5. Benefits & Costs of Economic Growth

Benefits of growthIncreased 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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Benefits of growthAlleviate Other Macroeconomic ProblemsPeople'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.

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Benefits of growthRedistributive BenefitsIf 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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Benefits of growthEnvironmental BenefitsAs 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 issues12

Costs of growthCurrent opportunity cost of growthTo 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.12Fill in the blanks

Costs of growthNegative 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 levelsIf 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 poor12

Costs of growthImpact on the balance of payments (BOP)

BOP: Current account and Capital account13

Costs of growthImpact 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 undesirable13

Costs of growthImpact 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.

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Costs of growthNon renewable ResourcesIf 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.13

Costs of growthNon renewable ResourcesWill limited resources ultimately limit growth?Malthusian Theory- Sustained economic growth is impossible as food production cannot keep up with population growthORAlternative explanation taking into account the role of the market mechanism13

Costs of growthEnvironmental destructionThe 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.14

6. The impact of Globalization/Trade on Economic GrowthPositive impactGovernments 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 expertise14

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

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6. The impact of Globalization/Trade on Economic GrowthNegative impactCountries become more vulnerable and more susceptible to external shocks14

7. ConclusionSo 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?

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What you will learn by the end of the topic..There are two types of growth: Actual andPotential growthPotential growth is determined by supply-side factorsGrowth has both positive and negative effects

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Web quest ActivityAn activity that requires internet resources to solve a problemForm a team of 4-5 members to analyse the impact and factors that contribute to the economic growth for a chosen countryhttp://zunal.com/webquest.php?user=37349Present your findings in the form of a concept map (Please use Mindmeister to do this) on T2W1Your tutor will select the groups who will present in class