Discuss the Extent to Which Economic Growth May Benefit an Economy. (18)

794 Words Apr 17th, 2016 4 Pages
Discuss the extent to which economic growth may benefit an economy. (18)
Economic growth is an increase in the output that an economy produces over time, for the minimum of two consecutive quarters. Economic growth can benefit an economy in a number of ways. Firstly, higher average incomes, this allows consumers to enjoy more goods and services and enjoy better standards of living. This in turn could lead to the ‘Trickle Down’ effect, those who are the highest income earners spending their disposable income on goods and services in the economy, those lower income earners could benefit from this as that money gets filtered through all sections of the economy. Therefore, many people in the economy will benefit from an increase in average
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In turn, more investment will result in an increase in aggregate demand and therefore encouraging a steady cycle of economic growth which is desired by many economies. Taking all these points into account, economic growth can benefit an economy in a number of ways. On the other hand, economic growth can also potentially negatively impact an economy such as inflation. If aggregate demand increases at a faster rate compared to aggregate supply then economic growth will be unsustainable in the long run. Economic growth tends to cause inflation when the growth rate is above the long run trend rate of growth, which is when demand increases at such a rapid rate that an economy will get a positive output gap and this will result in firms pushing up prices resulting in inflation.
This diagram shows how an increase in aggregate demand from AD to AD1 can cause and increase in real GDP from Y1 to Y2. However the price level has also risen from P1 to P2, this is demand pull inflation as aggregate demand is outstripping aggregate supply.
Another potential cost of economic growth is a current account deficit. An increase in economic growth may cause an increase in the spending on imports, if this results in the number of imports being greater than the number of exports then there will be a current account deficit. This in turn may cause a deficit in the balance of payments possibly resulting in a loss of confidence by foreign
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