translates to higher earnings -> better living standards.

~ Higher employment -> more demand for a countries product -> firms need to employ workers (Labour is a derived demand) -> workers begin earning incomes -> improving living standards.

~ Higher profits for firms -> higher spending from households -> firms can invest into capital -> accelerator effect.

~ Fiscal dividend for governments -> due taxes increasing -> are able to fund their spending easier -> building infrastructure.

Question 2

What Are The Costs Of Economic Growth?
(4 Points)

Answer 2

~ Higher demand pull inflation -> erodes purchasing power -> not contributing to higher living standards.

~ Higher income inequality -> growth coming from one sector dominance -> not being distributed to the whole population -> leads to income divide -> leads to continued existence of poverty.

~ Destruction to the environment -> pollution, deforestation, resource depletion and degradation -> negative externalities in production leading a welfare loss -> destruction of living standards.

~ Increased incomes -> greater consumption of demerit goods -> over time reducing the size of the working population -> decrease in living standards.