2.5.4 The impact of economic growth

• Impact of economic growth on

  • Consumers
  • Firms
  • The government
  • Current and future living standards
• Consumers


  • Economic growth does not benefit everyone equally. Those on low and fixed incomes might feel worse off if there is high inflation and inequality could increase.
  • There is likely to be higher demand-pull inflation, due to higher levels of consumer spending.
  • Consumers could face more shoe leather costs, which means they have to spend more time and effort finding the best deal while prices are rising.
  • The benefits of more consumption might not last after the first few units, due to the law of diminishing returns, which states that the utility consumers derive from consuming a good diminishes as more of the good is consumed.
• Consumers


  • The average consumer income increases as more people are in employment and wages increase.
  • Consumers feel more confident in the economy, which increases consumption and leads to higher living standards.
• Firms


  • Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.
• Firms


  • Firms might make more profits, which might in turn increase investment. This is also driven by higher levels of business confidence.
  • Higher levels of investment could develop new technologies to improve productivity and lower average costs in the long run.
  • As firms grow, they can take advantages of the benefits of economies of scale.
  • If there is more economic growth in export markets, firms might face more competition, which will make them more productive and efficient, but it will also give them more sales opportunities.
• The government


  • Governments might increase their spending on healthcare if the consumption of demerit goods increases.
• The government


  • The government budget might improve, since fewer people require welfare payments and more people will be paying tax
• Current and future living standards

  • High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services.
• Current and future living standards

  • As consumer incomes increase, some people might show more concern about the environment. Also, economic growth could lead to the development of technology to produce goods and services more greenly.
  • Higher average wages mean consumers can enjoy more goods and services of a higher quality.
  • Public services improve, since governments have higher tax revenues, so they can afford to spend on improving services. This could increase life expectancy and education levels.