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Economic Growth » The Impact of Economic Growth

What you'll learn this session

Study time: 30 minutes

Edexcel spec: 2.1.1 (a)

The benefits of economic growth for jobs, living standards, poverty and productive potential
The costs of growth for inflation and the environment
How to give both sides of growth in an exam answer

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Why does growth matter?

Governments want their economies to grow. But growth is not all good news. It brings benefits and it brings costs. This lesson is part of Section 2.1, Government and the Economy, which is examined on Paper 2 (Macroeconomics and the Global Economy).

Remember from the lesson on economic growth and GDP that growth means a rise in a country's output, measured by an increase in GDP. Here we look at what that rise does to people, firms and the planet.

Key terms:

Standard of living: how well off people are, shown by the goods and services they can buy and use, such as food, housing, healthcare and education.
Inflation: a general rise in prices over time. You will study it fully in later lessons.

The benefits of economic growth

Growth creates jobs and higher incomes, lifting standards of living

💼 Employment

When output rises, firms need more workers to make it. Businesses expand and hire, so more jobs are created and unemployment tends to fall. More people earn wages and pay tax.

🏡 Standards of living

More output means more goods and services for people to use. Higher incomes let families afford better food, housing, healthcare and leisure. Governments also collect more tax, so they can spend more on schools and hospitals.

👥 Poverty

Growth can reduce poverty. More jobs and higher wages lift people out of low income. Extra tax revenue can pay for benefits and public services that help poorer households.

🏭 Productive potential

Firms often use growth profits to buy new machines and train workers. This raises the maximum a country can produce, so its productive potential grows. On a production possibility diagram, the curve shifts outwards.

Notice the chain. Growth leads to more jobs. More jobs mean more income. More income means better living standards and less poverty. Examiners reward answers that link the points like this instead of just listing them.

The costs of economic growth

Faster growth often means more traffic and pollution, a cost to the environment

💰 Inflation

If demand rises faster than the economy can produce, firms cannot supply enough. Firms can raise prices, so inflation may rise. This is most likely in a fast boom, when many firms are already working at full capacity.

🏭 The environment

More production often uses more resources and energy. This can mean more air and water pollution, more waste and more traffic. Land may be cleared for factories, roads and homes, and some natural resources can run out.

Growth does not always share its gains fairly. Some people may gain a lot while others gain little, so it may not reduce poverty as much as hoped.

Whether growth is good overall depends on what type it is and how it is used. You will see how governments weigh growth against inflation and the environment in the lesson on trade-offs between objectives, so here you only need to describe each cost.

Putting both sides together

In a longer answer you may be asked whether growth is good for a country. Give the benefits, give the costs, then make a judgement. Your judgement should say what it depends on. For example, growth that creates jobs and new machines, and is shared widely, is far more useful than growth that mainly raises pollution and prices. The answer also depends on how fast the growth is and who gains from it.

A useful way to remember the six areas is to split them into people and planet. People: jobs, living standards, poverty. Output and prices: productive potential and inflation. Planet: the environment.

Summary table

Area	Possible benefit	Possible cost
Employment	More jobs, lower unemployment	None
Standard of living	More goods, services and income	Gains may be shared unevenly
Poverty	Fewer people on low incomes	Gains may not reach the poorest
Productive potential	Maximum possible output rises	Needs money spent on investment
Inflation	None	Prices may rise faster
Environment	None	More pollution, waste and resource use

Common mistakes

Saying growth is always good. Always say it brings costs as well.
Saying growth always causes inflation. It only tends to when demand rises faster than output.
Listing points without explaining them. Write why: "more output needs more workers, so employment rises".
Mixing up growth with a high level of GDP. Growth is the rise in GDP, not how big it is.

Exam-style question

Country Dorvane's GDP grew strongly for five years. New factories opened and many people found work. At the same time, prices rose faster and the air near the factories became more polluted.

(a) Identify one benefit of economic growth shown in the information. [1 mark]

(b) Explain how economic growth could reduce poverty. [3 marks]

Model answer

(a) More people found work, or more jobs were created. (1)

(b) Growth means firms produce more and need more workers, so more people get jobs and wages. (1) Higher incomes lift households out of low income. (1) The government also collects more tax, which it can spend on benefits and services for poorer households. (1)

(c) One cost is inflation. (1) Prices have risen faster, which may be because demand grew faster than output, so the cost of living goes up for households. (1) A second cost is damage to the environment. (1) The new factories produce air pollution, which harms health and quality of life for people living nearby. (1)

Exam tip

In an "Analyse" part, name the cost, then add a "because" or "so" that shows its effect. Two named costs with no link to the country earn few marks.

Recap

Benefits of growth: more employment, higher standards of living, less poverty and greater productive potential.
Costs of growth: possible inflation and damage to the environment.
Growth may be shared unevenly.
Good answers give both sides and explain each point with a chain of reasoning.

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