Benefits and Costs of Economic Growth

This topic video assesses some of the benefits and costs of real economic growth.

Main Benefits of Economic Growth

1. 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)
2. Employment effects – sustained growth stimulates jobs and contributes to lower unemployment rates which is turn helps to reduce income inequality.
3. Fiscal dividend – higher economic growth will raise tax revenues and reduce government spending on unemployment & poverty related welfare benefits
4. 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

Environmental effects

• 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