Economic Growth & Recession
Government and the Macroeconomy
A typical question asks for advantages and disadvantages of growth, so it helps to hold both in mind.
Advantages of growth
- Higher incomes and living standards, as rising output raises wages and lets households consume more goods and services.
- Lower unemployment, because firms expanding output take on more workers.
- Higher tax revenue for the government (more income tax, more spending taxes), which can fund better public services without raising tax rates.
- Reduced poverty, as more people earn a wage and the government can afford to support those on low incomes.
Disadvantages of growth
- Inflation risk, if demand grows faster than the economy's capacity, causing demand-pull inflation.
- Environmental damage, as more production can mean more pollution, congestion and use of non-renewable resources.
- Greater inequality, since the gains from growth do not always reach everyone equally; high earners and asset owners may benefit far more than low-paid workers.
- A worse current account, because rising incomes tend to draw in more imports.
Common exam question
Weighing the benefits and costs of economic growth
Question: Discuss whether everyone gains from growth or whether fast growth brings a current account deficit (6–8 marks), or pick growth's likely result (1 mark, multiple choice).
Asked in 2 of the 11 structured papers. For: higher incomes, more jobs, less poverty, tax revenue for education and healthcare. Against: structural unemployment in declining industries; little gain for the low-paid; pollution, depleted resources, inflation hurting the poor and savers. On the current account, rising incomes pull in imports, firms sell at home instead and inflation hurts exports, unless growth is export-led or investment makes home goods cheaper and better.
The 6-mark version gives up to 4 marks a side, none for a reversed point. The 8-mark one is levels-marked: one side alone cannot rise above the middle level (3–5).
Also set in 3 of the 13 multiple-choice papers: growth uses more resources, raising incomes and tax revenue; falling tax revenue or imports, a bigger budget deficit, more equal incomes are wrong.