Economic growth can be defined as a long-term expansion of the productive potential of the economy. Sustained economic growth should lead to higher real living standards and rising employment. Governments aim to achieve economic growth as it has many advantages; including higher employment levels. As Aggregate demand increases, more factors of production, most notably labour are needed to produce goods and services for the economy. When this occurs on a large scale unemployed workers shift into employment.
This is beneficial as governments provide less social security for the population, so they can spend money on public services. As a result of increased government spending, the quality of services such as education and health will improve, hence benefitting the standard of living and boosting aggregate supply. Another way in which economic growth may be desirable is that it may reduce poverty within a country, without having to redistribute income. If people’s incomes increase, then tax revenues will automatically increase, without having to increase the rates.
Some of this extra government revenue can be used to finance schemes to help the poor, or even improve public services, for example, education and so will result in an increase in aggregate supply in the long run so leading to further growth. However, rapid economic growth can similarly cause wages to increase too quickly and therefore driving up inflation. Inflation is the sustained in the general price level. If people’s incomes are considerably larger than previously, they will inevitably have more disposable income to spend on goods.
Consequently, there is higher demand on products causing the Retail Price Index to increase. There will be a higher demand by businesses for all factors of production and unless productive potential of the economy increases at the same rate, businesses will have to outbid each other for these factors. This will lead to an increase in costs (not just wages), which will increase inflation. Inflation is considered a to have negative economic effects on the UK’s international competitiveness. As the UK’s prices become higher than foreign competitors, which will cause the growth to slow down as the UK imports more and exports less.
Economic growth may be undesirable if it is unsustainable. This means that growth endangers future generations’ anility to expand productive capacity. For example if the government expands heavy industry, there will be an increase in negative externalities such as; pollution and damage to the environment. Similarly, non-renewable resources such as oil and coal will be depleted, reducing the productive potential of future generations. Use of unsustainable resources will lead only to short-term economic growth.