2.5.4 - impact of economic growth

Question 1

What are the benefits of economic growth for consumers?

Answer 1

• average consumer incomes will increase as more people are employed and wages increase
• consumers are more confident in the economy, increasing consumption and utility, leading to higher living standards
• decreased rates of absolute poverty

Question 2

What are the costs of economic growth for consumers?

Answer 2

• economic growth doesn’t benefit everyone equally, those on low fixed incomes may feel worse off if there is high inflation and inequality may be increased
• likely to be demand-pull inflation, due to high levels of consumer spending
• consumers could face more shoe leather costs, they have to spend time and effort finding the best deal while prices are rising
• the law of diminishing marginal utility = benefits of more consumption may not last after the first few units

Question 3

What are the benefits of economic growth for firms?

Answer 3

• firms may make more profits and have higher confidence levels, increasing investment
• higher investment may develop new technologies to improve productivity and lower average costs in the long run
• as firms grow, they experience economies of scale
• firms may face more competition, making them more productive and efficient and giving them more sales opportunities

Question 4

What is a cost of economic growth for firms?

Answer 4

• firms may face higher menu costs due to higher inflation, they may have to keep changing prices to meet levels of inflation

Question 5

What is a benefit of economic growth for the government?

Answer 5

• government budget may improve since fewer people require welfare payments and more people are paying tax

Question 6

What is a cost of economic growth for the government?

Answer 6

• governments may increase spending on healthcare if consumption of demerit goods increase
• the trade balance may be worsened if consumers purchase more imports with their higher incomes, leads to current account deficit

Question 7

What are some benefits of economic growth on current and future living standards?

Answer 7

• as consumer incomes increase, some people may have more concern for environmental protection
• may lead to development of technology to produce goods/services in more environmentally friendly ways
• higher average wages mean consumers can enjoy more goods/services of a higher quality
• public services improve due to higher tax revenues and more scope for government spending = may lead to higher life expectancy and education levels

Question 8

What are some costs of economic growth on current and future living standards?

Answer 8

• high levels of growth may lead to damage in the environment in the long run, due to increased negative externalities from consumption and production of some goods/services