AS Economics
PowerPoint Briefings 2006
Benefits and Costs of Economic
Growth
tutor2u™
UK Economic Growth
Growth of National Output for the UK
Annual percentage change in GDP at constant prices
6
5
4
3
Percent
2
1
0
-1
-2
-3
-4
-5
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
ar 4 quarters
Source: Reuters EcoWin
Economic benefits from growth
More tax
revenue
Higher
investmen
t
Consumer
confidenc
e
Benefits of Economic Growth
• Boosts average living standards through higher real GDP
per head – important in reducing poverty
• Increased output generates new jobs and reduces
unemployment
• Good news for shares and the housing market – boosting
household wealth
• Increased tax revenues for Government – growth provides
a “fiscal dividend” – can be used to fund extra public
spending
• Improved business confidence – attractive to foreign
investment inflows
• Higher consumer demand can lead to higher investment
• Growth acts as spur to introduce new technology (the
virtuous circle of growth) which spurs further innovation
Income and spending per head
Consumer spending and disposable income in the UK
Spending and income per head in real (inflation adjusted) terms, £ 000s per head at constant 2001 prices
13
12
2001 GBP (billions)
11
Disposable income per head
10
9
Consumer spending per head
8
7
6
80
82
84
86
Consumer spending
88
90
92
94
96
98
00
02
04
Disposable income
Source: Reuters EcoWin
Risks from Economic Growth
• Environmental impact
– Depletion of non-renewable resources – “resource
poverty”
– Concern about sustainability of growth for future
generations
– Increased levels of pollution / waste / congestion
• Increasing inequalities in income and wealth
– Widening gap between rich and poor – The “Wealth Gap”
– i.e. a richer society but with higher levels of relative
poverty
• Unbalanced growth – danger of inflation
– Risk of inflation if aggregate demand is too strong
– Increased demand for imports – larger trade deficit
GDP per capita in 2004
GDP per
capita ($)
Luxembourg
57 704 EU15
28 741
United States
39 732 Germany
28 605
Norway
38 765 Italy
27 699
Ireland
35 767 Spain
25 582
Switzerland
33 678 Korea
20 907
United Kingdom
31 436 Czech Republic
18 467
Canada
31 395 Hungary
15 946
Australia
31 231 Slovak Republic
14 309
Sweden
30 361 Poland
12 647
Japan
29 664 Mexico
10 059
France
29 554 Turkey
7 687
Economic Growth and the Environment
• Some economists believe that growth provides a basis
for environmental improvements
– As per capita incomes rise, a share of the new wealth
can be used to buy cleaner fuels like natural gas
– Higher real household incomes are associated with
lower fertility rates which has an impact on the natural
rate of population growth
– Richer countries also have the resources to devote
research and development
– The positive spill-over effects of R&D might include the
development of cleaner and less resource-intensive
production technologies
Growth Pessimists
• Questions over the long-term sustainability of growth
• Renewable resources depleted
– The Tragedy of the Commons
– Examples include the destruction of rain forests, the overexploitation of fish stocks and loss of natural habitat
created through the construction of roads, hotels, retail
malls and industrial estates
• Growth contributes to growing environmental threats
– Expansion of waste from both production and consumption
– Over-population (particularly in urban areas) putting
increased pressure on scarce land
– Pollution of the environment both by producers and
consumers including reductions in air quality
– Species extinction
The environmental cost of growth?