Costs Of Economic Growth
· Despite the benefits of economic growth there are potential costs.
· These costs will be greater if the rate of economic growth is too fast.
1. Inflation. If AD increases faster than AS then economic growth will be unsustainable. The output gap will narrow causing inflation to increase.
2. Boom and Bust Economic Cycles. If Economic growth is unsustainable then high inflationary growth may be followed by a recession. This occurred in the late 1980s and early 1990s.
In the 1980s there was an economic boom with growth of over 5% a year. However this caused inflation to rise to over 10%. To reduce inflation the government increased interest rates, this caused the economy to slow down and then enter into a recession.
- However if economic growth is at a sustainable rate this will not occur . For example, between 1993 and 2007, both economic growth and inflation were at a sustainable rate.
3. Balance Of Payments Deficit.
Increased Economic growth causes an increase in spending on imports therefore causing a deficit on the current account.
This shows that in the 1980s boom, there was an increasing deficit in the balance of goods and services. In the recession of 1991, there was an improvement in the current account.
4. Environmental Costs.
Increased economic growth will lead to increased output and therefore increased pollution and congestion. This will cause health problems such as asthma and therefore will reduce the quality of life
5. Reduced Inequality.
Higher rates of economic growth have often resulted increased inequality, however this depends upon things such as tax rates and the nature of economic growth
See also: Does Economic Growth increase happiness ?