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The Benefits of Economic Growth
Increase in Income and Wages: As the economy grows, businesses tend to experience greater profits which allows for them to offer higher wages. This however is not always the case, as businesses may choose to keep higher profits as opposed to offering higher wages.
Decreasing Unemployment: Higher economic growth is also associated with higher employment rates in the economy. As growth rises, businesses often expand operations and increase employment of workers to match demand. Resultantly, unemployment rates are likely to decrease as employment opportunities rise.
Technological Advancements: Economic growth is also associated with technological advancements in the economy. During times of economic growth, businesses often have higher profit levels and are more likely to invest in R&D, machinery and buildings. As business growth and profit rises, we often see an associated rise in technological advancement.
Government Revenue Rises: As we have discussed in the tax section, a higher rate of employment leads to higher total direct taxes paid by workers in the economy. This increases government revenue and benefits budget management. This can benefit the wider economy as the government may choose to increase spending on public services such as health care.
Costs of Economic Growth
The Risk of Inflation: Within The Hub, we have also explored the topic of Inflation. While economic growth can undoubtedly benefit the economy, rapid growth can in fact generate inflationary pressure. Due to high growth, high demand for goods and services can rise faster than supply, which can lead to a rise in prices. High inflation can decrease the value of money and increase the cost of living in the economy.
Sustainability Risks: As we have discussed when outlining the business cycle, constant and rapid economic growth is economically unfeasible. However, extensive economic growth can also have significant environmental costs due to the increase in output which is often associated with increased carbon emissions and pollution.
Inequality Risks: Economic growth does not guarantee an ‘equal’ distribution of wealth, and is unlikely to benefit all portions of society equally. We might predict that high economic growth further benefits the wealthy, and in fact widens the income inequality gap in the country.
What is the Gini coefficient? You will notice that the following graph uses the Gini coefficient to measure income inequality. The Gini coefficient is used as a measure of the level of income inequality in a population. The measure is recorded between 0 and 1 ( 0% and 100%). At 0, there is total equality, while at 1, there is maximum inequality one individual maintains all the wealth. In essence, one individual maintains all the wealth in this scenario. Quite simply, the Gini coefficient allows us to measure and compare how fair or unfair income distribution is in a society.
The following graph, comparing GDP per capita and income inequality in the UK, visualises the fact that economic growth is unlikely to decrease inequality. An increase in economic growth does not necessarily guarantee an equal distribution of benefits.
Income inequality rose significantly in the UK during the period of heavy period of unemployment in the UK, partially due to the mining closure which is also discussed here in the EF Hub. Despite the exponential rise in GDP per capita witnessed in the UK, income inequality has not decreased. Given this, many argue that GDP may be an inappropriate measure of living standards and that wider measures may be required for accurate conclusions to be drawn.
How does inequality in the United Kingdom compare globally?
Did you know? In the United Kingdom, those in the top 1% of households have 230 times more wealth than those in the bottom 10%!
