Inflation risk: If demand races ahead of aggregate supply the scene is set for rising

prices – many of the faster-growing countries have seen a trend rise in inflation – this is
known as structural inflation

Environmental concerns:

 Fast growth can create negative externalities e.g. noise pollution and lower air
quality arising from air pollution and road congestion
 Increased consumption of de-merit goods which damage social welfare
 The huge increase in household and industrial waste. These externalities reduce
social welfare and can lead to market failure.

Growth that leads to environmental damage may lower the sustainable rate of growth.
Examples include the destruction of rain forests through deforestation, the over-
exploitation of fish stocks and loss of natural habitat and bio-diversity from the
construction of new roads, hotels, malls and industrial estates.

Growth and the Environment: The Sustainability of Economic Growth

Growth may lead to a rapid destruction of rain forests , the over-exploitation of fish
stocks and loss of natural habitat created through the construction of new roads, hotels,
retail malls and industrial estates. Some of the main environmental threats include:

 The depletion of the global resource base and the impact of global warming. There
are plenty of examples of the “tragedy of the commons”; the permanent loss of
what should be renewable resources from over-extraction of some of our
environmental resources.
 A huge expansion of waste and pollution arising from both production and
consumption
 Over-population (particularly in urban areas) putting increased pressure on
scarce land and other resources. More than half of the world's population lives in
cities in 2009, most of them in developing countries according to the United
Nations Population Fund.
 Species extinction leading to a loss of bio-diversity - Scientists predict that at least
a third and as much as two-thirds of the world's species could be on their way to
extinction by the end of this century, mostly because people are destroying
tropical forests and other habitats, over-fishing the oceans and changing the
global climate.
Main Benefits of Economic Growth
1. Higher living standards – i.e. Real GNI per capita – helps to lift people out of
extreme poverty and improve development outcomes (e.g. rising HDI)
2. Employment effects – sustained growth stimulates jobs and contributes to lower
unemployment rates which is turn helps to reduce income inequality.
3. Fiscal dividend – higher economic growth will raise tax revenues and reduce
government spending on unemployment & poverty related welfare benefits
4. Accelerator effect - rising growth stimulates new investment e.g. in low-carbon
technologies. Better growth may attract foreign direct investment projects

Main Costs of Economic Growth

Rapid rates of GDP growth can bring about undesirable economic and social costs –
much depends on the nature/causes of growth.

Risks of higher inflation and higher interest rates

 Fast-growing demand can lead to demand-pull and cost-push inflation – this

leads to a conflict between macro objectives
 The central bank may decide to raise interest rates to control inflation

Environmental effects

 More negative externalities such as pollution & waste

 Risk of unsustainable extraction of finite resources – i.e. fast growing countries
may cause a long-run depletion of natural resources

Inequalities of income and wealth

 Rapid increases in real national income can lead to a higher level of inequality
and social divisions
 Many of the gains from growth may go to only a few people