Causes of Economic Growth -

Demand Side Causes

Based on the rise in Aggregated Demand
AD = C + I + G + (x-m)

C: Consumer Spending

I: Investment (by businesses on capital)

G: Government Expenditure (more like Government Investments)

x: exports

m: imports

What are some reasons behind the rise of

C/I/G in leading to increase in AD
(economic growth)?
Causes for increase in Consumer Spending
Increase in income (Gov can raise minimum wage - knock on effect: everyone
gets a raise)

Low unemployment —> rising consumer incomes

Increased consumer confidence —> a reduction in savings and increased

spending

Increase in government spending and income tax cuts (gov does not need so
much revenue anymore)

Lower interest rates —> increased borrowing (of money to spend it)

Causes for increase in Investments

Causes of Economic Growth - Demand Side Causes 1

 High consumer spending —> increased sales —> Higher demand for goods and
services, meaning that businesses need to produce more, which leads to
business investment in capital and labour

Increased business confidence —> increase in planned investment

Lower interest rates —> drop in cost of borrowing —> increased borrowing

Causes for increase in government spending

Increased government spending on areas including education, healthcare and
infrastructure (people quality of life is better)

Creation of jobs as a result of government spending, leading to higher

incomes and higher consumer spending

Causes for rise in net exports

Economic boom and rising AD in the economies of trading partners —>
increased demand for exports

Fall in the value of the domestic currency —> lowering the relative price of
exports —> increase in the Qd of exports

Removal of trade restrictions on exports to be more price competitive

imposition of trade restrictions on imports, making imports more expensive

and increasing demand for home produced goods

Costs of Economic Growth

Startup Activity

Benefits Costs

- Worsening in the balance of payments (income

inequality)
Consumers - Inflation → Higher interest rates → saving instead
of spending → lower consumer confidence
- Higher Quality of life → Demerit Goods

Causes of Economic Growth - Demand Side Causes 2

 Benefits Costs

- Inflation → decrease demand for goods and

services
- Greater Stress → producers have to work longer
hours to accommodate increased demand → risk of
Producers
possible industrial actions (eg. Strike)
- Increased minimum wage for employees →
Increased costs → Quality of good decreases due to
having to cut costs → less profit

- Higher tax
- Inflation may occur: Income increase → costs of
revenues
consumer goods increase → inflation
- Higher tax
- Environmental Impacts: eco-unfriendly production
revenues —>
methods may be used to meet increased AD
Government government can
- Income Inequality: the rich get richer while the
invest more in
money are not allocated to the poor
public goods such
- Higher Quality of Life → Demerit Goods → Market
as healthcare,
Failure
education etc.

Costs:
One of the main issues: WE ARE PRODUCING AND CONSUMING TOO MUCH
DEMERIT GOODS

eg. Video Games, Polluting Factories, Cigarettes, Guns, Junk Food

So, people are not necessarily better off with more output (of these
products)

Possible Costs from economic Growth

More output = resources being used up quicker (usually non-renewable/

fossil fuels)

Pollution, Destruction of Habitats

Causes of Economic Growth - Demand Side Causes 3