To most people, the achievement of economic growth would be seen as a complete success for an economy in any circumstance. Economic growth is measured by the increase in a country’s total output or real GDP compared from one period of time to another. The UK’s GDP growth rate has fluctuated over recent years, with the economy being in one of the slowest recovery stages. Yes, economic growth can have many benefits for the UK economy, but it can be argued that unsustained growth can be more damaging to the economy than beneficial.
One of the main aims for the UK government is to lower unemployment. When there is economic growth caused by an increase in aggregate demand, firms are incentivised to create more job opportunities. This is because there will be an increase in demand for labour, as firms will want to produce more in order to capitalise on higher demand. This therefore lowers unemployment. Lower unemployment reduces the strain on the government and taxpayers to support a population of unemployed people. Furthermore, with more people in the labour force, there is more people for the UK government to receive income tax. This is beneficial because the government can use this increased revenue to reduce the level of government borrowing and spend more on public services and investment in the country’s infrastructure.
This investment in public services can help improve the long-term performance of the economy. For example, better infrastructure enables lower cost of trade. However, this can have negative externalities in the form of third party costs caused by pollution and resource depletion. Future generations will not able to function in the same way if resources are lost so it can be argued that if the economic growth is not controlled, it can be unsustainable.
Another problem caused by economic growth driven by a rise in aggregate demand can have negative effects on inflation, potentially causing it to go above the MPC’s target rate of 2%. The AS/AD graph below shows us how an an increase in aggregate demand (an outward shift) would result in the price level (inflation).
The Phillips Curve also shows us how if unemployment is low, there will be high rates of inflation. On the other hand, if the economic growth is caused by improvements in the supply side of the economy, inflation may be actually be reduced in the long term. However, it can be argued that this increase in economic growth can have negative effects on the current account deficit as it can lead to a rise in the value of the pound and result in a rise in the import rate, as there will be a high marginal propensity to import in the UK. With economic growth, the pound value increases, as there will be more business opportunities in the UK, therefore increasing the demand for the pound, increasing its value. A stronger pound causes exports to become more expensive for foreign countries, which will negatively affect the balance of trade.
In contrast to this, if the economic growth is driven by an expansion in the sales of domestic goods and services in other countries, it may not be a problem. This will generate a flow of money for the UK from abroad, which can be used to strengthen the domestic economy and raise living standards. However, this is a risky strategy as there is high dependence on foreign markets and can be faltered by a recession in foreign countries, which is out of the UK government’s hands. It also depends upon foreign demand and whether producers in the UK can produce goods that will make high sales in other countries, taking into account import taxes.
The consequences of economic growth highly depend upon the causes of it: whether it is aggregate demand driven or aggregate supply driven. Economic growth is obviously better than an economic decline but only if it is controlled to prevent negative externalities.