Question

The costs of economic growth? In addition to the benefits of economic growth, there are also potentially costs. What are some of these costs?

Answer 1

Costs of economic growth

Economic growth means an increase in real GDP – an increase real incomes. This is usually considered beneficial, but there are also potential costs of economic growth such as:
•   Inflation
•   Boom and bust economic cycles
•   Current account deficit
•   Environmental costs – pollution, loss of non-renewable resources
•   Congestion
•   Potential of widening inequality.

Benefits of Economic Growth

•   Higher average incomes. Economic growth enables consumers to consume more goods and services and enjoy better standards of living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy.
•   Lower unemployment. With higher output and positive economic growth, firms tend to employ more workers creating more employment.
•   Lower government borrowing. Economic growth creates higher tax revenues, and there is less need to spend money on benefits such as unemployment benefit. Therefore economic growth helps to reduce government borrowing. Economic growth also plays a role in reducing debt to GDP ratios.
•   Improved public services. Higher economic growth leads to higher tax revenues and this enables the government can spend more on public services, such as health care and education e.t.c. This can enable higher living standards, such as increased life expectancy, higher rates of literacy and a greater understanding of civic and political issues.
•   Money can be spent on protecting the environment. With higher economic growth a society can devote more resources to promoting recycling and the use of renewable resources
•   Investment. Economic growth encourages firms to invest, in order to meet future demand. Higher investment increases the scope for future economic growth – creating a virtuous cycle of economic growth/investment.
•   Increased research and development. High economic growth leads to increased profitability for firms, enabling more spending on research and development. Also, sustained economic growth increases confidence and encourages firms to take risks and innovate.
•   Economic development. The biggest factor for promoting economic development is sustained economic growth. Economic growth in south-east Asia over the past few decades has played a major role in reducing absolute levels of poverty – increasing life expectancy.
•   More choice. In less developed economies, a large proportion of the population work in agriculture/subsistence farming, economic growth enables a more diverse economy with people able to work in service sector, manufacturing and having a greater choice of lifestyles.