2.5 Economic Growth



  1. Economic growth is the growth of real output in an economy over time. It is usually measured as growth in real domestic product (GDP).



Positive consequences of economic growth

  • Increasing aggregate supply curve in the long run while aggregate demand increases in the short run leads to non-inflationary growth, i.e. real output increases while price stays the same.
  • Increase in national income → Increase in levels of education, human capital, freedom and democracy.
  • If GDP per capita increases → People’s income increases → Higher standards of living.
  • Helped in technological advancements in areas such as medicine, household appliances, computers, audio-visual equipment, transportation, entertainment → Making lives of people much easier, pleasurable → Higher standards of living.
  • Higher incomes → Higher tax rates → Government can spend more on public and merit goods → Higher standards of living → Redistribute income and reduce inequality.
  • Improvement in competitiveness of a country’s exports → Aggregate demand increases.


Negative consequences of economic growth

  • Higher incomes doesn’t necessarily result in higher standards of living.
  • Might result in less leisure time and neglect of personal relationships as people are trying to work hard to stimulate the economy → Poorer standards of living.
  • People who get rewarded more and more might get dissatisfied after a while.
  • A structural change in economy → Increase in structural unemployment.
  • Rapid economic growth → Higher emissions of greenhouse gases.
  • Increase in income → Higher levels of household waste.
  • Producing a higher level of output means nonrenewable resources are getting rare.


Paper 3 Questions


The following data is from a country’s national accounts: