Readers Question: Evaluate The importance of increasing income per head for an economy.
Higher income per head means that GDP per Capita is higher.
This means there is an increase in living standards as more people can consume higher levels of goods and services.
Increased GDP per Capita will improve government finances. This is because people will pay more income tax and more VAT; firms will pay more corporation tax. Also the government will spend less on income support and unemployment benefits. Therefore the budget deficit will decrease. Also the government could decide to spend more on investing into the economy. e.g. spending on better roads. This will enable higher rates of growth in the long term.
Increased incomes per head means that AD will be increasing and the economy experiencing economic growth. This should lead to lower unemployment as firms take on more workers to produce more goods.
Increased Income per head may cause inflationary pressures to occur. Inflation will occur if incomes per head rise too rapidly and the economy increases above the long run trend rate of economic growth. However, if there is spare capacity in the economy and GDP per head increases then inflation may not occur. The important thing is that the increase in income per head is sustainable.
Higher incomes may cause a current account deficit. This is because people spend more on imports. In the UK, consumers have a high marginal propensity to import so it has a big impact. However, higher income per head may not cause a deficit, if growth is export led like in China.
Higher incomes per head may cause environmental problems. It will lead to increased consumption and use of raw materials. However, environmental problems can be overcome if people spend their increased incomes on better technology.