Question

*What are the causes/ sources of economic growth. Highlight positive n negative effects of economic growth.

Answer 1

Economic growth means the real GDP is rising. Economic growth means an increase in national output and national income. Economic growth is caused by two main factors: An increase in aggregate demand (AD)An increase in aggregate supply (productive capacity)

Lower interest rates – Lower interest rates reduce borrowing costs, and thus encourage investment by consumers and firms. Lower interest rates also lower mortgage payments and thus increase consumer disposable income. Increased wages. Higher real wages increase disposable income, and encourage consumer spending. For example, government investment in building new roads, or increased welfare expenditure, which increases disposable income.

Pros are:

Increased consumption. First, higher GDP implies more goods and services are produced by the economy and therefore consumers can enjoy more goods and services. If there is a link between human welfare and consumption then growth will benefit society. Higher levels of consumption will help reduce any incidence of absolute poverty (when people are unable to meet basic necessities of life). This may not be so obvious to developed countries, such as the UK and the US, but economic growth and rising incomes play a major role in lifting people out of poverty for developing economies.

With higher GDP the government will be able to collect more taxes; this is because people will pay more income tax and VAT as incomes rise and people spend more. This is beneficial as the government can use this increased revenue to lower the level of government borrowing and/or spend more on public services and country infrastructure investment. This investment in public services could help to improve the economy's long-term performance. For example, better infrastructure allows for lower trading costs. Growth can therefore cause a virtuous cycle of higher investment leading to higher growth – allowing for more investment.

Cons are:

First, if economic growth is unsustainable and higher than long-term trend inflation is likely to occur. Furthermore, this temporary output boom is unlikely to continue, and an economic downturn or recession may follow. Thus, raising the rate of economic growth above the sustainable rate can be very damaging. This cycle of boom and bust occurred in the UK during the late 1980s and early 1990s.

An increase in economic growth could also lead to a problem with the balance of payments. If increased consumer spending, as in the United Kingdom, causes the growth, then the imports will increase. If the imports rise faster than the exports a deficit will occur. Growth, however, might be export-led e.g. The growth of Japan in the 1960s and 70s, and of China at present.