Benefits of economic growth

Economic growth means an increase in real GDP – an increase in the value of national output, income and expenditure. Essentially the benefit of economic growth is higher living standards – higher real incomes and the ability to devote more resources to areas like health care and education.

real-gdp-1955
UK real GDP since 1955. Shows the magnitude of increased national output.

The benefits of economic growth include

benefits-growth

  1. Higher average incomes. Economic growth enables consumers to consume more goods and services and enjoy better standards of living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy.
  1. Lower unemployment. With higher output and positive economic growth, firms tend to employ more workers creating more employment.

unemployment-total

UK unemployment rises during a recession – falls during periods of economic growth.

  1. Lower government borrowing. Economic growth creates higher tax revenues, and there is less need to spend money on benefits such as unemployment benefit. Therefore economic growth helps to reduce government borrowing. Economic growth also plays a role in reducing debt to GDP ratios.

uk-national-debt

A long period of economic growth in the post-war period helped reduce the UK debt to GDP ratio.

  1. Improved public services. Higher economic growth leads to higher tax revenues and this enables the government can spend more on public services, such as health care and education e.t.c. This can enable higher living standards, such as increased life expectancy, higher rates of literacy and a greater understanding of civic and political issues.
  2. Money can be spent on protecting the environment. With higher economic growth a society can devote more resources to promoting recycling and the use of renewable resources
  3. Investment. Economic growth encourages firms to invest, in order to meet future demand. Higher investment increases the scope for future economic growth – creating a virtuous cycle of economic growth/investment.
  4. Increased research and development. High economic growth leads to increased profitability for firms, enabling more spending on research and development. Also, sustained economic growth increases confidence and encourages firms to take risks and innovate.
  5. Economic development. The biggest factor for promoting economic development is sustained economic growth. Economic growth in south-east Asia over the past few decades has played a major role in reducing absolute levels of poverty – increasing life expectancy.
  6. More choice. In less developed economies, a large proportion of the population work in agriculture/subsistence farming, economic growth enables a more diverse economy with people able to work in service sector, manufacturing and having a greater choice of lifestyles.

Evaluation of economic growth

  • For developing economies in Sub-Saharan Africa, economic growth enables countries to escape the worst levels of poverty. Even a small level of economic growth can facilitate higher living standards and an improvement in life expectancy. In the developed world, economic growth is less essential.
  • It depends on the nature of economic growth. For example, if economic growth leads to more pollution and congestion, then living standards may not seem to hit. It also depends on the distribution of economic growth – who benefits from economic growth. If growth benefits primarily the richest in society, growth may do little to overcome poverty.

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