What this lesson teaches
I can explain the causes of economic growth and weigh its advantages and disadvantages.
Syllabus K343, 4.5.3. Causes and consequences of economic growth: how economic growth may be caused by an increase in total demand, an increase in the quantity of resources or an increase in the quality of resources; advantages and disadvantages of economic growth
Make a guess
A country's real GDP doubles in ten years. Is everyone in it better off?
- No. Growth always makes the poor poorer.
- Not necessarily: gains may be unequal.
- Yes. Doubling output doubles everyone's income.
Show the answer
Not necessarily: gains may be unequal.
Growth raises average income, but some groups may gain little, and the environment or leisure time may suffer.
Growth raises incomes, jobs and tax revenue, but can harm the environment and widen inequality.
Advantages: higher output means higher incomes, so people can buy more goods and services and living standards rise. Firms sell more and hire more workers, so unemployment falls.
Governments collect more tax without raising tax rates, so they can spend more on health and education. Growth can also reduce poverty.
Disadvantages: more production can mean more pollution, congestion and use of natural resources. Growth may not be shared fairly, so the gap between rich and poor can widen.
Fast growth can also cause inflation if demand rises faster than the economy's ability to produce. People may work longer hours and have less leisure time.
- Advantages
- Higher incomes and living standards, more jobs, more tax revenue, less poverty.
- Disadvantages
- Pollution, resource depletion, inequality, possible inflation.
Worked example: Weighing growth
A country's economy grows at 7% a year for a decade.
- Benefit: average incomes double in about ten years, and millions move out of poverty.
- Benefit: tax revenue funds new schools and hospitals.
- Cost: air pollution in cities worsens and forests are cut down.
- Cost: incomes in cities rise much faster than in rural areas.
Watch out for this
Economic growth always makes everyone better off.
Growth raises average income, but the gains may be unequal, and pollution or longer working hours can reduce quality of life.
Check your understanding
How does strong economic growth usually help the government's budget?
- Demand for public services falls to almost zero.
- Tax revenue rises as incomes and spending grow.
- Spending on unemployment benefits rises sharply.
Show the answer
Tax revenue rises as incomes and spending grow.
Right. More income and spending bring in more tax, which can fund public services.
Check your understanding
Which is a possible disadvantage of rapid economic growth?
- Lower tax revenue for the government
- More pollution and traffic congestion
- Lower average incomes for households
- Higher unemployment across the economy
Show the answer
More pollution and traffic congestion
Right. More production and travel can damage the environment and crowd cities.