5.

Benefits & Costs of

Economic Growth

Benefits of growthFill in the

blanks

Increased Levels of
Consumption (and
therefore higher material
standard of living)
If economic growth outstrips
population growth
=> higher real income per
head
=> higher levels of
consumption of goods and
services
=> gain to society

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2

Benefits of growth

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2

Alleviate Other Macroeconomic

Problems
People's demands for rising incomes are
likely to lead to higher inflation, balance
of payments crises (higher levels of
imports) and industrial disputes.
Growth in productive potential helps to
meet these aspirations and avoid
macroeconomic crises.

Benefits of growth
Redistributive Benefits
If incomes rise, even by
maintaining the tax rate
constant, the government can
redistribute incomes from the
rich to the poor without the rich
losing in absolute terms.
Increased government revenue
means that more budget can be
used on programmes (e.g.
healthcare, education) to help
the poor

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2

Benefits of growth

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2

Environmental Benefits
As people grow richer, they can
afford to become less preoccupied
with their own private consumption
and more concerned about living in a
clean environment.
Most of the developed world places a
great importance on environmental
issues

Costs of growth

Fill in the
blanks

1
2

Current opportunity cost of

growth
To achieve faster growth, there will
be a need for more investment which
requires financing. This leads to a
reduction in current consumption in
the SR.

Costs of growth

1
2

Negative effects on Employment and

the Distribution of Income
Growth involves changes in production, the
more rapid the rate of growth is, the more
rapid structural change may occur.
This can result in structural unemployment or
lower wage levels
If the means to higher growth are in the form
of greater incentives given to specific sectors
of the economy then the rich might get
richer, with little or no benefits for the poor

Costs of growth
Impact on the balance of
payments (BOP)
BOP: Current account and Capital
account

1
3

Costs of growth

1
3

Impact on the balance of payments (BOP)

Economic growth could cause a BOP current
account deficit.
IF economic growth => rising income =>
increase expenditure on imported capital
goods => deficit would then be desirable
BUT IF economic growth => rising income
=> increase expenditure on imported
consumer goods => deficit would then be
undesirable

1
Costs of growth
3
Impact on the balance of payments (BOP)
Developing countries which are dependent
on FDI for economic growth could experience
a BOP capital account surplus when capital
funds flow in as a result of the FDI.
In LR, a portion of the profits generated from
the FDI would be repatriated to the foreign
shareholders, possibly leading to a BOP
current account deficit.

Costs of growth
Non renewable Resources
If growth involves using a greater
amount of resources, rather than
using the same amount of resources
more efficiently, certain non
renewable resources will run out
more rapidly.

1
3

Costs of growth

1
3

Non renewable Resources

Will limited resources ultimately limit
growth?
Malthusian Theory
- Sustained economic growth is impossible
as food production cannot keep up with
population growth
OR
Alternative explanation taking into
account the role of the market mechanism

Costs of growth

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4

Environmental destruction
The more rapid is economic growth, the
more waste the environment must
absorb.
Possibly immense environmental damage
caused by our consumption habits.
Difficult to determine the extent of the
damage due to insufficient/ imperfect
knowledge.

6. The impact of
Globalization/Trade
on Economic Growth

Positive impact
Governments maintaining competitive
and open economies.
Governments recognizing the
constructive role that global enterprises
and electronic commerce can play in
creating new opportunities.
Export oriented manufacturing and
services develop labour skills,
technology and expertise

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4

6. The impact of
1
Globalization/Trade
4
on Economic Growth
Positive impact
Freer labour movement across
national boundaries.
Developing countries benefit from
greater access to technology, foreign
capital and export networks.

6. The impact of
1
Globalization/Trade
4
on Economic Growth
Negative impact
Countries become more vulnerable
and more susceptible to external
shocks

7. Conclusion

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5

So should countries pursue growth?

It depends on
(a) the type of costs and benefits
involved in achieving growth, and
(b) the weights people attach to the
costs and benefits.
What policies should governments
pursue to achieve growth?

What you will learn by the end of 1

the topic..
1. There are two types of growth:
Actual and
Potential growth
2. Potential growth is determined by
supply-side factors
3. Growth has both positive and
negative effects

Web quest Activity

An activity that requires internet resources
to solve a problem
Form a team of 4-5 members to analyse the
impact and factors that contribute to the
economic growth for a chosen country
http://zunal.com/webquest.php?user=37349
Present your findings in the form of a
concept map (Please use Mindmeister to do
this) on T2W1
Your tutor will select the groups who will
present in class