Benefits and Growth for a UK

Q.1. Evaluate the benefits and the cost of growth for a country. Such as UK. Economic growth in the SR (short-run) is an increase in real GDP and the long-run improvement in productive capacity. First benefit of higher growth is lowered unemployment. More goods, higher growth means more demand for labor. Since labor is more productive, the demand for labor goes down. Therefore, unemployment levels go down. Second benefit is the government's budget. Low levels of unemployment should benefit the government's budget. Low tax revenue leading to reduction in budget deficit. Countries such as the UK have huge amounts of public finance deficit and debt. Therefore, lower debt burden due to the reduction in budget deficit should benefit the UK economy. Words, if productivity is rising due to capital investment & output is increasing, it may reduce the employment level & from then on requirement in workers may decrease. Overall, it may decrease govt. collection of tax revenue & increase welfare payments. Using budget deficit. Secondly, higher growth can have cost to an economy such as demand-pull inflation. Price level ↑ P ↑ | | AS | | | AD₁ | | | AD₀ | | | | y₁ y Real output Too high AD due to higher consumption investment, govt. spending or net exports can lead to demand-pull inflation. With fixed income, people with lower standard of living likely suffer the most if the rate of inflation with the same pace doesn't rise much in their income. However, higher growth in the long-run takes place due to improvement in productive capacity. Price level ↑ | | LRAS | | | AD₁ | | | AD₀ | | | | y₁ y Real output If growth has taken place due to improvement in productive capacity (e.g., UK spent money on HS2 and health care, which means improvement in productive capacity), LRAS shifts right and the economy grows. It should lower the rate of inflation and improve the standard of living of people. Finally, higher economic growth can cause over-utilization of scarce resources. Investment may increase if many factories and industries take place. This means more work which causes poor quality of life and may decline people's health due to misallocation of resources. However, countries like the UK have growth due to development in the services sector, therefore less chance of air pollution. Countries such as India or China might have strong legislation such as green tax, congestion charge & tradable permits etc. These measures should contribute to clean-up the environment and reduce degradation. Finally, there can be many other costs to an economy such as BOP trade deficit due to massive imports. A country like the UK has high marginal propensity to import. This means if income increases, the demand for imports may rise, leading to BOP trade deficit. However, this might not be the case for export-led growth countries. For example, high growth in China is due to big exports. Competition resulting from high international exports trade should improve as exports are increasing. In conclusion, high growth should have more benefit for an economy if its reaching its trend growth. Steady growth at a sustained level gives opportunity to an economy to improve physical capital as well as human capital. In my opinion, higher growth at sustained level is better provided the growth is taking place due to rising AD and keeping inflation low.