Costs and benefits of economic growth

Economic growth versus wellbeing

• economic growth is narrower, focusing only on increased output. economic growth can contribute to increased wellbeing (material living standards, better quality goods and services).

• improved wellbeing is holistic, broader. improved wellbeing may lead to activities not increasing economic growth e.g. valuing increased leisure time more.

Benefits of economic growth

1. Higher material living standards

2. Better quality goods and services + increased choices for customers -more production, innovation, and imports

3. Greater employment opportunities- increased output requires increased factor/ resource inputs, including labor

4. Knock on effect of growth

5. Fiscal dividend

6. Reduced environmental footprint

Higher material living standards

increased capacity for production of goods and services → members of society can earn higher real incomes, get more purchasing power and increase their material standard of living

Knock on effect of growth

Economic growth causes high business and investor confidence, so they are more likely to inject new investment spending (injection) into the economy. Firms investing in new (technologically improved) capital increase productivity → increase economic growth.

Fiscal dividends

Rises in output, income and spending increase tax payment levels, so government has more available revenue to improve quantity and quality of public and merit goods and services e.g. transport infrastructure, healthcare, education.

Reduced environmental footprint

Increasing output doesn’t have to mean increased environmental damage- as material living standards rise, people have a capacity to act/ demand that others act in an environmentally friendly matter e.g. paying more for the eco-friendly option

Costs of economic growth

1. Inflation risk

2. Environmental damage

3. Damaging to social welfare

   Inequality of income and wealth

4. Structural change and structural unemployment

Inflation risk

if aggregate demand exceeds aggregate supply, economy experiences capacity constraints:

• demand pull inflation- excess demand creates upward pressure on prices

• cost push-competition for limited resources (labor, raw materials) drives up wages and input costs.

• Examples- traffic congestion, shortages of skilled labor

Environmental damage

Increased output → resource depletion and environmental damage (e.g. overfishing, greenhouse gas emissions). extra output and consumption have negative externalities (e.g. more pollution, landfills).

Damaging to social welfare

Higher incomes→ increased consumption of de-merit goods that reduce social welfare (e.g. alcohol, recreational drugs, gambling, dangerous driving of hot cars). obesity, traffic congestion.

Inequality of income and wealth

Benefits of growth distributed unevenly → growth causes greater income and wealth inequality → reduces social harmony and cohesion.

Structural change and structural unemployment

growth isn’t balanced (industries don’t expand at the same rate).

• growth of one industry e.g. mining may cause decline of another e.g. manufacturing through impact on the value of the exchange rate (foreign buyers must pay more to purchase Australian goods and domestic buyers can pay less for cheaper imports, so manufacturing declines), causing structural unemployment (displaced workers may not have skills to transition into growing sector.)