The Effects of Economic Growth

Impact on consumers

Advantages

• Income levels of the average consumer increases as there are high levels of employment when there is economic growth (as output increases so does the need for workers).
• Consumers also have higher levels of confidence in the economy which causes increased spending on consumer durables.
• Wages could also rise as firms are likely to earn greater profits – this will result in a rise in standard of living (so long as prices don’t rise more than wages).
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Disadvantages

• People on fixed incomes may actually be worse off as there is high inflation meaning the real value of their wages decreases rapidly.
• There is likely to be high levels of demand-pull inflation which could cause hyperinflation if not appropriately dealt with.
• Inequality could rise as those who reap the largest benefits of economic growth are likely to be the richest and with a larger skill set.
• Along the same line of reasoning it seems clear that those with a small skill set may not be able to prosper. My explanation for this statement is that the place or industry where growth is taking place may not be accessible to people who have low labour market flexibility and so this group of individuals gain no benefit from economic growth when a lot of others may be. The knock-on effect is increased income inequality.

Impact on firms
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Advantages

• Firms tend to make more profits during periods of economic growth as demand for goods increases with increased disposable income for consumers (due to increased employment).
• Higher levels of business confidence usually lead to increased investment which could help with development of new technology and more efficient processes which may not harm the environment as much. Therefore, economic growth could lead to the government macroeconomic objective of protecting the environment being reached.
• If firms grow during these periods of economic growth, they can lower costs by making use of economies of scale which benefit both the producers and consumers.
• If there are lower production costs, then the international competitiveness of a business increases as may be able to sell products for cheaper than their competitors.
• Furthermore, the entire economy may reap benefits as there will be export-led growth (caused by possible more international competitiveness causing increased sales internationally).  
  
  

Costs

• There may be some menu costs. These are costs incurred when firms have to change their prices in order to reflect the new nominal price due to inflation.

Impact on the government

Advantages

• The government budget will become more balanced as increases in employment would lead to an increase in tax revenue for the government while outflows decrease.

Costs

• Increased output may cause scenery and habitats to be destroyed, furthermore finite resources may be overexploited and cause pollution which the government then has to deal with. Furthermore, as income rises people may actually spend more on imports which leads to a deficit on the balance of payments.

 
Impact on the current and future living standards
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Advantages

• As income levels increase, more people are likely to may act more responsibly and buy more environmentally friendly goods even if they are more expensive.
• Economic growth could also lead to greener technology being used and developed because companies have more money.
• The living standards in the country may increase if the government directs its extra revenue towards public goods and services.
• Increased consumer confidence would increase consumption of durables, in turn leading to better living standards as people have goods they previously wanted but couldn’t afford. Furthermore, citizens who were previously unemployed (but no longer are) can afford more than basic necessities.

 
Costs

• The environment may become damaged which reduces the living standards for future generations. There could also be many demerit goods consumed due to higher income and so the current living standards could also fall.