Positive Effects Of High Economic Growth.

Stephanie McFarlane Question: Discuss the positive effects of high economic growth. Growth in the short run is the percentage increase in real GDP over a period, whereas in the long run it is the increase in productive potential. The first positive effect of high economic growth is that it can increase the level of employment. This is because higher growth means that there will be a greater national income, which thereby results in an increased marginal propensity to consume. Hence, Real Output and Aggregate Demand will increase. Consequently, this will mean that there will be a derived demand for labour, as more workers will be needed to produce more goods and services, thereby reducing unemployment. Thus, the government will be able to raise more revenue as they do not need to spend on benefits, which will further improve the government deficit and the government debt. Furthermore, the government can use this money to invest in public services such as schools, so that the future generation has a high level of employability. (Diagram- AD shifting right) However, a disadvantage of this is automation. This is because if the firms continue to invest in capital goods, then this will mean that fewer workers will be needed to produce more goods and services, as they will ultimately be replaced by machines. Furthermore, another disadvantage is structural unemployment. For instance, if the economic growth was only a consequence of moving from the primary to the secondary sector, then this would mean that the people working with raw materials, such as coal, would lose their jobs. Moreover, the second positive effect is that the growth attracts Foreign Direct Investment. This is because if the economy is growing rapidly then this will result in a high confidence level. Therefore, this attracts multinational companies to invest in the economy due to high international competitiveness. Investment allows us to improve our infrastructure as it brings technology and skills, hence promoting economic development as it provides more jobs to the domestic economy; which improves the standard of living. In addition, Foreign Direct Investment is an injection which means that it will stimulate a faster circular flow of income, thus resulting in a faster growth rate due to the multiplier effect. In hindsight, high growth may result in demand-pull inflation, which is when aggregate demand exceeds aggregate supply, and so the prices increase in response. This will decrease consumption and exports in the long run which will reduce Aggregate Demand, thus causing fluctuations in the economy. Also, multinational companies may refrain from investing due to this instability and existing may also leave and go back to their home country. Finally, the third positive effect is that a higher national income means that more funds are available to invest, because of the accelerator effect. Thus, investment increases the productive potential as it leads to an advancement in technology. Additionally, it means that more money can be spent on research and development on renewable resources, so that we can learn to conserve scarce materials. Moreover, long-run Aggregate Supply will increase which means that low inflationary goods can be produced as real output increases. Hence, international competitiveness is increased as trading partners will be more attracted to buying from us. (Diagram-LRAS shifting right) However, if excess funds are invested abroad or used to buy imported goods, then the international competitiveness of an economy may not increase. This is because the funds are Stephanie McFarlane not being invested to improve the domestic economy, and so there may not be an increase in productive potential. In conclusion, I think that the most significant positive effect of high economic growth is the expansion in the level of employment, quality of life and the living standard of human capital especially if growth is taking place due to increase in AD and AS at the same time. Long-run growth seems to have less objective conflicts like the short-run growth. In the SR, economic growth can be inflationary whereas long-run growth is more steady and stable with more benefits to the economy as a whole.