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:
- Boom and bust economic cycles
- Current account deficit
- Environmental costs – pollution, loss of non-renewable resources
- Potential of widening inequality.
The costs of economic growth will depend on the type of growth that we see.
Potential costs of economic growth include
1. Inflation. If Aggregate Demand (AD) increases faster than Aggregate Supply (AS), then economic growth will lead to higher inflation as firms put up prices. Economic growth tends to cause inflation when the growth rate is above the long run trend rate of growth. It is when demand increases too quickly that we get a positive output gap and firms push up prices.
Graph showing economic growth caused by rising AD leads to inflation.
2. Boom and bust economic cycles. If economic growth is unsustainable then high inflationary growth may be followed by a recession. This occurred in the UK in the late 1980s and early 1990s.
In the 1980s there was an economic boom with growth of over 4% a year. However, this rate of economic growth caused inflation to rise to over 9%. To reduce this inflation, the government increased interest rates, and this rise in rates caused the economy to slow down and then enter into a recession.
- However, if economic growth is at a sustainable rate, this will not occur. For example, between 1993 and 2007, both economic growth and inflation were at a sustainable rate.
In this diagram we have AD increasing at the same rate as LRAS. In this case, we get economic growth without inflation.
3. Current account deficit
Increased economic growth tends to cause an increase in spending on imports, therefore, causing a deterioration on the current account.
This shows that in the 1980s UK economic boom, there was an increasing deficit in the balance of goods and services. In the late 1980s, there was high growth in consumer spending leading to a rise in import spending. In the recession of 1991, there was an improvement in the current account. The UK is susceptible to a current account deficit during high growth because the UK has a high marginal propensity to import.
4. Environmental costs
Increased economic growth will lead to increased output and consumption. This causes an increase in pollution. Increased pollution from economic growth will cause health problems such as asthma and therefore will reduce the quality of life. Economic growth also means greater use of raw materials and can speed up depletion of non-renewable resources. Economic growth can also lead to problems of congestion as more people can afford to buy a car, but it is hard to increase the supply of roads to meet demand.
Higher rates of economic growth have often resulted in increased inequality because growth can benefit a small section of society more than others. For example, those with assets and wealth will see a proportionally bigger rise in the market value of rents and their wealth. Those unskilled without wealth may benefit much less from growth.
However, it depends upon things such as tax rates and the nature of economic growth. Economic growth can also be a force for reducing absolute and relative poverty.
6. Diseases/problems of affluence
With rising living standards it can cause unintended consequences. For example, with rising incomes, there are more goods to steal. Also, high growth can make people more materialistic – which encourages crime. Crime rates have risen since the 1930s. Also, higher incomes enable people to afford more food – this is a factor behind rise in obesity and health related problems.
It depends on the nature of economic growth. If growth is balanced and sustainable, then it can occur without inflation. Also, the environmental costs of economic growth can be minimised through the better use of technology.
Essay/Term paper: The advantages and disadvantages of a market economy.
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The Advantages and Disadvantages Of A Market Economy.
27/9/96 Command and Market economies Neil Samtani
When considering the advantages and disadvantages of command and market
economies, you may notice that they are usually straight forward, yet, both
advantages and disadvantages may merge at times, resulting in an unclear issue,
that could be debatable whether it is for the good of the society, or for the
government. Therefore, what I am trying to say, is that no matter how hard you
try, it is always impossible to debate on which economic system is better. Both
have their good points and their bad, but, each is aimed towards a community
that will make use of it. This community has usually got a majority of people
either rich or poor, and, social class usually effects the way people may choose
In a market economy, the advantages are normally aimed towards the
middle/upper class in a community. This is why we normally find them in richer
communities (i.e. England, USA). The concept of a market economy is to allow
people to get through life by themselves. Government usually does little to
change the economy, and, the control is given to the people with the money, or,
rather, the people with the businesses. The main people in such an economy are
usually the consumers, the producers, the owners of private property, and, the
government. These are the people with the power. The whole system revolves
around private gain rather than the interests of everyone in a community. Since
the rich are in control of the economy, their decisions result in the rich
getting richer and the poor getting poorer. This is a perfect example of what I
mentioned before, which is the way that you can not categorise all statements.
This would be an advantage for the rich, but, a disadvantage for the poor.
However, governments may also affect the situation, resulting in the rich
getting richer, and, the poor managing to stay alive.
The entire idea of the market economy is freedom. The freedom for people
to do what they want, make what they want, and, sell what they want (to a
certain extent). This can also be described as being able to decide WHAT is
going to be produced (what products), HOW it is going to be produced
(organisation, etc.) and FOR WHOM it is going to be produced. This is definitely
an advantage, as freedom and rights are allowed. Besides this, the norm is that
you're wage is affected by the amount you work. The harder a person works, the
more you would expect to get paid. This is another advantage, since people are
paid by the amount they work : a lot of work results in a high outcome, and a
high income for the person. This is an incentive to work too, since, the point
stated previously can affect a person negatively, since, not enough work can
result in pay cuts or, even job losses.
Since the economy is controlled by the rich, a problem that is bound to
occur is the economic growth rates increasing and decreasing. This can result in
people either spending a lot of money (ending up with more people being
employed) , and, people not spending a lot of money (ending up with people being
fired, to save money). This means that there is little job security, which is
one of the disadvantages we are facing today. This means that not working hard
can result in no source of income. However, since the economic growth changes so
much, nothing can be certain. You can be rich one moment, and bankrupt the next.
This also means that a man willing to work can not have a job, and below the
poverty line, which is another disadvantage. There are not always enough jobs to
accommodate the people with the ability to work.
Everyone has rights and freedom to build what they wwant, sell what they
want, and buy what they canafford. Poor people can not necessarily afford
much. Since there is little government interaction with the community, the
people have to manage to live without their help.
It is usually possible to increase living standards by increasing your
level of work, or your quality of it. The economy is controlled by the rich,
and, therefore the richhave the power. Their decisions would always be to get
themselves richer, and, that makes the poor poorer.
There are strong incentives built into the system to innovate and
produce high quality goods (high quality goods = higher income, low quality
goods = lower income / unemployment) Since the economy is controlled by the
people, stable growth is is very difficult. This can result in job losses, due
to a the economic cycle.(boom followed by bust) This result in low job security.
Free markets provide choice for the incentives to innovate, and the
economy to grow. There are bound to be losses. Since job security is low, and
the economy can not always be predicted, bankruptcy is and poverty can creep up
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