🛒 Consumers
Households spend more, for example after a tax cut or when they feel confident about the future.
Economic Growth » Causes and Consequences of Economic Growth
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 4.5.3
- Three causes of economic growth: more total demand, more resources, better resources
- The four parts of total demand
- The advantages of economic growth
- The disadvantages of economic growth
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Unlock This CourseWhat causes economic growth?
Economic growth means a rise in real GDP. So what makes a country's output go up? The spec gives three causes: an increase in total demand, an increase in the quantity of resources, and an increase in the quality of resources.
Key terms:
- Total demand: all the spending on a country's goods and services in a period of time.
- Net exports: the value of exports minus the value of imports.
Cause 1: an increase in total demand
Total demand is made up of four parts. If any one of them rises, firms sell more, so they produce more and real GDP grows.
🏭 Firms
Firms spend more on machines and buildings, for example when interest rates fall.
🏥 Government
The government spends more on things like hospitals, schools and roads.
🚢 Net exports
Overseas buyers spend more on the country's exports, or the country buys fewer imports.
Example: in the made-up country of Kelvoria, shoppers spend 10% more on goods made at home. Factories take on more workers to meet the demand, and real GDP rises.
One limit: an economy can only produce so much with the resources it has. If total demand keeps rising beyond that, output cannot keep up and prices are pushed up instead.
Causes 2 and 3: more and better resources
Growth can also come from the supply side. Remember from earlier that the quantity and quality of resources can both change. Either one lets a country produce more.
👷 Greater quantity
More workers, more machines, more land or a new mineral discovery means more can be produced.
🎓 Greater quality
Better-trained workers and better machines produce more from the same number of resources.
Example: the made-up country of Ostenia opens training colleges and buys modern machines. It has no extra workers, yet each worker makes more, so real GDP rises.
Two routes to growth
More total demand pulls output up by spending. More or better resources raise how much the economy is able to produce. Both can happen together.
Advantages of economic growth
💰 Higher incomes
More output means more income earned, so people can afford more goods and services.
💼 More jobs
Firms that produce more usually need more workers, so unemployment may fall.
🏦 More tax revenue
Higher incomes and spending mean more tax paid, with no need to raise tax rates.
🏡 Better living standards
The government can spend the extra tax on hospitals and schools, and people can buy more.
Disadvantages of economic growth
🏭 Pollution
More production and more transport can mean more waste and more harmful gases.
⛰️ Resource depletion
Using more oil, timber and minerals can use them up faster, leaving less for future generations.
⚖️ Inequality
The gains may go mainly to some groups, such as owners of firms or skilled workers, so the gap between rich and poor can widen.
🔥 Inflation risk
If total demand grows faster than the economy can produce, prices may rise across the economy.
These are risks, not certainties. Growth that is planned well, for example with clean energy, may cause far less damage.
Common mistakes
- Saying growth means "prices going up". Growth is a rise in real GDP, which is output.
- Listing only one cause. Remember total demand, quantity of resources and quality of resources.
- Saying growth is always good, or always bad. Good answers give both sides.
- Writing "more jobs" with no reason. Say why: firms producing more need more workers.
Exam-style question
Zandoria is a country that has recently had strong economic growth. Its government has spent more on roads and ports, and its firms have bought new machinery. Factories have expanded and many new jobs have been created, but some people worry about river pollution.
(a) Identify two parts of total demand. [2 marks]
(b) Explain how an increase in the quality of resources may cause economic growth. [4 marks]
(c) Discuss whether economic growth is good for the people of Zandoria. [6 marks]
Model answer
(a) Any two from: consumer spending (1), firm spending (1), government spending (1), net exports (1).
(b) Better quality resources, such as workers with more training or better machines, can produce more output from the same amount of resources (1). For example, trained workers make more goods each hour (1). So the economy can produce more goods and services (1), which means real GDP rises, and that is economic growth (1).
(c) Growth has advantages. Higher output means higher incomes (1), and the new jobs created reduce unemployment (1). More tax revenue lets the government pay for services such as schools (1) (maximum 6 marks for the whole answer). However, growth has disadvantages. More production may cause pollution, as in the river pollution mentioned (1), and resources may be used up faster (1). Growth may also make inequality worse if only some people gain (1). Overall, growth can improve living standards, but the benefits depend on whether pollution is controlled and whether the gains are shared (1).
Exam tip
In a "Discuss" question, give at least one advantage and one disadvantage, use the context (Zandoria's pollution), and finish with a short overall judgement.