Benefits, costs and the sustainability of growth

Overview

Main benefits of economic growth for households, benefits of economic growth for the government and benefits of economic growth for firms.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What are the main benefits of economic growth for households?

   Model answer

   Growth raises real incomes on average, so households can consume more goods and services and material living standards improve. Rising output increases the demand for labour, so employment rises and unemployment falls, bringing both income and the wider benefits of work. Higher incomes allow greater saving and more choice about hours worked, and over time growth has historically been accompanied by longer life expectancy and better health as resources become available for healthcare and nutrition.

2. 2

   What are the benefits of economic growth for the government?

   Model answer

   Higher output and incomes generate more tax revenue at unchanged tax rates, while lower unemployment reduces spending on benefits, so the fiscal position improves from both directions. This allows spending on public services, infrastructure and redistribution without raising tax rates or borrowing. Growth also reduces government debt relative to the size of the economy even when the debt itself is unchanged, because the denominator is larger, which eases the constraint on future policy.

3. 3

   What are the benefits of economic growth for firms?

   Model answer

   Rising household incomes increase demand for firms' products, so sales and profits rise, which is most pronounced for producers of goods with high income elasticity of demand. Higher profits and greater confidence about future demand encourage investment, which raises productivity and lowers unit costs. Expanding output also allows firms to exploit economies of scale, reducing average cost and improving their competitive position against foreign rivals.

4. 4

   What are the environmental costs of economic growth?

   Model answer

   Producing and consuming more requires more energy and raw materials, so growth increases emissions of greenhouse gases and other pollutants and accelerates the depletion of non-renewable resources. More output means more waste to dispose of, and expanding production consumes land, damaging habitats. These are negative externalities: the cost falls on third parties and on future generations, and it is not reflected in the price of the goods concerned, so the market produces more of them than is socially optimal.

5. 5

   How can economic growth worsen the distribution of income?

   Model answer

   The gains from growth accrue first to those who own the factors that are scarce and in demand, which is typically capital and skilled labour, so profits and high salaries can rise faster than the wages of the low-skilled. Technological change that raises productivity often displaces routine work while raising the value of skilled work, widening the wage gap. Asset prices such as housing and shares rise during expansions, which benefits those who already own assets and disadvantages those trying to acquire them. Growth therefore raises the average without necessarily raising the median.

6. 6

   What are the costs of economic growth for workers and for society beyond the environment?

   Model answer

   Rapid structural change destroys jobs in contracting industries and creates them elsewhere, so the growth that benefits the economy as a whole imposes concentrated losses on those displaced, who face structural unemployment. Growth is often accompanied by longer or more intense working hours and by greater job insecurity, which imposes a cost in stress and reduced leisure that measured output does not capture. Rapid change can also erode established communities as economic activity relocates.

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