Essay on Causes and Effects of Economic Growth

1724 Words Mar 31st, 2008 7 Pages
Discuss the causes and effects of Economic Growth

Economic Growth

Before discussing the causes and effects of economic growth, I will define what economic growth actually is and distinguish between the two types of growth in the economy; actual and potential. On the whole, economic growth may be defined as ‘a long-run increase in an economy’s productive capacity and trend output’. The long-run output growth trend an economy achieves is indicated by the path of trend Gross Domestic Profit (GDP) and is usually calculated as a percentage average annual output growth over a large number of years. This is because, given long enough, the phases of the business cycle averages out so that increases in the economy’s real GDP are largely
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– Labour
This is measured in the number of hours worked.
– Capital
This includes machinery and other productive assets which could increase the marginal productivity.
– Entrepreneurial skills
i.e. the business skills which the population has.

If the supply potential is to grow then one or both of the above bullet points must take place. For this growth to be sustained over the long-term there then must be an increase in potential output, i.e. the economy capacity to produce must increase.

A low stable inflation and steady growth in aggregate demand is required to produce the type of macroeconomic situation which encourages economic growth. This is the aim of the governing bodies that can control this. However, there are various effects of economic growth to economies. These can either be positive or negative.

Effects of Growth

Benefits of Growth

There are four main benefits of growth to an economy. These are;
• Increased levels of consumption
A high level of consumption of goods and services is linked back to a higher real income per head. This in turn will happen if economic growth outstrips population growth. Overall, if human wellbeing is related to the level of consumption, then growth provides an obvious advantage to the society.

• It can help avoid other macroeconomic problems
It is only human for people to have wants and wishes of a higher living standard. Without a growth in productive