IB Economics 3.3.2 Consequences of Economic Growth Notes

Economic growth has further consequences than expanding real output. As output rises it changes how people live, how income is shared, and how heavily the economy draws on the environment, so its main consequences include:

1. Impact on living standards: higher output can raise incomes and consumption, so households can afford more goods, services, healthcare and education, though only if the gains reach ordinary people.
2. Impact on the environment: greater production usually means more energy use, emissions and resource extraction, so growth can create negative externalities and deplete natural resources unless it is pursued sustainably.
3. Impact on income distribution: growth can narrow or widen the income gap, because who captures the extra output depends on the drivers of growth and on government policy.

Impact on living standards

Economic growth can lead to higher incomes and improved access to goods and services, ultimately raising living standards. This occurs because:

1. GDP per capita increases when growth outpaces population growth, because total output is then shared among people at a faster rate than the population expands, so average income per person rises and each household can command more goods and services than before.
2. Higher consumption of goods and services follows from those higher incomes, because as people can afford better healthcare, education and housing their material welfare and quality of life tend to improve.

Factors affecting the impact of economic growth on living standards

The extent to which economic growth improves living standards depends on:

1. Distribution of income: growth benefits all groups when income is equitably distributed, because extra output reaches lower-income households and lifts their consumption, but it worsens inequality if the gains stay concentrated among the wealthy, so average living standards can rise while many people feel no improvement.
2. Household spending: economic growth raises consumer spending, which drives demand for more goods and services, so firms hire and invest to meet that demand and further growth is stimulated.
3. Government spending on merit goods: when growth raises government spending (G), living standards improve if that spending is directed into education, healthcare and infrastructure, because these are under-provided by the market yet raise the productivity and well-being of the whole population.