Benefits and Costs of Economic Growth

Topics: Economics, Macroeconomics, Gross domestic product Pages: 2 (636 words) Published: April 15, 2010
Economic growth is defined as the sustained increase in real GDP or GNP per capita over time. Economic growth is desirable for an economy as it increases its real national income and standards of living for its people in general. Although it is desirable, economic growth does have its benefits and costs.

One benefit would be increased levels of consumption. Provided economic growth outstrips population growth, it will lead to higher real income per head. This can lead to higher levels of consumption of goods and services. With economic growth there will be improvement in business expectations, leading to increase in investment. Firms replace worn-out/ obsolete capital or invest in new capital. There will also be expansion of demand, leading to increased output. Existing idle capacity and unemployed labour are utilised. This result in more people being employed, thus increasing the level of consumption within the country. If human welfare is related to the level of consumption, then growth provides an obvious gain to society.

Next, it can help to avoid other macroeconomic problems. People aspire to higher living standards. Without a growth in productive potential, people’s demands for rising incomes are likely to lead to higher inflation, balance of payments crises(as more imports are purchased), etc. Growth in productive potential helps to meet these aspirations and avoid macroeconomic crises.

Moreover, economic growth makes it easier to redistribute incomes to the poor. If incomes rise, the government can redistribute incomes from the rich to the poor without the rich losing. For example, as people’s incomes rise, they automatically pay more taxes. These extra revenues for the government can be spent on programmes to alleviate poverty. Without a continuing rise in national income, the scope for helping the poor is much more limited.

Society may also feel that it can afford to care more for the environment. As people grow richer, they may become...
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