1.2 Benefits and Costs of Economic Growth

Question 1

What are the benefits of economic growth?

Answer 1

• higher material standard of living
• higher non-material standard of living
• decrease in demand-deficient unemployment
• higher capacity for redistributing income and helping the poor

Question 2

How does economic growth lead to a higher MSOL? What are the assumptions needed to make this link?

Answer 2

Assumptions: Percentage of population growth is lesser than the percentage of economic growth + Income is distributed reasonably equitably

• residents on average will have an increased purchasing power ==> more final goods and services can be produced for consumption for the average individual ==> material welfare improves
• stimulates investments and hence potential growth ==> NY increases ==> sum total of national savings increases (savings are a fraction of the NY) ==> increase in loanable funds + stable and healthy economic growth ==> interest rate & cost of borrowing falls + increased business confidence ==> increased incentive to invest ==> higher capital expenditure ==> expansion of the productive capacity of the economy ==> potential growth ==> sustained growth ==> continuous rise in RNY ==> higher future and current MSOL

Question 3

How does economic growth lead to higher NMSOL? What are the assumptions needed to make this link?

Answer 3

Assumptions: Same assumptions as that for MSOL

Higher incomes ==> people can afford better quality healthcare, education, and spend more time on leisure + increased capacity to care for the environment and for the less fortunate

Question 4

How does economic growth lead to a decrease in demand - deficient unemployment?

Answer 4

With economic growth ==> more goods and services are being demanded and produced ==> increase in induced demand for labour ==> more labour is hired ==> demand- deficient unemployment is reduced.

*note that frictional and structural can still exist, or even worsen when economic growth takes place.

Question 5

How does economic growth lead to a higher capacity for redistributing income and helping the poor?

Answer 5

Enlarging of the nation’s economy enables everyone to be richer and have more, including the poor ==> rise in incomes due to higher growth brings about extra tax revenues ==> governments are able to spend more on transfer payments and subsidies to alleviate poverty and ensure social mobility ==> inclusive growth.

Question 6

What are the costs of economic growth?

Answer 6

• overheating economy and demand pull inflation
• unequal and inequitable distribution of income
• negative externalities and environmental costs

Question 7

How does economic growth lead to an overheating economy and demand - pull inflation? Why is an overheating economy bad?

Answer 7

Rapid increase in aggregate demand and actual growth (when the economy approaches full employment) ==> resources become increasingly more scarce ==> inflationary pressures in the economy + smaller and smaller extents of rise in real output till productive capacity is constrained at the real national output at full employment levels ==> further increases in aggregate demand will only lead to increases in the GPL.

High inflation ==> hurts export competitiveness + causes uncertainty for investors ==> export revenue + investment expenditure decreases.

Question 8

How does economic growth lead to unequal and inequitable distribution of income?

Answer 8

Real beneficiaries of growth are the skilled and minority rich (have savings that enable new wealth accumulation and material gains from their financial investments) ==> experience a disproportionally bigger rise in their rental incomes and wealth when the economy grows (compared to unskilled workers and less wealthy individuals) ==> inclusive growth is not attained.

*note that this will lead to a reduced level of social cohesion as trust between different segments of society is weakened ==> adverse impacts on the non-material aspects of life + unequal access to opportunities ==> less social mobility ==> income inequality widens

Question 9

How does economic growth lead to negative externalities and environmental costs?

Answer 9

Growth and rising incomes encourage the creation of artificial wants and needs ==> greater the unnecessary use of raw materials ==> higher cost on the environment.

Use examples such as the burning of fossil fuel, growth involving clearing land to justify how growth that requires such events have negative externalities.

Ultimately both the depletion of resources and degradation of the environment leads to unsustainable economic growth.