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5.4 Is growth good?
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What you will learn in this unit…
This topic looks at the concept of economic growth. It explains how
the production of more goods and services by businesses allows the
standard of living in a country to increase. Other ways of measuring
living standards are also considered. As with most economic
concepts, there are costs as well as benefits and the topic will also
consider the costs to society as a whole of producing more goods
and services. Problems such as pollution, traffic congestion, the use
of non-renewable resources, such as oil and coal, and the problem
of waste will be considered. The concept of ‘sustainability’ will be
investigated, as well as what role businesses and the Government
have in ensuring that the benefits of economic growth outweigh the
costs
What is growth?
Does growth increase the standard of living?
Can growth be bad?
Can growth be sustainable?
What can Government do?
Some of the key questions we will be looking into are below
 What is growth? What is meant by economic growth? Why
do small changes in economic growth actually amount to
output measured in billions of pounds? How can we
improve our economic growth rate? Should the
Government spend more money on education or should
we encourage firms to buy more machinery?
 Does growth increase the standard of living? What is the
standard of living? Can living standards be measured
purely in terms of the amount of goods and services we
can purchase with our income? What other ways are there
of measuring living standards?
 Can growth be bad? What are negative externalities?
What are the costs of economic growth? What effects do
negative externalities have on society and on future
generations?
 Can growth be sustainable? What is meant by the term
‘sustainable growth’? Can economy grow in a sustainable
way? What role do renewable resources play in allowing
sustainable growth to occur? How can businesses become
more socially responsible and take more responsibility for
the effects their operations have on society?
 What can governments do?s How can the Government
encourage sustainable economic growth? What role do
taxes, subsidies and laws play in helping to protect the
environment? What effects will these policies have on
business?
How do businesses grow?
Key Terms:
Gross domestic product (GDP) – the total value of output produced in an economy in a
year.
Economic growth – the percentage increase in GDP per year. (This can be negative)
Output – the amount of goods and services produced in a period of time.
Resources – the land, labour and machinery that are used to produce goods and
services.
Investment – spending on equipment and plant that helps contribute to production.
Human capital investment – spending on training and education which allows workers
to be able to produce more output in the future.
Physical capital investment – spending on new assets such as factories or machinery
which allows a firm to produce more output in the future.
Case Study:
In 2003 China was the sixth largest economy in the world. By 2007 it
had become larger than the United Kingdom and became the
world’s fourth largest economy. By 2025 it is forecasted to become the
second largest and should finally topple the United States and
become the largest global economy by 2050. China is rapidly
becoming an economic super power and in the 4 years to 2008 it
posted economic growth rates higher than 10%. In contrast the United
Kingdom economy grew by between 1 and 3% per year during the
same time period. This is because China is now starting to take
advantage of the large amount of resources it has, namely its
population of 1.4 billion people
Referring to the above case study, discuss with your shoulder partner
who you think is/will benefit the most from China’s growth
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Calculating GDP
Economic growth rates do not tell you how big an economy is, they
just show you how fast it is expanding or shrinking.
If GDP in Year 1 was £20,000 and Year 2 was £25,000
The GDP% would be a growth rate of = 25%
(5000/20000 x 100)
If GDP in Year 1 was £28,000 and Year 2 was £29,500
The GDP% would be a growth rate of =
If GDP in Year 1 was £19,000 and Year 2 was £22,000
The GDP% would be a growth rate of =
If GDP in Year 1 was £20,000 and Year 2 was £17,000
The GDP% would be a growth rate of =
Complete the missing words from the below statement
OUTPUT
RESOURCES
HUMAN CAPITAL
INVESTMENT
PHYSICAL CAPITAL
PRODUCTIVITY
Economic growth occurs when a country produces more goods and
services or GDP in a year. To produce more ______ firms need to
purchase more _________. When a firm spends money on improving
either the number or quality of its resources this is known as
__________. Firms can invest money in _____________, this involves
improving the skills and training of workers so they can produce
more output in a period of time.
A firm could also invest in ________________ this involves purchasing
new assets such as a factory or a machine. When a person or
machine produces more in a period of time, this is known as
increasing ____________.
Key Terms:
Grants – sums of money provided by the Government to encourage a particular project
or activity.
Infrastructure – road, rail and air links that allow people and output to move speedily
around a country and which help trade.
Output – the amount of goods and services produced in a period of time.
Less economically developed countries (LEDCs) – these are countries that have a low
gross domestic product and where the average standard of living is low.
Below are several ways a Government can help in promoting
economic growth. Give an explanation as to how each of the
strategies can affect economic growth
What can a Government do? Explanation
Reduce taxes on profits
Provide Grants
Improve infrastructure
TEST YOURSELF
1.
Gross Domestic Product can best be defined as the total:
Select one answer
A) Amount of goods and services produced in an economy in a year
B) Amount of spending made by families in an economy in a year
C) Amount of spending on physical capital made in an economy in a
year
D) Value of goods and services produced in an economy in a year
2.
The country with the highest economic growth rates will have the
highest:
Select one answer
A)
B)
C)
D)
3.
Level of GDP
Level of investment
Increase in the value of output in a year
Infrastructure spending in a year
Firms are most likely to invest in human capital because:
Select one answer:
A) Demand for their product will increase
B) Productivity will increase
C) It will increase the country’s GDP
D) It will increase the country’s economic growth
Answers
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Does growth increase the standard of living?
Key Terms:
Standard of living – the amount of goods and services a person can buy
with their income in a year
GDP per capita – the value of output produced by a country in a year
divided by the population of that country.
Technical economies of scale – reductions in average costs of production
due to the use of more advanced machinery
Quality of life – an individual’s overall sense of well being. This can be
measured by health and education as well as the amount of goods and
services a person can buy.
Infant mortality rates – the percentage of babies that do not survive past
their fifth birthday.
Income distribution – where there is a difference between different groups
of people within a country.
Life expectancy rates – the average age which people are expected to
live from birth.
Literacy rates –the percentage of adults who are able to read and write
Case Study:
In a small village in China, Weidi Zheng gets ready for another day at
work. Despite China’s huge economic growth and increase in Gross
Domestic Product over the last ten years, Mr Zheng’s standard of
living has barely changed. He still lives in a house made from metal
sheets, works hard in the fields for long hours and wakes in the
morning to find frost and ice in his home during the cold winter
months. The only benefit from China’s economic miracle that he can
see is that he used to burn scrap wood he collected to keep warm,
now his income has risen by enough that he can afford coal. Mr
Zheng is not the only person in China’s 1.4 billion population to have
hardly benefitted from the rise in incomes and GDP. In 2007 196 million
Chinese people lived on less than $1.25 per day.
In reference to the above case study, build a mind map which reflects
your standard of living and what it means to you
My standard of
living
Calculating GDP per capita
An increase in the standard of living is often shown by looking at changes
in the GDP per capita of a country over time.
Complete the table below by calculating the countries GDP
Country
GDP per
capita (USD)
47,893
Population
53,041
316.5 million
41,787
64.1 million
6,807
1.357 billion
505
94.1 million
Calculated GDP
424,700
Luxembourg
United States
United
Kingdom
China
Ethiopia
From the above information, which country as the highest GDP per
capita?
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Which country is the most productive?
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Researching Quality of life data
Research the figures to complete the below table
Country
Infant
Life expectancy
Mortality rates rates
(per 1000)
Literacy rates
United
Kingdom
United States
China
Ethiopia
Compare this data to the previous table and describe your findings
below
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Answers
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Can growth be bad?
Key Terms:
Non-renewable resources – resources which are limited in supply and will
eventually run out, e.g. oil and coal
Case Study:
Galkino lives in the port of Aralsk, Kazakhstan. His father was a fisherman,
just like his grandfather. However Galkino will not follow in his parents’
footsteps. The family’s fishing boat, like those of others in the Aral Sea, is
rotting on the sea bed in Aralsk harbour. Not only are there no fish, but
there is also no sea. Since the 1970’s the Aral Sea has been getting smaller,
shrinking in size by almost two thirds. The sea once had a surface area
larger than Wales, but since the 1960’s its size has fallen from 68,000 Km 2 to
just 17,160 Km2 in 2004. The sea has now split into three lakes, leaving the
port of Aralsk at least 30 Kms from the edge of the water. The Aral sea
disaster lays claim to being one of the world’s biggest man-made
environmental catastrophes. In the 1950’s the government decided that
the land around the Aral Sea would be perfect for growing cotton and
boost the GDP. The diversion of water from rivers led to the sea shrinking
and the use of fertilizers led to the poisoning of fish. As the sea had shrank
the climate began to change, rain fell less and winters became colder,
making it hard to grow crops.
Galkino is an example of a third party which has been affected by
decisions taken over the Aral Sea. Economists call the costs and
benefits of a decision on a third party externalities. Externalities can be
positive or negative. Economic growth can create a number of
important negative externalities
Produce a flow chart showing the externalities from the decision to
grow cotton.
The decision to
grow cotton
In the table below complete the notes on how the negative
externalities would affect a country
Negative
Externalities
Congestion
Non-renewable
resources
Waste
Effect on the country
Pollution
TEST YOURSELF
1) Which of the following is a non-renewable resource?
A)
B)
C)
D)
Petrol
Wind
Solar power
Fish
Select one answer
2) Growth is not always beneficial due to the existence of:
A)
B)
C)
D)
Increased unemployment
Lower levels of tax revenue
Increased fixed costs
Increased external costs
Select one answer
3) By increasing output, a firm will increase negative externalities
faced by society. This is because by producing more it:
A) Incurs higher wage costs
B) has higher raw material costs
C) produces more waste
D) could be left with too much supply
Select one answer
Answers
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Can growth be sustainable?
Key Terms:
Sustainable economic growth (development) – an increase in GDP that
minimises negative externalities faced by future generations.
Renewable resources – resources that are not limited in supply and are
naturally replaced in the environment. E.g. solar power and wind power.
Corporate social responsibility – a measure of the impact that a business
has on society and the environment as a result of its operations.
Greenwash – where a business tries to give the impression that it is
environmentally friendly when its claims may not be entirely true or justified.
Ethical responsibility – where a business takes a moral standpoint and
ensures that its behaviour does not impact stakeholder groups in a negative
way, it tries to do the ‘right thing’.
Environmentally friendly – where a business acts or produces products in a
way that minimises damage to the environment
Case Study:
The remote island of Lewis in the Outer Hebrides is at the centre of a
storm. Developers want to build Europe’s largest wind farm by erecting
more than 230 windmills on peat moor land to the north west of the
island. The company behind the scheme, Lewis Wind Power, expect
the wind farm to generate enough electricity to power almost half a
million homes. The scheme has the backing of the local council and
local businesses since it is expected to create 400 jobs and around £6
million per year of benefits to the local community. Some
environmental groups are also backing the proposal since generating
more electricity from renewables would reduce the use of nonrenewable resources. It will also reduce the quantity of greenhouse
gases in the atmosphere, reducing the speed of climate change.
However, not everybody is in favour of the plans. Local farmers are
worried about the loss of grazing land, whilst others are concerned
about the impact the wind farms will have on the rare species of bird
that nest on the island such as the Golden Eagle.
Stakeholders:
Make a list below of all the stakeholders involved in the above case
study, include a brief explanation of their interest
Make a list below of renewable and non-renewable energy
sources
Renewable energy
sources
Non-Renewable energy
sources
What can a business do to help make growth
sustainable?
Give a minimum of two example of how a business can be
environmentally friendly and ethically responsible in order help
make growth sustainable
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TEST YOURSELF
1) Which of the following would be an example of a firm becoming
more environmentally friendly?
A) Deciding to reduce the amount of packaging on its products
B) Making sure that costs are kept to a minimum
C) Encouraging consumers to use more of their products
D) Advertising the product to make people aware of how green the
product is
Select one answer
2) In order to become more socially responsible, firms should:
A) Ensure that they do not create any negative externalities
B) Consider the consumer to be the most important stakeholder
C) Consider the local community to be the most important
stakeholder
D) Make sure they consider all stakeholders
Select one answer
3) Using solar power is an example of sustainable economic growth
because:
A) Solar power will never run out
B) Solar power creates minimal pollution
C) Solar power generates electricity more cheaply
D) Solar power will only work in countries where there are higher
levels of sunlight
Select one answer
Answer
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What can Government do?
Key Terms:
Taxation – a payment made to the Government by consumers or firms. It is
usually based on spending or incomes.
Internalising an externality – where an unconsidered external cost is turned
into a considered private cost which is paid in money.
Incentives – measures designed to encourage a person to act in a different
way – a way which may be considered preferable or desirable
Subsidy – a payment to businesses and other organisations from the
government to encourage the production of certain products or to make
them cheaper for the consumer. .
Legislation – laws that are introduced by the Government.
Bam – a law that makes the production of a product or other business
activity illegal.
Regulation – restrictions and rules placed on business activities, which may
be monitored by an independent body or by the industries themselves
Case Study:
In 2010 the prospective owners of top of the range luxury cars will hit by
a brand new tax. Labelled the ‘showroom tax’ by many, it is in fact an
increase in the Vehicle Excise Duty (VED) or ‘road tax’ for the first year of
the life of a brand new car. The new tax will start in 2010 and the top
rate of £950 will only apply to those new cars with the biggest engines
and the greatest fuel consumption. As a result, they tend to emit the
most carbon dioxide from their exhaust, a gas which contributes to
global warming and climate change. Cars that emit very little carbon
dioxide per kilometre (less than 100g per km) are exempt from the tax
and their owners pay nothing. However, even the smallest petrol
powered car does not meet this standard, including the 0.7 litre petrol
engine Smart Car.
What do you believe are the reasons behind the Government
introducing the ‘showroom tax’?
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Match the below tools to why the Government would use it
Taxes
Subsidies
Legislation
Regulation
This refers to laws passed by the government.
It can be used to ban or restrict the
production of something considered ‘bad’.
Those who break the law may risk fines,
imprisonment and other sanctions.
This refers to a set of rules that govern the way
something is carried out
Imposing this on a good or service raises its
price. When price rises, demand falls. This can
be used to reduce demand for products
considered ‘bad’.
These are a sum of money given to businesses
and other organisations to help them reduce
the cost of producing something considered
‘good’. This would be an incentive to produce
more.
TEST YOURSELF
1) Which of the followingis the best example of ‘regulation’?
A) The Government making a payment to encourage the
production of a good
B) Firms deciding to increase prices
C) The Government deciding to tax a good to discourage its use
D) The Government introducing a law which limits the amount of
pollution
Select one answer
2) Which of the following will provide households with an incentive
to reduce the amount of electricity they use?
A) A subsidy for each household that uses electricity
B) Greater regulation on firms that produce electricity
C) A tax on the amount of electricity used by households
D) Subsidies for firms that produce electricity from renewable
sources
Select one answer
3) Giving bus operators a subsidy will only be effective in reducing
traffic congestion if:
A) Demand for car travel is price insensitive
B) Demand for bus travel is price sensitive
C) Demand for bus travel is price insensitive
D) There are no negative externalities involved
Select one answer
Answer
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