This topic video assesses some of the benefits and costs of real economic growth.
Main Benefits of Economic Growth
- Higher living standards – i.e. Real GNI per capita – helps to lift people out of extreme poverty and improve development outcomes (e.g. rising HDI)
- Employment effects – sustained growth stimulates jobs and contributes to lower unemployment rates which is turn helps to reduce income inequality.
- Fiscal dividend – higher economic growth will raise tax revenues and reduce government spending on unemployment & poverty related welfare benefits
- Accelerator effect - rising growth stimulates new investment e.g. in low-carbon technologies. Better growth may attract foreign direct investment projects
Main Costs of Economic Growth
Rapid rates of GDP growth can bring about undesirable economic and social costs – much depends on the nature/causes of growth.
Risks of higher inflation and higher interest rates
- Fast-growing demand can lead to demand-pull and cost-push inflation – this leads to a conflict between macro objectives
- The central bank may decide to raise interest rates to control inflation
- More negative externalities such as pollution & waste
- Risk of unsustainable extraction of finite resources – i.e. fast growing countries may cause a long-run depletion of natural resources
Inequalities of income and wealth
- Rapid increases in real national income can lead to a higher level of inequality and social divisions
- Many of the gains from growth may go to only a few people