Causes and Effects of Economic Growth

1720 words 7 pages
Discuss the causes and effects of Economic Growth

Economic Growth

Before discussing the causes and effects of economic growth, I will define what economic growth actually is and distinguish between the two types of growth in the economy; actual and potential. On the whole, economic growth may be defined as ‘a long-run increase in an economy’s productive capacity and trend output’. The long-run output growth trend an economy achieves is indicated by the path of trend Gross Domestic Profit (GDP) and is usually calculated as a percentage average annual output growth over a large number of years. This is because, given long enough, the phases of the business cycle averages out so that increases in the economy’s real GDP are largely
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Growth in productive potential therefore helps to meet these aspirations and avoid macroeconomic crises.

• It can make it easier to redistribute incomes to the poor
If incomes rise, the government can redistribute incomes from the rich to the poor without the rich losing. For example, as people’s incomes rise, they automatically are required to pay more taxes. This extra revenue for the government can be spent on programmes to lessen poverty. Without a continuing rise in national income the scope for helping the poor would be much more limited.

• Society may feel that it can afford to care more for the environment
As people become better off, they may become less preoccupied with their own private expenditure and more concerned to live in a clean environment. This can be backed up with the fact that the regulation of pollution tends to be tougher in developed countries than in the developing world.
(Adapted from Sloman 2006)

Costs of Growth

Before deciding that economic growth is a good thing, there are costs of growth to economy’s that we must first consider.
• Inflation risk
If the economy grows too quickly there is the danger of inflation as demand races ahead of the ability of the economy to supply goods and services. Producer’s then take advantage of this by raising the prices they are charging consumers. This type of inflation is called demand-pull. An outward shift in aggregate


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