Discuss the extent to which economic growth may benefit the economy. (18) Economics growth is, it the short run an increase in real GAP and in the long run an increase in the productive capacity of an economy (the maximum output that the economy can produce). GAP stands for Gross Domestic Product which is the country’s production of goods and services valued at market price in a given time period. Real GAP is when these figures are corrected for inflation using a base year (The I-J uses 2003 as its base year).
It can be measured in three different ways; the output assure is the value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government. The expenditure measure is the value of the goods and services purchased by households and by government, investment in machinery and buildings. It also includes the value of exports minus imports and finally the income method is the value of the income generated mostly in terms of profits and wages.
Economic growth is often a result of low unemployment, which has an effect on the components of aggregate demand in that consumption will rise as when more people eave a Job, more people have more disposable income, savings and investment rise and with this productivity rises too. Long-term economic growth will arise from a continuous percentage increase in real GAP however it may not always be sustainable. Economic growth can benefit the economy in that with it often comes lower rates of unemployment. A fall in unemployment would arise as a result of expansion and development so more workers are needed.
Low unemployment as a result of economic growth makes it desirable in that if less people are unemployed, less people will be claiming unemployment benefits and the government will be able to reallocate the money and spend it on other things like health care or education which will in turn raise the standard of living. Improvements in standards of living is a huge benefit of economic growth. Improvements in living standards are not Just derived from a greater GAP per capita but improvements in healthcare, education and fortification of the armed services.
It also involves the reduction of poverty. With more of the population having a larger disposable income they will be able to buy more luxury goods and may invest in their win property, either buying a larger one or making improvements to it. There are more goods and services available for the population to consume and enjoy and their purchasing of these goods benefits the economy too. For living standards to be maintained GAP must grow at the same rate as population.
Another desirable effect of economic growth is increased tax revenue, the government receives more money trot tax payers Witt out having to increase tax rates. If people are earning more, the more money they will pay in tax, the more money companies make the more tax they must pay to the government. The more money the government gains in tax revenue the more they can do to improve the country, they can invest in transport and infrastructure, they can make improvements to health care and they may even need to employ more people further reducing unemployment.
Not all aspects of economic growth are positive, for example when an economy is at, or near its full capacity of productivity prices can be driven up causing inflation and the devaluing of their currency, where each unit of currency buys fewer goods and services that it previously could have. It can increase the opportunity cost of saving ND holding onto money which will decrease the proportion of income people are putting into banks which will in turn lead to an increase in interest rates and less consumer confidence so less people borrowing money and investing in new capital.
If an economy outgrows other economies this could result in what we import being greater than what we export which leads to a disruption in the balance of payments and it’s trade balance will be in deficit. Ultimately, economic growth may bring a higher material standard of living but in does not take into account happiness. It can lead to negative externalities such as pollution or even crime which reduce the quality of life for some people and can even decrease the value of their homes.
It is important that economic growth is sustainable in that it does not impact the potential or the living standards of generations to come, unfortunately with the exploitation on the natural environment and the continuous burning of fossils fuels the current methods of trying to maintain economic growth are far from sustainable. Of course, economic growth can benefit the economy to a certain extent, we need the economy to grow with population so as to maintain our current living standards and even to improve them and to prevent poverty.
Improvements in education and health care are always desirable but we reach a point where government spending can only do so much. Inflation, pollution, a disturbance in the balance of payments, economic growth is only beneficial when it is stable and sustainable. Ultimately material goods cannot buy happiness and the constant strive towards economic growth has lead many economies including our own into the turmoil of recession.