L15 - Economic Growth - Evidence, Benefits and Costs

Question 1

What are the Benefits of Economic Growth?

Answer 1

• Living standards –> growth is a powerful weapon against poverty
• Life style –> new products and production processes created by technical advances transform our ways of living (e.g. living and working in different locations; holidays; quality of food; health care etc.)
• Income re-distribution –> income growth means that it is much easier to be generous to the poorer members of a society, without increasing taxes on the wealthy

Question 2

What are the Costs of Economic Growth?

Answer 2

There are perhaps five potential factors which are costs of economic growth:

• Opportunity Costs
• Personal and Social costs
• Time distribution of Costs
• Negative externalities
• Growth and happiness

Question 3

Why is Opportunity Costs a Cost of Economic Growth?

Answer 3

• In a world of scarcity everything has an opportunity cost, including economic growth. Growth usually requires an investment in capital goods, in education and health.
• Such investments do not yield any immediate return. Growth, which promises more goods tomorrow, is achieved only by consuming fewer goods today.
• For the economy as a whole, this is a sacrifice of current consumption and this is the primary cost of economic growth

Question 4

What does the Production Possibility Curve look like?

Answer 4

• Capital Goods on the y-axis and Consumption goods of the x-axis
• a quarter circle like curve
  with various straight line with the increasing gradient the increased percentage of growth it would get if they used that ratio of capital to consumption goods at the point of intercept

Question 5

What are the Personal & Social Costs of Economic Growth?

Answer 5

• Personal costs - a growing economy is a changing economy, which means a continual reallocation of resources is necessary as innovation renders some people and their skills obsolete
• Although the costs may be small for society they are very high for the individuals concerned and very unevenly spread
• e.g. industrial revolution destroyed the jobs of skilled textile workers and replaced them with unskilled factory jobs. Robots and computers (i.e. CAD/CAM) destroyed factory jobs in the 1980s forcing many ‘skilled’ workers to take less skilled service sector jobs

Question 6

What are the Distribution Costs of Economic Growth?

Answer 6

• Time distribution: costs of future growth are borne today whereas the benefits are reaped by the next generation! Consumption is surrendered today for higher consumption tomorrow; but the old today will not live to benefit from their sacrifice.
• Geographical distribution: there are often regional and national losers and gainers from economic growth. (Think about the south west compared to the south east of England; or Portugal compared to the Netherlands)

Question 7

Why are Negative Externalities a cost of Economic Growth?

Answer 7

• Economic growth has lead to increased pollution: smoke, sewage, chemical waste, hydrocarbon emissions, spent nuclear fuel etc. threaten the environment and to overwhelm the Earth’s natural regenerative processes.
• Congestion on roads increases journey times; overcrowding on trains makes journey time more unpleasant
• While the earth’s natural processes had little trouble dealing with the pollution generated by its 1bn inhabitants in 1800, the 6bn people who now inhabit the plant put demands on pollution abatement systems that threaten to become unsustainable

Question 8

Why is Growth & Happiness a cost of Economic Growth?

Answer 8

• Growth does not make us happy! In the USA surveys show that the percentage of population feeling “very happy” was no higher in 2000 than it had been in 1960 despite a doubling of real incomes over that period
• It seems that the pressures of competing in an ever more stressful world have lead to increases in depression and other stress-related illnesses.
• Working longer hours reduces leisure time with family and friends which add to unhappiness. Keynes estimated in the early 1900s that by the 2000 everyone in the UK could work a 3-day week and be comfortably off!

Question 9

What is Sustainable Development?

Answer 9

• Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:
• The concept of ‘needs’, in particular the essential needs of the world’s poor, to which overriding priority should be given; and
• The idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs. This point refers to: resource exhaustion and resource depletion

Question 10

How has Economic Growth led to Resource Exhaustion?

Answer 10

• Since 1945 there has been a rapid acceleration in the consumption of the world’s resources. The world’s population has increased from under 2.5bn to over 6bn in that period: this increase alone has increased the demand for the world’s resources
• Moreover as economic development spreads to more and more countries, living standards are rising. As people become richer they consume more resources.
• Such continually rising living standards are unsustainable given current technologies. The problem is too many people aspiring to levels of consumption that cannot be sustained with existing technologies.

Question 11

How is innovation and timing link to Resource Exhaustion?

Answer 11

• The typical innovation in production processes uses less of all inputs per unit of output thus technological change is part of the solution
• Although many barriers can be overcome by technological advances such achievements are not automatic, inevitable or instantaneous.
• The critical problem is therefore one of timing: will technology advance quickly enough to solve the problem before there is an unimaginable global, economic, political and social catastrophe

Question 12

What is the Evidence of Resource Exhaustion?

Answer 12

• When resources are scarce their prices tend to rise, but there is no evidence of sustained price rises.
• E.g. energy prices low in the 1960s, spiked in the 1970s
• declined from 1980 onwards until 2000. Food and agricultural raw materials prices generally have had a downward trend. Metal prices pro-cyclically but no change
  between 1962 and 2014.
• The amount of resources and energy used per unit of GDP has fallen steadily over the past 200 years

Question 13

How is Economic Growth causing a Problem for Renewable Resources?

Answer 13

• The demands placed on renewable resources threaten to destroy their natural recuperative cycle
• For example, fishermen have traditionally been only a very small part of the predatory process. Now the demands of 6bn people worldwide have made fish a scarce resource. The tropical rainforests are another example of a renewable resource that is being depleted
• The problem here is not so much growth as lack of management of the resources due to undefined property rights or lack of government jurisdiction.

Question 14

What Conclusion can be draw from this Lecture?

Answer 14

• Economic growth has raised the average citizen of advanced countries from poverty to plenty in less than 200 years.
• Yet many problems remain – starvation and poverty to name but two – so further growth is needed → further pressure on resources and the environment → pollution and congestion.
• Further growth must be sustainable growth, based on technical change. To reduce the demands placed on the earth’s eco-systems, policy incentives, will be needed to direct technical change into more environmentally friendly ways.
• There is no guarantee that the world will solve the problems of sustainable growth, but there is nothing in modern models of economic growth or existing evidence to suggest that such an achievement is impossible.