Chapter 49: Economic growth (2.3)

Key concepts

Definition of economic growth

Shifting LRAS – quantity and quality of factors

Investment and growth

o Physical capital

o Human capital

Productivity and growth

Consequences of growth

HL extension

Calculating growth from data

Causes of economic growth

• Describe, using a production possibilities curve (PPC) diagram, economic growth as an increase in actual output caused by factors including a reduction in unemployment and increases in productive efficiency leading to a shift from a point inside the PPC to a point closer to the PPC (Done in Chapter 2)

• Describe, using a PPC diagram, economic growth as an increase in production possibilities caused by factors including increases in the quantity and quality of resources leading to outward PPC shifts (Done in Chapter 2)

• Describe, using an LRAS diagram, economic growth as an increase in potential output caused by factors including increases in the quantity and quality of resources leading to a rightward shift of the LRAS curve

• Explain the importance of investment for economic growth, referring to investment in physical capital, investment in human capital and investment in natural capital

• Explain the importance of improved productivity for economic growth

• HL: calculate the rate of economic growth from a set of data

Consequences of economic growth

Discuss the possible consequences of economic growth, including the possible impacts on living standards, unemployment, inflation, the distribution of income, the current account of the balance of payments and sustainability

Definition of economic growth An economy ‘grows’ when the money value of total output adjusted for inflation increases, e.g.

there is an increase in real GDP.

Often data will be in sets spanning over several years – especially when one wishes to see

extraordinary periods such as recessions or booms. Figure 49.1 below shows the effects of the

2007/¨08 recession for some of the major economies. It is clear that the recession hit the the BRIC

nations (Brazil, Russia, India and China) far less than advanced nation economies such as the US,

Japan and Britain.

Figure 49.1 The BRIC countries and the 2008 recession

From the Economist, “Winners and losers Jan 16th 2012, 15:31 by The

Economist online (Best disguise this a tad Rory!)

Definition: “Economic growth”

Economic growth takes place when an economy produces more output during

a period of time. This is measured in real money terms, i.e. adjusted for

inflation. The most common measure is real GDP change per year.

Investment and growth

In the BRIC countries shown in figure 49.1, GDP per capita is projected to increase far more than

employment. This is possible only by way of increasing the productivity of the factors used in

production. Three key factors in an economy are land, capital and labour – raw materials, man-

made factors of production and people at work using the raw materials and capital. Often

economists refer more pointedly to natural factors, physical capital and human capital.

o Natural factors Clearly arable land, abundant forests, plentiful water, and any one of thousands of other land resources are

linked to a country’s ability to satisfy its citizen’s needs and wants. Different countries are differently

endowed with such natural factors; Canada has the world’s largest freshwater supply while Namibia has

one of the largest reserves of uranium in the world. Natural factors can to a certain extent explain

development; England’s abundant coal and iron helped bring about a technical revolution which enabled

them to become the richest country in the world by 1900. Another country of some fame in this respect is

Iceland, whose 320,000 inhabitants enjoy one of the highest living standards in the world; natural hot

springs provide plentiful cheap energy and the island is surrounded by one of the largest fish stocks in the

world.

o Physical capital

The definition of investment is an increase in the capital stock of a country during a period of

time. Firms invest in order to become more productive and while this is a cost (depreciation) it

serves to lower costs and increase profits. Physical capital is tangible, meaning ‘material’ or

‘touchable’ and refers to the machines, tools, factories and transport vehicles used in the

production of goods and services. Man-made factors of production are collectively known as

physical capital. You will encounter this numerous times in this book as investment or an

increase in capital stock. Machinery and factories are directly involved in production, while roads

and communications are necessary ‘backbones’ of production, e.g. infrastructure.

o Human capital

The combined talents, experience, knowledge and education of labour are major intangible assets

in firms. Experienced workers will produce more per hour than new and inexperienced workers –

just as experienced teachers will be able to get the message across better and with less effort than

inexperienced teachers.

Increase in the quality of human resources: The quality of the working population – the human capital

– is the result of knowledge, skills, education and training. Human capital also results from health care, as

this adds to productive capabilities in a country. Most economists would agree that education/knowledge

Definition: “Physical capital”

An increase in investment means that physical capital has increased. Examples are factories,

machinery and roads. The accumulation of capital increases a country’s capital stock.

Definition: “Natural factors of production”

Natural factors consist of a country’s endowments (= gifts) in natural resources – land – such

as minerals, forests, arable land for agriculture, plant and animal diversity…etc.

and health care are central factors in potential growth and development. The benefits of enhancing human

resources – investment in human resources rather – go far beyond economic growth. A short-list of positive

effects resulting from investment in human capital would have both economic and social benefits:

Economic benefits would be higher productivity in the economy; increased labour mobility as

more people would be attractive on the job market; more dynamism as a result of entrepreneurial

spirit; and better use of finite resources.

Social benefits include better health and longer lives; greater participation and democratisation in

local and municipal issues; better opportunities for women in choosing their own lives; and the

ability to partake in a wider range of cultural offerings.

Productivity and growth

According to the US Department of Labor (yes, it’s spelled like that) average productivity

increased by 0.4% during 2010 to 2011.1 Labour productivity is calculated by dividing real output

(e.g. the value of output adjusted for inflation) with the total amount of hours worked in all

industries in the economy. Naturally this measure also includes the physical capital used in

production so better tools, increased use of computerised manufacturing processes and more

machines will all increase productivity. Out of a very long list, here are some examples of how

economies have increased productivity over the past century:

Spread of new technology and manufacturing techniques between industries and

countries.

Increased division of labour throughout the supply-chain and distribution networks.

Vastly improved (and cheaper) telecommunication networks which have enabled firms to

use skills and expertise in other countries.

Increasing educational standards and universities linked to research and development

centres in private enterprises.

Greater awareness of how motivational aspects at work increase labour productivity.

Shifting LRAS – quantity and quality of factors

As outlined above and in Chapter 44, any macro variables which increase the quality and/or

quantity of factors of production will shift LRAS. This has historically been going on

since…well, since the industrial revolution at the very least. Better tools, more efficient

machines, improved education have all served to increase the potential output – LRAS – for

hundreds of years. As LRAS increases, the underlying trend rate of growth (see the business

cycle in Chapter 46, figure 46.6) will also increase.

Assume an economy at initial LR equilibrium – also known as general equilibrium or the full

employment level of output – where the quantity and/or quality of factors of production increase.

The initial shift of LRAS (LRAS0 to LRAS1) in Figure 49.2 gives three possible scenarios over

time:

1 See Economic News Release at http://www.bls.gov/news.release/prod2.nr0.htm

Definition: “Human factors” and “human capital”

Human resources – labour – comprise the skills, knowledge, experience, education and health

of the population which makes up the labour pool. Investment in these areas, often called

social investment, increases human capital.

1) Growth and a degree of inflation: As the potential economy has moved beyond actual

output a negative output gap is created allowing AD to increase from AD0 to AD2 creating

a new general equilibrium at point A. Note that in this new-classical version, the shift in

LRAS enables AD to increase without causing wage inflation and thus decreasing SRAS.

(Compare with figure 46.5 in Chapter 46.)

2) Growth and stable prices: Any variables affecting LRAS can also affect SRAS.

Increasing SRAS from SRAS0 to SRAS2 would have an anti-inflationary effect and

together with increased AD (AD0 to AD1) as a result of increasing incomes, the economy

sees long run growth and also price stability at point B.

3) Growth and benign deflation: A final possibility is that households hold off on

consumption due to the expectations effect of falling prices (households hold off on

purchases waiting for prices to fall further) and there is negative inflation or deflation. In

this scenario the increase in factors and productivity shifts SRAS from SRAS0 to SRAS1

and general equilibrium is established at point C. Falling price levels are usually

associated with falling AD and falling income (such as Japan has seen for long periods)

but in this case there is also growth; hence “benign” (roughly ‘kind’ or ‘benevolent’)

inflation.

Figure 49.2 – shifts in LRAS and possible scenarios

(TYPE 3 MEDIUM HEADING) LAND, LABOUR AND CAPITAL AGAIN

Figure 49.3 is pretty much a reprise of the production possibility frontier issues illustrated in Chapter 2.

Bundling together human and capital investment on the Y-axis, an economy can increase potential output

in the long run be incurring the opportunity cost (sacrifice) of present consumption. This is shown by the

GDPreal/t

Price level

(index) LRAS0 LRAS1

YFE YFE

A: …the economy expands in terms of

population and increasing economic activity,

AD increases from AD0 to AD2 and closes what

in effect is a negative output gap.

AD0

100

SRAS0

SRAS1

AD2

SRAS2

AD1

104

96

A

B

C C: …increased/improved factors shift SRAS

from SRAS0 to SRAS1 resulting in ‘benign’

deflation. AD does not increase as households

hold of on consumption due to deflationary

expectations.

B: …increased productivity shifts SRAS from

SRAS0 to SRAS2 while the increase in income

also drives up AD from AD0 to AD1.

The shift in LRAS creates an initial

negative output gap which over time is

closed when…

movement from A to B, and the shift of the production possibility frontier from PPFSR to PPFLR. Point C

is – possibly – a new level of total output.

Figure 49.3 – shifts in LRAS and possible scenarios

The movement from A to B can result from:

improvements in quality and use of land

resources

increased spending in education

more investment in fixed capital such as

machines and factories

road-building, dams, telecommunications and

other infrastructural investment

All of the above will shift the PPF outwards in the long

run, enabling potentially higher output at point C in the

future.

A WALK ON THE WEIRD SIDE; DAYLIGHT SAVINGS TIME AND GROWTH

Can daylight savings time actually increase growth rates?! Well, yes, apparently so.

JAPAN’S economy has been in a funk for most of the past two decades. The country has tried fiscal stimulus. It pioneered quantitative easing. Yet still the outlook remains dark. Might giving the public an extra hour of sunlight help? The 27 countries in the European Union will set their clocks back for winter by one hour on October 31st; Americans do so on November 7th. Japan stands virtually alone among rich countries in not using daylight-saving time (DST), or summer time. The country did so between 1948 and 1951 during the American occupation, but stopped after General MacArthur left Tokyo. John Alkire of Morgan Stanley believes that adopting DST would mean a new dawn for the Japanese economy. One extra hour of sunlight every evening for seven months would boost domestic consumption, as people leave work for bars, restaurants, shopping and golf. Summer time is credited with reducing traffic accidents and crime; boosting energy efficiency as people use less lighting and heating; and even improving health as people are radiated with vitamin D. “The best part is that it doesn’t cost anything,” chirps Mr Alkire. “It’s a real fiscal stimulus without any money.”

“Bright idea”, Economist, Oct 30th

2010

Consequences of growth

“Once you start thinking about growth it’s hard to think about anything else.” Robert Lucas,

Nobel laureate

I now raise the bias/subjective flag as I start off with a rather personal note here. I find something

disconcerting about the caption “Consequences of growth”. It is as if one is putting on a new shoe

but waiting for the other to drop into the sewer – e.g. one should rush through the positive issues

of growth such as poverty reduction, increase in standard of living, increase in choices for people,

improvements in quality of live…in order to get to the “real life” issues of negative effects such

as environmental sustainability and income distribution. I have found that this is a rather common

stance and one with a very heavy implicit moral take – it is somehow implied that the “race for

riches” necessitates giving up more “human” aspects of development found in the “softer”

variables associated with quality of life. Having ploughed through quite a lot of data in the past

decade, it becomes ever clearer that as soon as one starts looking at measurable and quantifiable

data on growth and quality of life…well, Lucas (quote above) might have a point!2

(Smaller heading) Benefits of growth Economic growth benefits society and society is made up of people. Have a quick look at circular

flow model in Chapter 36 and the connection to the five points below should be clear.

1. Higher incomes; households will be able to increase consumption of goods and services.

This in itself is an increase in living standards as households can enjoy better food,

housing and recreation. As shall be seen in Section 4, this has enormous implications for

developing countries in terms of poverty reduction.

2. Lower unemployment; increases in consumption and thereby aggregate demand create

jobs in industries.

3. Government tax revenue; increased output and expenditure mean that vital tax bases such

as expenditure taxes and labour taxes increase government tax receipts.

4. Increased public and merit goods; increased tax receipts enable governments to provide

more public services such as infrastructure, education and health care.

5. Improvements in environment; while in no way conclusive across a full range of

environmental indicators, there is evidence that higher incomes not only enable

governments to preserve natural environments and take care of precious natural

resources, it incentivises governments. When a sufficiently high income is achieved

people can afford to value the environment more and the increased wealth enables

government to enact environmental legislation and institutions which safeguard the

standards.

The correlation (again, not causality!) between national income and standard of living is quite

clear and illustrated in figure 49.4. Using the Human Development Index (HDI, which is

comprised of GDP per capita, life expectancy and education) as a metric (= statistic for

measuring) of standard of living, it is evident that higher income is correlated to increased living

standards. The higher the HDI value, the higher the standard of living – the curve shows that

living standards increase dramatically up to a GDP per capita of about USD10,000 after which

there is a slower rate of increase.

2 Once again, the title of this book is The Good, the Bad and the Economist – not The Good, the Bad and

the Ugly.

Figure 49.4 GDP per capital and HDI

(Sources; HDI 2008 at UNDP, GDP figures at World Bank)

(Smaller heading) Possible negative consequences of growth However repetitive it will sound, everything has an opportunity cost. Growth comes with some

strings attached and often in the form of trade-offs.

(Even smaller heading) Inflation In Chapter 46 we dealt with one of the key trade-offs in macroeconomics, namely the possibility

that demand-driven growth can be inflationary. This cornerstone of new-classical theory will be

discussed in some detail in Chapters 53 and – for HL – 54. The basic tenet (= rule) is that any

increase in aggregate demand and thus growth beyond the long run potential of an economy will

result in inflation.

(Even smaller heading) Externalities Recall that any consumption and/or production which levies costs or benefits on a third party is an

externality. Growth will come with such a price tag attached: water and air pollution; traffic noise and

congestion; encroachment of wildlife areas; and thousands of other negative results which are the

unintended consequence of growth. Economic theory has increasingly sought to include these

consequences in tallying up the costs and benefits of economic growth and development. The World

Bank’s World Development Report (WDR) in 2003 states that a 3% growth rate in the world will

quadruple global GDP by 2050.

An example of how income growth affects the demand for goods which have high income elasticities is the

growth of car ownership in Mexico. Income elasticity of cars is approximately 2 and the average yearly

increase in income in Mexico was 3.4% between 1973 and 1998. During the ‘90s, the amount of private

vehicles had increased by 30% leading to reoccurring traffic gridlock and pollution3.

(Even smaller heading) Population growth and the environment Even with constant population growth rates, population increases will put additional burdens on the

environment. Most estimates of population growth indicate that around 2 billion people will be added to the

current global population of 6 billion within the next 50 years – almost all of it in developing countries4

(see Figure 49.5). This will put an immense strain on our resources and the natural environment, adding to

an already alarming list of externalities:5

Air: Greenhouse gases will continue to grow unabated if there is no large scale movement away

from the burning of fossil fuels. Seven economies account for 70% of global CO2 emissions – the

US alone, with 4% of the world’s population, accounts for 25% of the CO2 emissions.6

Water: There is a real risk that fresh water becomes increasingly scarce in a world where one

third of the population already experiences chronic shortages of drinkable water.

Land: Soil degradation – such as erosion and increased salt content – has already affected close to

2 million hectares of land since 1950 – 320,000 hectares virtually irreversibly.

Forests: One fifth of tropical forests have been cleared since 1950, which often results in

increased desertification (= spread of deserts).

Fish stocks: Over 70% of the world’s fish stocks are exploited to the point of carrying capacity –

or simply over-exploited.

Figure 49.5 World population trend

(Marcia: original.)

It isn’t difficult to see that growth in the ¾ of the world considered developing will have a considerable

impact on the environment if they follow the same path as the developed world. In China, which has

averaged some of the highest growth rates of the 1990s, air pollution has reached levels in Beijing and

Shanghai which make these two cities the dirtiest in the world. The attraction of jobs and cultural

opportunities has led to mass urbanisation and ‘mega-cities’ such as Mexico City, where population has

3(The Economist, All jammed up, Sep 3rd 1998; and The World Economy, A millennial perspective,

OECD, table A2-e, page 197) 4WDR 2003, chapter 1, page 1

5These are figures from the WDR 2003, Chapter 1, pages 1 – 5, and it should be noted that they are not

uncontested. See for example The sceptical environmentalist by Björn Lomborg (op cit). 6Globalization, Growth and Poverty, World Bank report 2002.

exceeded 15 million.7 Urban growth puts additional pressure on infrastructure such as water and sanitation,

while inner-city congestion is forcing a number of cities to limit cars.

However…

Global population is expected to peak at 9 to 10 billion people by 2100 – some 20 to 30% lower than

predicted in the 1960s.8 It is worth noting that are also many positive externalities of growth.

Back roads in distant rural areas built by timber companies give people the ability to commute and

get produce to market. (This is clearly evident in the northern Scandinavian forests, where timber

roads from the growth period in the 1800s still enable thousands of people to live in the

countryside and commute to jobs.)

An increasing number of firms in high-growth regions will have free medical care, education and

housing schemes for employees as a policy of enhancing labour capital.

Growth in Information Technology centres in India has created a need for – and thus supply of –

improved infrastructure such as electricity grids and phone lines which have benefited the region

in general.

Globalisation and trade will spread new technologies – many of which will be far more

ecologically sound than older production methods.

There is also evidence that growth – ultimately – has positive effects on the environment. While the

evidence is very unclear (since there are so many other variables to take into consideration other than

income) as to whether growth in poor countries can be tied to environmental improvement, it is quite clear

that wealthy countries have seen significant improvement in a number of areas.9 When people get richer,

they demand for and can pay for a cleaner environment. As incomes increase there are resources available

to clean the environment – just witness the improvements over the past 30 or so years; London’s air is far

better and the Baltic Sea far cleaner than one generation ago. Technology enables efficiency – more

Widgets at less pollution – and wealth means that people start to demand other things, like a view

unobstructed by garbage; enjoying clean air and fishable lakes… etc. Wealth, technology and disutility then

feed off each other. When people get richer they have the ‘luxury’ of wanting a liveable environment and

caring about environmental issues. Technology enables something to be done about it. Wealth allows them

to pay for it.10

7 During the five years I lived in Mexico City I read of population estimates of 15 million to 25 million.

Nobody really knows. 8WDR 2003, Chapter 1, page 4

9See for example Globalization, growth and poverty, World Bank 2002, page 130 ff

10 I just needed to look out my window back home in Sweden, at Öresund, the strait between Sweden and

Denmark, for a good example. Just 25 years ago, raw sewage went straight into the sea. The strait was so

polluted that swimming bans were commonplace, fish stocks were severely depleted, and the bottom of the

sea was predicted to be unable to sustain life by the year 2000. By late May of every year, my IB2s were

down post-exam frolicking on the beach and the heartier specimens were jumping in the water (14°C) –

while sports fishermen cast for wild salmon and sea-trout. The wealthy citizens of Sweden and Denmark

simply cleaned up their act – and the sea – by installing waste removal plants and implementing strict

legislation on pollution. They were able to do this as they were wealthy and could afford the cleaning

technology.

Furthermore, while evidence is not conclusive on environmental performance related to growth in

developing countries specifically, the OECD has shown broad positive correlation between growth and

income in countries generally. Figure 49.6 shows that positive correlation between income and

environmental performance (a composite index of a number of environmental measures) can be seen for a

range of countries. Other evidence – put forward by the World Bank – suggests that growth which is

primarily trade-based has not created ‘pollution havens’ due to multi-national companies seeking out

countries with low environmental standards.11

Figure 49.7 Income and environmental performance

Source: Open markets matter, OECD policy brief October 1999, page 9

Poverty is, arguably, a worse threat to the environment than growth.12

Poor people living on ever lower-

yielding land will be forced to use marginal resources for survival. They know full well that the depletion

and destruction of natural resources worsen future living standards but simply do not have a choice.

Poverty also leads to population growth as children are needed for labour to work on land suffering with

diminishing returns. Children also provide a ‘social security net’ in a society where there is scant

availability of pensions, health benefits and social security benefits. The forces of increasing numbers of

people living off depleting resources create yet another vicious cycle: poverty population growth

lower productivity and land yields per capita poverty. Lifting people out of poverty is increasingly

viewed as the most effective way of improving the environment.

(Even smaller heading) Income distribution “A society can be Pareto optimal and still be perfectly disgusting.” Amartya Sen

There has often been a heated debate as to whether global income distribution is worsening, i.e. whether the

‘gap’ between rich and poor is widening in many countries. The debate has quieted down in later years as it

has become increasingly clear that the ‘gap’ is indeed increasing in both poor and rich countries alike.

Saving developing countries for Section 5 we can look at the richest nations in the world, the OECD

11Economic man, cleaner planet, The Economist, September 27th 2001

12See for example Moore, page 89; and Legrain page 244

countries’ Gini coefficients as a measurement of income inequality.13

For the majority of the wealthy

countries in the world, the high growth rates of the 1990’s did not translate into a equitable share of

increasing prosperity.

Figure 49.8 Income inequality in OECD countries 1985 to 2008

However…

Widening income gaps do NOT mean “the rich get richer and the poor get poorer”. Yes, this is

possible but by no means certain. Case in point, look up the US and Sweden over the period from

1985 to 2005. Exactly; first one needs to adjust for inflation and then one needs to see whether

the increased disparity is because the lowest income groups have increased their incomes at a

slower rate than higher income groups.

(Even smaller heading) Current account imbalance We will look at the current account in balance of payments in great detail in Chapter 70 so for the

time being just think of it as an accounting method for export revenues and import spending.

Traditionally a ‘strong’ current account is one which shows greater export revenue than import

spending – a current account surplus. An ‘imbalance’ would thus be greater import spending than

export revenue – a current account deficit.

13

OECD is the Organisation of Economic Cooperation and Development. The 34 members are mostly high

income countries. The Gini coefficient can take any value between zero and 100. It measures the ‘spread’

of a nation’s income – the higher the value the more unequal is the distribution of income.

There are two mechanisms at work when national income rises in an economy which both serve

to worsen the current account; the relative inflation effect and the income effect.

Rising income in the Home Economy which is demand-driven primarily – i.e. the result

of increased aggregate demand – is inflationary. Ceteris paribus (no change in exchange

rates or the inflation rates of trade partners) this means that there is an increase in the

inflation rate relative to trade partners. The increase in relative inflation makes exports

more expensive for trade partners and imports relatively cheaper for households in the

Home Economy. Falling export revenue and increased import spending can therefore

worsen the current account.

In conjunction with the above, rising incomes in the Home Economy lead households to

increase their overall consumption. Some of these goods and services are produced in

trade partners’ economies. This increases import spending and can worsen the current

account.

HL extension

Calculating growth from data

Figures 49.9 and 49.10 below give data on GDP for the UK over a six year period and for China

over the same period. Note that the latest year (2010) is the base year.

Figure 49.9 – GDP in current USDs and GDP deflator, UK, 2005 – 2010

United Kingdom

GDP, current prices, billion $US GDP deflator

(base year 2010)

2005 2282.9 87

2006 2447.7 90

2007 2812.0 92

2008 2679.0 95

2009 2182.4 97

2010 2250.2 100

Source: World Economic Outlook, September 2011 and HM Treasury at http://www.hm-

treasury.gov.uk/data_gdp_fig.htm

1. Calculate the rate of growth for each five year period (e.g. 2005 to 2006, 2006 to

2007…etc).

2. Calculate real GDP for each year.

3. Calculate real growth rates over the period.

Figure 49.10– GDP in current and PPP adjusted USDs, China, 2005 – 2010

China

GDP, current prices, billion $US GDP, current PPP dollars, bln

2005 2256.9 5364.3

2006 2712.9 6240.8

2007 3494.2 7333.8

2008 4520.0 8216.0

2009 4990.5 9068.2

2010 5878.3 10119.9

Source: World Economic Outlook, September 2011

1. When you calculate the (nominal) growth rate, it is evident that China’s rate of growth is

considerably higher than the US. There are two “howevers”. Which?

2. The column to the right shows GDP in purchasing power parity (PPP) dollars. This

means that GDP values have been adjusted for what a US dollar can actually buy. Why

are the PPP values for GDP higher for China? (See Chapter 81.)

(Rory: I dearly hope we have some cool icon to put here telling the kids and colleagues to go to

the homepage! The little Aussie marsupial is working on it as I write this.)

Summary and revision

1. Growth is defined as an increased in real GDP over a period of time – usually one

year.

2. Growth in the long run occurs due to increased quantity and quality of factors:

a. Natural factors such as minerals, oil and arable land.

b. Physical capital due to investment, such as machines and infrastructure.

c. Human capital arising from improvements in education and increased

skill base of the labour force.

3. The productivity of labour increases due to new technology, increased division of

labour, better telecommunications, research and development and the application of

motivational techniques in firms.

4. Positive aspects of growth include improved living standards, lower

unemployment, increased government tax receipts, provision of more public

services and possible improvements in environment.

5. Negative aspects of growth include rising inflation rates if the increase in income

is primarily demand-driven, externalities such as pollution, sustainability problems

when natural resources are depleted/destroyed, widening gaps between richer and

poorer households, and worsening of the current account.