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Benefits and Costs of Growth


The British economy has enjoyed continuous growth of real national output since the late autumn of 1992. Eight years of growth inevitably brings a range of economic and social benefits - but there are also dangers and risks when an economy rides a fast growth path.




Real economic growth stimulates higher employment since labour is a derived demand. An increase in real GDP should cause an outward shift in the aggregate demand for labour. Not all industries will share in the growth of an economy.



The chart above tracks real GDP for the UK since 1955. There have been three main economic recessions over the last thirty years (1974-75, 1980-81 and 1990-92) but over the long run real output has increased on average by a little over 2% per year.


Fiscal dividends from economic growth

Growth has a positive effect on Government finances - boosting tax revenues and helping to reduce the budget deficit. More people in work, rising spending and higher company profits all contribute to an increased flow of revenue to the Treasury.


Growth and Investment

Rising demand and output encourages further investment in new capital machinery via the accelerator mechanism. This is known as income induced investment.


Business Confidence

Sustained economic growth should have a positive impact on company profits & business confidence


Living Standards

Growth improves living standards as measured by real GDP per capita although real GDP on its own is an inadequate measure of the true standard of living and quality of life.




Inflation risk

If the economy grows too quickly there is the danger of inflation as demand races ahead of the ability of the economy to supply goods and services. Producer then take advantage of this by raising prices for consumers.



Fast growth can create negative externalities (increased pollution and congestion) which damages overall social welfare



Not all of the benefits of economic growth are evenly distributed. We can see a rise in national output but also growing income and wealth inequality in society. There will also be regional differences in the distribution of rising income and spending.




E-mail Steve Margetts