Benefits and Costs of Economic Growth (2019 Update)

What is economic growth?

• Growth is measured by the annual percentage change of real national output (GDP)
• Most economists view economic growth as a long-run concept
• They see growth as a sustained increase in a country’s productive capacity and capabilities

What are the advantages of rapid economic growth?

1. Higher per capita incomes if growth exceeds the annual expansion of population which brings about a reduction in extreme poverty rates
2. Increased consumption and savings per capita. Higher savings increase the ability of the financial system to lend for productive investments
3. Can promote better development outcomes
4. Increased employment rates / lower unemployment in the formal labour market
5. Increased consumer demand stimulates capital investment via the accelerator effect
6. Increased incomes generates higher tax revenues (a fiscal dividend) to be spent on public services, e.g. education, pensions and healthcare

What are the main risks or drawbacks of rapid economic growth?

1. Risk of accelerating inflation if there is excess aggregate demand / inelastic AS
2. Higher per capita incomes and consumption can increase the trade deficit
3. Higher resource consumption and pollution leads to increased environmental / social costs
4. Danger of a significant widening of income and wealth inequality (relative poverty)

Much depends on whether the rate of economic growth is sustainable, inclusive and balanced. The quality of growth can matter as much as the pace of growth and it is also contextual depending in part on the stage of economic development that a country has reached.