economic growth as level essay

Example 25-Mark Essay in style of AQA Economics A-level

Below is an example model answer to a 25 mark question in the style of AQA Economics A-level.

To practise your AQA exam technique with 2024 practice questions, click the button below:

Question for model answer

Consider the following question. I have written this question in the style of a 25-mark AQA Economics A-level question for section B:

Taking effect from 1st April 2023, the UK Government has committed to increasing the corporation tax rate from 19% to 25% for companies with profits above £250,000 per year. For firms with profits below £50,000, there is no increase in corporation tax rates. But for firms with profits between £50,000 and £250,000 there will be a smaller increase in corporation tax rates.

(Source: here )

Evaluate the effects on the UK economy of increasing corporation tax rates on firms making high profits (25 marks) .

This is a key macroeconomics essay on current affairs. A quick essay plan is here:

Define key terms.
Laffer curve – higher government revenue.
Evaluation – position on Laffer curve.
AD effect – lower investment and negative multiplier effect.
Evaluation – proportion of AD that comes from investment.
LRAS effect – reduced incentives and productivity.
Evaluation – need to compare corporation tax rates to those of other economies.

Conclusion.

Possible model answer

Corporation tax is a tax on firms’ profits. Aggregate demand (AD) is the total demand in the economy, AD = C+I+G+X-M.

Increasing corporation tax rates may increase tax revenue for the UK Government. The Laffer curve shows this. An increase in tax rates from T to T1 raises tax revenue from R to R1. This revenue could go towards reducing the budget deficit. The government’s budget deficit is very high at 4.2% of the UK’s GDP in 2023-24. This is because of government spending on Covid support programmes such as the furlough scheme, energy subsidies and other tax cuts. Reducing the budget deficit may lead to government borrowing and hence reduced debt interest payments . With less spending on debt interest the UK Government could choose to spend more money in the future on other priorities such as healthcare spending. Sounder public finances might also make investors more confident in the UK Government’s ability to make bond repayments. This may reduce the interest rates at which investors are willing to buy government bonds and thus reduce future borrowing costs.

Whether the tax increase raises government revenue depends on the position of the UK economy on the Laffer curve. If instead the economy is at point (T1,R1) before raising corporation taxes, then increasing the corporation tax rate to T2 may decrease revenue to R. This is because a corporation tax rise may reduce incentives to start or grow a business, reducing the size of the tax base. The UK Government does predict that tax revenue would rise by over £10bn a year because of the corporation tax rate rise. With corporate tax rates relatively low now, it is likely that there will be higher revenue. But the effect of higher taxes on incentives may reduce the extent to which revenue increases.

Increasing corporation tax rates “from 19% to 25% for companies with profits above £250,000 per year” reduces the post-tax profits of these firms. This leaves reduced funds for investment, so investment may fall. Also as firms know any future profits will be taxed at a higher rate, this will disincentivise investment further. This is because firms will have reduced returns (lower post-tax profits) from any new investment. So investment falls and as investment is a component of aggregate demand (AD=C+I+G+X-M), aggregate demand shifts left from AD to AD1. This may cause a negative multiplier effect . This is where a fall in investment leads to a larger than proportionate fall in A. Lower investment results in lower incomes for firms and cuts in wages, so consumers cut their spending, meaning consumption also falls and so on. So AD shifts further left to AD2. This results in lower real GDP as real GDP falls from Y to Y2. Hence corporation tax may lower real GDP, likely resulting in lower living standards.

However this argument depends on the proportion of AD influenced by the corporation tax rate rise. Only firms making larger profits are facing a corporation tax rise. So firms making lower profits, for example small businesses, are less likely to reduce their investment. Also consumption is the largest component of AD, making up roughly 60% of AD, not investment. So a given percentage fall in investment may have only a smaller effect on AD. Corporation tax is likely to reduce AD leading to lower real GDP. But these impacts are limited by the relative importance of investment to AD and the design of the policy to target high profit firms only.

Decreased investment can also influence the supply side of the economy. Lower investment could mean reduced firm spending on capital goods and human capital. So this could reduce productivity and hence the productive capacity of the economy. This means the LRAS could shift to the left. Higher corporation taxes could mean higher business costs, shifting the short-run aggregate supply curve left too. Lower productivity and higher business costs could lead to a higher price level in the UK economy, reducing the price competitiveness of UK exports which may widen the current account deficit. Productivity for the UK economy is 15% below the average of other G7 economies (as of 2015), so corporate tax rises could further worsen this UK productivity gap with other nations. There may also be fewer businesses choosing to set up in the UK, preferring to set up abroad in locations with lower taxes. This would further reduce the productive potential of the economy, compared to a situation of lower corporation tax rates.

However this depends on the level of corporation tax rates in other economies . The UK has the lowest corporate tax rate among the G7 economies, even after the tax rise. Hence there may be fewer incentives to set up a business abroad, so the effect on competitiveness is reduced. Also many economies have agreed to a global minimum corporation tax of 15%, further reducing the risk to competitiveness from raising corporation taxes. While the corporation tax rate rise may reduce investment, it is less likely to have a significant impact on competitiveness.

Overall raising corporation tax on firms making high profits is likely to be effective in raising revenue. While raising corporation tax will reduce aggregate demand and aggregate supply, by raising taxes only on higher-profit firms, the impact is limited. The impact of the tax rise does depend on how other countries respond – if other countries maintain or reduce their tax rates to attract more businesses, then increasing corporate taxes could significantly reduce the incentive for international businesses to set up in the UK. However, given the increasing degree of tax cooperation globally , as shown by the 15% minimum corporate tax rate agreement, it seems likely that countries will not seek to undercut each other’s corporate tax rates.

Application is throughout using examples from the short extract and from own knowledge to support analysis and evaluation.

Analysis is detailed, using chains of reasoning and graphs to support the answer.

Evaluation is also detailed, making use of chains of reasoning and where relevant, data about the economy. The conclusion addresses the question and justifies the answer.

Note for the conclusion you could have picked another side for this policy too depending on the arguments used. You could also use other possible points – there is no right way of doing this. For example with interest rates at historical lows, how does that impact the cost of government borrowing and the necessity of raising taxes? What other factors may matter for investment beside corporate tax rates?

This essay would likely score level 5 according to AQA Economics A-level criteria.

For more guidance on AQA exam technique (25 markers, 15 markers, 9 markers and more), check out the blue button below:

How should you structure a 25 marker economics essay?

Introduction

Depending on depth of your previous points, add another round of analysis and evaluation.

For more information on AQA Economics essay structure, I recommend the following article linked here .

How should you write a conclusion for 25 markers economics?

A conclusion has these key elements:

Answer the question.
Justify your answer in step 1.
Consider other evaluation points, including real-world context, for further justification or that may go against your answer.

How should you evaluate in economics 25 markers?

I recommend the “depends on” structure for AQA Economics style evaluation. For more information on this, see my AQA Economics style evaluation guide here .

More Resources

For AQA style practice questions on recent current affairs, click the blue button below:

If you are interested in more A-level Economics resources, please feel free to click the button below:

About the author

Helping economics students online since 2015. Previously an economist, I now provide economics resources on tfurber.com and tutor A Level Economics students. Read more about me here .

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Economics 9708 AS and A Level Past Papers

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Economic growth

A) Rates of change of real Gross Domestic Product (GDP) as a measure of economic growth

GDP (Gross Domestic Product) measures the value of all final goods/services produced in an economy in a year. There are two methods used to work out the GDP value of an economy. The first one is the expenditure method. In the expenditure method there are four main components that are added up in order to get the GDP value. These include: Consumer expenditure, Investment, Government spending and Net trade (exports – imports).

The other method is called the income method, which involves adding up all the incomes within an economy (wages, interest, profits and rents). The GDP value from the income method and expenditure method should always be the same. For example, consumers earn money through working for firms (income), they then spend this income on goods/services (Expenditure). If a firm’s revenue exceeds their costs then they will earn a profit (Income) which they then may spend to hire more employees or expand their business (expenditure). The following formula can be derived from this fact: Income = Output = Expenditure. As a result of this, when GDP raises so do incomes which some may suggest points to an increase in living standards.

B) Distinction between:

Real and nominal:

Nominal GDP is the value of final goods/services within an economy without adjusting for inflation. Real Gross domestic product is the same as GDP but takes into account inflation. For example, if the value of goods/services within an economy (GDP) rose by 10%, but the inflation rate was 4% then real GDP would be 6%. This is because the inflation rate offsets the raise in incomes that occur as a result of an increase in GDP.

Total and per capita

Total GDP is the total value of goods/services within an economy in a year. On the other hand, GDP per capita takes into account the difference in populations between countries. It does so by taking the GDP figure and dividing it by the country’s population. This gives the average output/income per person, making it easier to compare standards of living amongst different countries.

Value and volume

The value of goods/services shows what certain goods/services are worth. However, the volume shows the number of goods/services that are produced. This is very important to remember when talking about trade. Although a country may import more goods/services than they export, they could still record a trade surplus. This is because the value of exports may exceed the value of imports, despite the volumes not.

C) Other national income measures:

Gross National Income (GNI)

Gross National Income (GNI) can be worked out by taking the GDP figure and adding it to the income paid into the country by other countries for such things as interest and dividends. This is in contrast to GDP which doesn’t include net income received from abroad. GNI is similar to GNP, but is calculates income rather than output. For countries with a large foreign population, the GNI figure can be much lower than GDP as some of the income received by foreigners is sent back to their home countries. This can be seen in Ireland, where lots of MNC’s locate due to their low corporation tax rate.

Gross National product (GNP)

GNP includes the value of goods/services produced by citizens regardless of their location. This means that the output of citizens working abroad is included in the sum (even those that don’t send back their income as a remittance). However, GNI excludes the output from foreign worker located in the domestic country (even if they don’t send that income back to their home country). Therefore GNI = The final value of all goods and services produced by domestic residents (GDP) plus income that residents have received from abroad, minus income claimed by non-residents.

D) Comparison of rates of growth between countries and over time

You should be able to use economic data to compare the economic performance between different countries and draw a conclusion about an individual country’s economic performance over a long time period. It is also important that you know the different assumptions made during the process. For example, comparing two countries GDP data may be less valuable information than comparing the GDP per capita of two countries. This is because it allows for an easier comparison due to the fact that it takes into account population differences.

Furthermore, using real data rather than nominal data can also make for a better/fairer comparison. This is because a country that has a high inflation rate is likely to have a higher GDP growth rate as it has been artificially boosted by the large increase in inflation. Therefore, although consumer’s real incomes have not actually risen by much in real terms, the nominal GDP growth rate may wrongly suggest otherwise. It is important that this level of analysis is used when comparing countries economic data as it has to be highly accurate in order to determine the level of success that a country’s policy decisions have resulted in.

E) Understanding of Purchasing Power Parities (PPPs) and the use of PPP-adjusted figures in international comparisons

Purchasing power parity helps to compare the costs of living between countries. For example, if the basket of goods in the UK is the equivalent of $400 (after pounds have been converted to dollars), but the basket of goods in America is worth $800, then the purchasing power parity is 1:2. Therefore, although America may have a higher GDP per capita than the UK, American citizens will be worse off. This is because they have a higher cost of living, meaning their wages can buy fewer items than in the UK. If GDP per capita in the UK was equivalent to $80,000 and GDP per capita in the US was $100,000, then UK GDP (PPP) would be $80,000 and US GDP (PPP) would be $50,000. Therefore, despite GDP per capita being higher in America, when adjusted to purchasing power parity, the UK actually have a higher GDP per capita rate than America, suggesting a higher standard of living in the UK. This shows how PPP can be used to give a more accurate comparison of different countries GDP rates

F) The limitations of using GDP to compare living standards between countries and over time

GDP does not take into account the improving quality of goods – GDP does not take into account improvements in the quality and diversity of goods, as it counts their final value only. For example, a phone 10 years ago has fewer functions than a phone for the same price presently. However, because the values are the same, the contribution to GDP would have been the same. This can potentially mean that one country’s GDP per capita figure can be the same as another country that is less technologically advanced and has worse quality goods/services.

GDP does not include unofficial or unpaid/goodwill work – Some workers may choose to do work for free and therefore earn no income from that work. Therefore, the value of the work produced is not included in the GDP figure. This can be a big issue in LDC’s where there are high levels of subsistence agriculture. As a result, the GDP figure stated is often underestimated.

Increases in real GDP may not be shared equally among an economy’s population – Although a high GDP per capita suggests high levels of income amongst citizens, it doesn’t show how that income is distributed amongst its population. For example, a small percentage of the population may have a huge amount of income whilst the majority of the population has a very low income. Those on very high incomes will boost the GDP per capita figure, pushing up the average income figure. This masks the high levels of inequality that may exist within society and therefore does not reflect the true standards of living. Therefore, although two countries may have a similar GDP per capita, the distribution of the income in those two countries may be very different from each other.

GDP doesn’t take into account other factors that affect living standards e.g. pollution, congestion, number of hours worked and stress levels – A large increase in GDP growth is an indication of large increases in output and therefore incomes also. However, this can result in negative impacts on people’s standard of living, which is in contrast to what some people may associate with a high GDP growth rate.

Wednesday, November 1, 2017

Importance of economic growth, why economic growth is important.

Reduction in poverty . Increased national output means households can enjoy more goods and services. For countries with significant levels of poverty, economic growth can enable vastly improved living standards. For example, in the nineteenth century, absolute poverty was widespread in Europe, a century of economic growth has lifted nearly everyone out of this state of poverty. Economic growth is particularly important in developing economies.
Reduced Unemployment . A stagnant economy leads to higher rates of unemployment and the consequent social misery. Economic growth leads to higher demand and firms are likely to increase employment.
Improved public services . Higher economic growth leads to higher tax revenues (even with tax rates staying the same). With higher growth, incomes and profit, the government will receive more income tax, corporation tax and expenditure taxes. The government can then spend more on public services.

Political aspect . Elected politicians have a vested interest in higher economic growth. Higher growth enables vote pleasing policies such as tax cuts and/or more public spending.

Virtuous cycle of economic growth

Countries with positive rates of economic growth will create a virtuous cycle
Economic growth will encourage inward investment as firms seek to benefit from rising demand
Higher growth leads to improved tax revenues which can be spent on long-term public sector works, such as improved transport and communication. This helps long-term growth.
Confidence to invest. Higher growth encourages firms to take risks - innovate and invest in future products and productive capacity.

Limitations of economic growth

Inequality and distribution . Economic growth doesn't necessarily reduce relative poverty, it depends on the distribution of incomes. Economic growth could bypass the poorest in society. For example in the 1980s, the Gini coefficient rose sharply - the richest 1% gained dis proportionality more.
Negative externalities . Economic growth can cause negative externalities such as pollution, higher crime rates and congestion which actually reduce living standards. For example, China has experienced very rapid economic growth but is now experience very serious levels of air pollution in major cities.
Economic growth may conflict with the environment . e.g. increased carbon production is leading to global warming. Economic growth may bring benefits in the short-term, but costs in the long-term.
It depends on what is produced . The Soviet Union has fantastic rates of economic growth, but, often through producing a lot of steel and pig iron that was not actually very useful.
Economic growth can be unsustainable . If growth is too rapid, it will cause inflation, current account deficit and can lead to boom and bust.
Does happiness actually increase? Theories of hedonistic relativism suggest (beyond a certain level) increasing output has no effect on changing life quality or happiness.
Causes of Economic Growth
Benefits of economic growth
The Importance of Economics

3 comments:

No one is explaining clearly WHY the UK deficit has got so much worse so suddenly in 2009. What items are (roughly) responsible for each part of the increase?

2008 Financial Crisis, read the following: https://www.ifs.org.uk/publications/13302

Are the answers the same with why economists take much attention to economic growth matters

A State-Ranker’s Guide to Writing 20/20 Economics Essays

So, you want to know how to improve your preliminary and HSC economics essay...

Cory Aitchison

State Ranker & 99.95 ATAR

1. Introduction to this Guide

So, you want to know how to improve your preliminary and HSC economics essay writing? Look no further! In this guide, I’ll be covering key tips to help YOU smash the structure, amaze with your analysis, conquer the contemporary, and ultimately master the mystery of maximising your marks.

My name is Cory Aitchison, currently one of the Economics tutors at Project Academy . I completed the HSC in 2018, achieving a 99.95 ATAR as well as two state ranks — 6th in economics and 12th in chemistry. Graduating from Knox Grammar School, I also topped my grade in economics and was awarded Dux of the School for STEM. Believe it or not, at the beginning of Year 11 I initially struggled with economics due to the transition in conceptual thinking required in approaching economic assessments in comparison to my other subjects such as English. However, through Year 11 and Year 12, I built up key tips and strategies — that I’ll be sharing with you in this guide — to help me not only consistently achieve top marks in my internal assessments, but to ultimately go on to achieve the results I did in the HSC.

2. The Correct Way to Write

First off, you need to understand something: HSC economics essays are NOT english essays! They aren’t scientific discussions, nor geography reports, nor historical recounts. They’re unique and often quite different from other essays that you might’ve done previously in high school. The style of writing and approach to answering questions can be confusing at first, but follow these tips and you’ll be ready in no time:

Phrasing should be understandable and concise

Unlike some subjects where sophisticated phrasing is beneficial to getting marks, HSC economics essays should emphasise getting your point across with clarity. This means don’t run your sentences on for too long, be aware of any superfluous words, and make sure you actually understand yourself what you’re trying to say in a sentence.

For example:

GOOD: “An increase in interest rates should lead to decreased economic growth.”

NOT GOOD: “As a result of a rise or increase in interest rate levels from their previous values, the general state of economic activity in the domestic economy may begin to decrease and subsequently indicate the resultant situation of a decrease in economic growth.”

“Understandable” does not mean slang or lacking in terminology

Just because you want to get a point across, doesn’t mean you should resort to slang. In fact, using economic terminology is a strong way to boost your standing in the eyes of the marker — if you use it correctly! Always make sure you use full sentences, proper English grammar, and try and incorporate correct economic terms where possible.

GOOD: “This was a detrimental outcome for the economy.”

NOT GOOD: “This was a pretty bad outcome for the economy.”

GOOD: “The Australian Dollar depreciated.”

NOT GOOD: “The Australian Dollar decreased in value.”

Analysis should be done using low modality

Modality just refers to the confidence of your language — saying something “will” happen is strong modality, whereas saying something “might” happen is considered low modality. Since a large portion of economics is about applying theory, we have to make sure that we are aware that we are doing just that — talking about the theoretical, and so we can’t say for sure that anything will happen as predicted.

Some useful words include:

May, Might, Should, Could, Can theoretically

Don’t use words like:

Must, Will, Has to, Always

3. How to use Statistics

“What’s most important is that this contemporary is used to bring meaning or context to your argument…”

Using contemporary (statistics) can often seem straightforward at first, but using it effectively is usually harder than it looks. Contemporary generally refers to applying real-world facts to your analysis to help strengthen (or weaken) the theoretical arguments. This can include many different statistics or pieces of information, including:

Historic economic indicators, such as GDP, inflation, GINI coefficients, exchange rates, or unemployment rates
Trends or economic goals, such as long-term GDP growth rates, or the stability band for inflation
Names of economic policies, such as examples of fiscal or microeconomic policies
Specifics of economic policies, such as the amount spent on infrastructure in 2017

Whatever statistics you deem relevant to include in your essay, what’s most important is that this contemporary is used to bring meaning or context to your argument — just throwing around random numbers to show off your memorisation skills won’t impress the marker, and in fact might appear as if you were making them up on the spot. Rather, your use of contemporary should actively improve your analysis.

GOOD: “Following a period of growth consistently below the long-term trend-line of 3%, the depreciation of the AUD to 0.71USD in 2017 preceded an increase in economic growth to a 10-year high of 3.4% in 2018.”

NOT GOOD: “Economic growth increased by 1 percentage point in 2017 to 2018”

NOT GOOD: “GDP was $1.32403 trillion in 2017”

GOOD: “The 2017 Budget’s Infrastructure Plan injected $42 billion into the economy — up 30% from 2016’s $31 billion, and 20% higher than the inflation-adjusted long-term expenditure.”

NOT GOOD: “The 2017 Budget’s Infrastructure Plan injected $42 billion into the economy”

That in mind, don’t think that these statistics have to be overly specific. As long as the general ideas gets across, it’s fine. You don’t need to say “$1,505,120” — just “$1.5 million” will suffice.

Ask yourself: if I get rid of the contemporary from my paragraphs, does the essay still have enough content?

Further, don’t get roped into the “contemporary trap” — where you fall into the mindset that “if I memorise all these statistics, my essay will get good marks”. Including numbers and contemporary at the expense of having a robust theoretical explanation and analysis will definitely be detrimental in getting you top marks. Particularly in trial exams and the HSC when you’ve got all these numbers floating in your head, it can be tempting to try and include as many as you can (often just because you can!). To avoid this, always try and focus your arguments on analysis and syllabus content first, contemporary second. Ask yourself: if I get rid of the contemporary from my paragraph, does the essay still have enough content?

4. Must Have Insightful “However”s

If you really want to extend your analysis and show the marker that you know your stuff, including insightful “however”s is a strong way to do it. What I mean by this is that for each of your paragraphs, try and include a counterpoint that highlights the flexible nature of economic theory. There are broadly two kinds of “however”s:

Theoretical “However”s

These are counterpoints that are based on theory — often there will be theoretical limitations for many of the concepts you come across in economics. It’s always important to include these limitations as it reinforces your knowledge of the actual content of economics.

“Although the Budget and fiscal policy can be effective at stimulating economic growth, it is also restricted by the “implementation time lag” limitation since it is only introduced annually.”

Contemporary “However”s

These are counterpoints that are based on contemporary — highlighting how although something should happen theoretically, this isn’t usually what is observed in reality. This can be particularly powerful in that it combines your knowledge of theory with your analysis of contemporary.

“Despite the expansionary stance that the RBA adopted in 2012–2016 for monetary policy, Australia’s annual GDP growth rate has remained below the trend rate of 3% — against the theoretical expectations. This could be attributed to factors such as …”

5. How to Interpret the Question

When you first look at a question, before you even put pen to paper, you need to come up with a plan of attack — how can you ensure that you answer the question correctly, and give the markers what they want? There are three main points to look for when interpreting essay questions:

Knowing your verbs

As you may (or may not) know, NESA has a bank of words that they like to pull from when writing questions, and these words impact how they want their question answered. These verbs should help steer your analysis onto the right path. For example:

Explain: “Relate causes and effects”

To answer these questions, you have to demonstrate a thorough understanding of how theory and events impact each other and the economy. This verb particularly emphasises the idea of a process — you need to be able to make clear links as to how each step leads to the next, rather than just jumping to the outcomes.

Analyse: “Draw out and relate implications”

These questions usually wants you to investigate the connections between different aspects of economic theory. Generally this involves showing a holistic understanding of how different areas (such as micro- and macroeconomic policies) come together to make a cohesive impact on the economy. It usually helps to think back to the syllabus and how the points are introduced when figuring out which ideas to link together.

Assess/Evaluate: “Make a judgement based on value/a criteria”

These require you to not only critically analyse a topic but also come to a conclusion given the arguments you provided. This type of question usually gets you to make a judgement of the effectiveness of some economic theory — such as the ability for economic policies to achieve their goals. Make sure you actually include this judgement in your answer — for example, say things like “strong impact”, “highly influential”, “extremely detrimental”.

Discuss: “Provide points for and/or against”

Similar to assess, discuss wants you to provide arguments towards and against a particular topic. Although it doesn’t require a specific judgement to be made, it does place greater emphasis on showing a well-rounded approach to the argument — providing relatively equal weightings towards both the positive and negative sides of the discussion.

Linking to the syllabus

When trying to understand what the question wants from you, I found the best way to approach it is to consider what points in the syllabus it is referring to (To do this, you need to have a solid understanding of the syllabus in the first place). Once you’ve located it, try drawing upon other topics in the vicinity of that dot point to help you answer the question.

For example, if the question mentions “trends in Australia’s trade and financial flows”, then you know from the syllabus that you probably need to talk about value, composition and direction in order to get high marks. Further, it may also be worth it to bring in ideas from the Balance of Payments, as this is the next dot point along in the syllabus.

Digging into the source

For essay questions that provide a source for you to include in your answer, this is another goldmine from which you can discern what the marker really wants. If the source mentions microeconomic policy, it probably wasn’t on accident! Even if it may not be obvious how to link that to the question immediately, try and draw upon your knowledge and implications and see if there’s a different angle that you might be missing.

6. Putting it All together — Structuring your essay

My essays usually consisted of four main parts: an introduction, a background paragraph, body paragraphs, and a conclusion.

Introduction

Your introduction should not be long. I rarely wrote an introduction longer than three sentences.

First sentence: Answer the question (thesis)

Try and answer the question, while including the main key words of the question in your answer. Don’t directly restate it — instead, try and add meaning to it in a way that represents what you’re trying to get across in your essay.

For example: if the question was “Assess the impact of microeconomic policy in improving economic growth in Australia”, my first sentence might be “Microeconomic policy has had a significant impact in increasing aggregate supply and thus long-term economic growth in Australia since the 1960s”.

Next sentences: Introduce your arguments/paragraphs

In this part, it’s fine to almost list your paragraphs — there’s no need to do a whole sentence explaining each. That’s what the paragraphs themselves are for.

For example: using the same question as above, my next sentence might be “Although trade liberalisation may have been detrimental for short-term growth in manufacturing, policies such as competition policy and wage decentralisation have been highly effective in fostering economic growth in Australia”.

Background Paragraph

The aim of a background paragraph is threefold: to get across the main theory that underpins your argument; to establish the economic context for your argument; and to show the marker that you “know your stuff”.

For example, if the essay was on monetary policy, you may want to describe the process of Domestic Market Operations (how the reserve bank changes the cash rate) in your background paragraph, so that you don’t need to mention it each time you bring up changing stances. Further, it may be good to showcase the current economic climate — such as GDP growth rate and inflation — to give context to your analysis in your essay.

Some ideas for what to include in this paragraph include:

Key theory such as DMOs or the rationale for macroeconomic policies
Economic indicators that provide context to the time period that you’re working in, such as growth rates, inflation, unemployment rates, exchange rates, cash rates, etc.
A brief description of the recent Budget (if talking about fiscal policy), including the stance and outcome

Bear in mind that this paragraph shouldn’t be too long — it isn’t the focus of your essay! Instead, aim for around 100–150 words at most. At this point in your essay, it may also be good to include a graph (more on this later).

Body Paragraphs

There’s no set rule for how many body paragraphs to include in your essay — I generally aim for at least 4, but there’s no real limit to how many you can (or should) write! Unlike english essays, it’s totally acceptable to just split a paragraph in two if you feel like the idea is too large to be written in one paragraph (as long as each paragraph makes sense on its own).

When writing a paragraph, I usually follow this structure:

Topic sentence

This is where you answer the question, and outline your argument or idea for this paragraph. If you are doing a discuss/assess/evaluate essay, try and make your judgement or side obvious. For example: “Trade liberalisation has been detrimental in its impact on economic growth in manufacturing industries”.

These sentences are where you bring together the theory and contemporary to build up your argument. Remember, the theory should be the focus, and contemporary a bonus. Try and weave a “story” into your analysis if you can — you should be showing the marker how everything fits together, how causes lead to effects, and ultimately bringing together relevant economic concepts to answer the question. Feel free to also include graphs here when they help strengthen your argument.

Fit in your “however” statements here. For discuss questions, this however section may take up a larger part of the paragraph if you choose to showcase two opposing arguments together.

Link your argument back to your overarching thesis, and answer the question. Following on from your “however” statement, it can often be a good idea to use linking words such as “nevertheless”, “notwithstanding”, or “despite this” to show that taking into account your arguments presented in the “however” statement, the overarching idea for the paragraph still remains.

Like the introduction, your conclusion should not be overly long. Rather, it should briefly restate the arguments made throughout your essay, and bring them all together again to reinforce how these points help answer the question.

Aggregate Demand / Supply Graph

Graphs are a great way to add extra spice to your essay — not only does it help strengthen your explanations of economic theory, it also makes it look like you wrote more pages than you actually did! Graphs, such as aggregate demand graphs, business cycle graphs, and Phillips curves, can be great in reinforcing your ideas when you mention them in your essay. They usually come either in background paragraphs or body paragraphs, and it’s usually best to draw them about a quarter to a third of the page in size. It’s also good practice to label them as “Figure 1” or “Graph 1”, and refer to them as such in your actual paragraph.

Although they can be beneficial, don’t try and force them either. Not all essays have appropriate graphs, and trying to include as many as you can without regards for their relevance may come across negatively in the eyes of the marker.

8. How to Answer Source Questions

If your essay question involves a source, try and refer to it multiple times throughout your essay. For example, this can be in the background paragraph and two of your body paragraphs. Rather than just adding in an “…as seen in the source” to one of your sentences, try and actively analyse it — show the marker that you understand why they included it, and how it actually helps strengthen your arguments.

9. Plan You Essay

Don’t be afraid to use the first page of your answer booklet as a planning page. Taking a couple minutes before you answer the question to lay out your scaffold for body paragraphs is a great first step to helping ensure that you actually end up answering the question to the best of your abilities. It also serves as a great reminder to keep checking as you finish each paragraph to ensure that you actually wrote what you intended. Just make sure to make it clear to the marker that those scribbles on the page are just a plan, and not your actual essay!

10. How to Prepare for Essays in the Exam

I find it much better to prepare paragraphs and ideas that you can draw upon to help “build up” a response during the exam itself.

Don’t go into the exam with a pre-prepared essay that you are ready to regurgitate — not only are there too many possibilities to prepare for, but it’s also unlikely that you’ll actually answer the question well with a pre-prepared response.

Instead of memorising sets of essays before the exam, I find it much better to prepare paragraphs and ideas that you can draw upon to help “build up” a response during the exam itself. What I mean by this, is that in your mind you have a “bank of different paragraphs” and ideas from all the topics in the syllabus, and when you read the exam, you start drawing from different paragraphs here and there to best formulate a response that answers the question. This allows you to be flexible in answering almost any question they can throw at you.

On top of this, ensure you have a solid foundation in both the theory and contemporary — knowing what statistics or topics to include in your essay is useless knowledge unless you have the actual content to back it up.

Now that you know the basics of how to write a good HSC economics essay, it’s time to start practising! Have a go, try out different styles, and find what works best for you. Good luck!

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What is economic growth? And why is it so important?

The goods and services that we all need are not just there – they need to be produced – and growth means that their quality and quantity increase..

Good health, a place to live, access to education, nutrition, social connections, respect, peace, human rights, a healthy environment, and happiness. These are just some of the many aspects we care about in our lives.

At the heart of many of these aspects that we care about are needs for which we require particular goods and services . Think of those that are needed for the goals on the list above – the health services from nurses and doctors, the home you live in, or the teachers who provide education.

Poverty, prosperity, and growth are often measured in monetary terms, most commonly as people’s income. But while monetary measures have some important advantages, they have the big disadvantage that they are abstract. In the worst case, monetary measures – like GDP per capita – are so abstract that we forget what they are actually about: people’s access to goods and services.

The point of this text is to show why economic growth is important and how the abstract monetary measures tell us about the reality of people’s material living conditions around the world and throughout history:

In the first part, I want to explain what economic growth is and why it is so difficult to measure.
In the second part, I will discuss the advantages and disadvantages of several measures of growth, and you will find the latest data on several of these measures so that we can see what they tell us about how people’s material living conditions have changed.

What are these goods and services that I’m talking about?

Have a look around yourself right now. Many of the things you see are products that were produced by someone so that you can use them: the trousers you are wearing, the device you are reading this on, the electricity that powers it, the furniture around you, the toilet that is nearby, the sewage system it is connected to, the bus or car or bicycle you took to get where you are, the food you had this morning, the medications you will receive when you get sick, every window in your home, every shirt in your wardrobe, and every book on your shelf.

At some point in the past, many of these products were not available. The majority did not have access to the most basic goods and services they needed. A recent study on the history of global poverty estimates that just two centuries ago, roughly three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.” 1

Let’s look at the history of the last item on that list above, books.

A few centuries ago, the only way to produce a book was for a scribe to copy it word-for-word by hand. Book production was a slow process; it took a scribe about eight months of daily work to produce a single copy of the Bible. 2

It was so laborious that only very few books were produced. The chart shows the estimates of historians. 3

But then, in the 15th century, the goldsmith Johannes Gutenberg combined the idea of movable letters with the mechanism that he knew from the wine presses in his hometown. He developed the printing press. Gutenberg developed a new production technology, and it changed things dramatically. Instead of spending months to produce one book, a worker was now able to produce several books a day.

As the printing press spread across Europe, book production soared. Books, which were previously only available to a tiny elite, became available to more and more people.

This is one example of how growth is possible and what economic growth is : an increase in the production of goods and services that people produce for each other.

A list of goods and services that people produce for each other

Before we get to a more detailed definition of economic growth, it’s helpful to remind ourselves of the astonishingly wide range of goods and services that people produce. I think this is helpful because measures of economic output can easily become abstract. This abstraction means we easily lose the mental connection to the goods and services such measures actually talk about.

This list of goods and services isn’t meant as a definitive list, but it helped me to think about the relevance of poverty and growth: 4

At home: Light in your home at night; the sewage system; a shower; vacuum cleaner; fridge; heating; air conditioning; electricity; windows; a toilet – even a flush toilet; soap; a balcony or a garden; running water; warm water; cutlery and dishes; a hut – or even a warm apartment or house; an oven; sewing machine; a stove (that doesn’t poison you ); carpet; toilet paper; trash bags; music recordings or even online streaming of the world’s music and film; garbage collection; radio; television; a washing machine; 5 furniture; telephone; a comfortable bed, and a room for one’s own.

Food: The most fundamental need is to have enough food. For much of human history, a large share of people suffered from hunger , and millions still do .

But we also need to have a richer and more varied diet to get all of the nutrients we need. Unfortunately, billions still suffer from micronutrient deficiency .

Also, think of clean drinking water; reliable markets and stores with a wide range of available goods; food that rarely poisons you (pasteurized milk, for example); spices; tea and coffee; kitchen utensils and practical ingredients (from a bag of flour to canned soups or a yogurt); chocolate and sweets; fresh fruit and vegetables; bread; take-away food or the possibility to go to a restaurant; ways to protect your food from spoiling (from the cold chain that delivers the goods to the cellophane to wrap it with); wine or beer; fertilizer ( very important); and tractors to work the fields.

Knowledge: Education from primary up to university level; books; data that allows us to understand the world around us; newspapers; vocational training; kindergartens; and scientific knowledge to understand ourselves and the world around us.

Infrastructure: Public transportation with buses, subways, and trains; roads; paved roads; airplanes; bridges; financial services (including bank accounts, ATMs, and credit cards); cities; a network of competent workers that can help you to fix problems; postal services (that delivers fast); national parks; street cleaning; public swimming pools (even private pools); firefighters; parks; online shopping; weather forecasts; and a waste management system.

Tools and technologies: Pencils, ballpoint pens, and paper; lawnmowers; cars; car mechanics; bicycles; power tools like drills (even battery-powered ones); a watch; computers and laptops; smartphones (with GPS and a good camera); being able to stay in touch with distant friends or family members (or even visiting them); GPS; batteries; telephones and mobiles; video calls; WiFi; and the internet right here.

Social services: Caretakers for those who are disabled, sick, or elderly; protection from crime; non-profit organizations financed by the public, by donations or by philanthropies; insurance (against many different risks); and a legal system with judges and lawyers that implement the rule of law.

There is also a wide range of transfer payments, which in themselves are not services (they are transfers) but which become more affordable as a society becomes more prosperous: sick leave and disability benefits; unemployment benefits; and being able to help others with a regular donation of some of your income to an effective charity . 6

Life and free time : tents; travel and holidays; surfboards; skis; board games; hotels; playgrounds; children’s toys; courses to learn hobbies (from painting to musical instruments or courses on the environment around us); a football; pets; the cinema, theater or a music concert; clothes (even comfortable and good-looking ones that keep you warm and protect you from the rain); shoes (even shoes for different purposes); shoe repair; the contraceptive pill and the ability to choose if and when to have children; sports classes from rock climbing to pilates and yoga; cigarettes (not all goods that people produce for each other are good for them); 7 a musical instrument; a camera; and parties to celebrate life.

Health and staying well: Dentists; antibiotics; surgeries; anesthesia; mental health care from psychologists and psychiatrists; vaccines; public sewage; a haircut; a massage; midwives; ambulances; modern medicine; band-aids; pharmaceutical drugs; sanitary pads; toothbrushes; dental floss (some do floss); disinfectants; glasses; sunglasses; contact lenses; hearing aids; and hospitals – including very well-equipped, modern hospitals that offer CT scans, which include intensive care units and allow heart or brain surgery or organ transplants.

Specific needs and wishes: Most of the products listed above are generally helpful to people. But often, the goods and services that are most important to one individual are very specific.

As I’m writing this, I have a big cast on my left leg after I broke it. These days, I depend on products that I had no use for just three weeks ago. To move around, I need two long crutches, and to prevent thrombosis, I need to inject a blood thinner every day. After I broke my leg, I needed the service of nurses and doctors. They had to rely on a range of medical equipment, such as X-ray machines. To get back on my feet, I might need the service of physiotherapists.

We all have very specific needs or wishes for particular goods and services. Some needs arise from bad luck, like an injury. Others are due to a new phase in life – think of the specific goods and services you need when you have a baby or when you take care of an elderly person. And yet others are due to specific interests – think of the needs of a fisherman, or a pianist, or a painter.

All of these goods and services do not just magically appear. They need to be produced. At some point in the past, the production of most of them was zero, and even the most essential ones were extremely scarce. So, if you want to know what economic growth means for your life, look at the list above.

What is economic growth?

So, how can we define what economic growth is?

A definition that can be found in so many publications that I don’t know which one to quote is that economic growth is “an increase in the amount of goods and services produced per head of the population over a period of time.”

The definition in the Oxford Dictionary is almost identical: “Economic growth is the increase in the production of goods and services per head of population over a stated period of time”. And the definition in the Cambridge Dictionary is similar. It defines growth as “an increase in the economy of a country or an area, especially of the value of goods and services the country or area produces.”

In the following footnote, you find more definitions. Bringing these definitions together and taking into account the economic literature more broadly, I suggest the following definition: Economic growth is an increase in the quantity and quality of the economic goods and services that a society produces.

I prefer a definition that is slightly longer than most others. If you want a shorter definition, you can speak of ‘products’ rather than ‘goods and services’, and you can speak of ‘value’ rather than mentioning both the quantity and quality aspects separately.

The most important change in quantity is from zero to one when a new product becomes available. Many of the most important changes in history became possible when new goods and services were developed; think of antibiotics, vaccines, computers, or the telephone.

You find more thoughts on the definition of growth in the footnote. 8

What are economic goods and services?

Many definitions of economic growth simply speak of the production of ‘goods and services’ collectively. This sidesteps a key difficulty in its definition and measurement. Economic growth is not concerned with all goods and services but with a subset of them: economic goods and services.

In everything we do – even in our most mundane activities – we continuously ‘produce’ goods and services in some form. Early in the morning, once we’ve brushed our teeth and made ourselves toast, we have already produced one service and one good. Should we count the tooth-brushing and the toast-making towards the economic production of the country we live in? The question of where to draw the line isn’t easy to answer. But we have to draw the line somewhere. If we don’t, we end up with a concept of production that is so broad that it becomes meaningless; we’d produce a service with every breath we take and every time we scratch our nose.

The line that we have to draw to define the economic goods and services is called the ‘production boundary’. The sketch illustrates the idea. The production boundary defines those goods and services that we consider when we speak about economic growth.

For a huge number of goods or services, there is no question that they are of the ‘economic’ type. But for some of them, it can be complicated to decide on which side of the production boundary they fall. One example is the question of whether the production of illegal goods should be included. Another is whether production within a household should be included – should we consider it as economic production if we grow tomatoes in our backyard and make soup from them? Different authors and different measurement frameworks have given different answers to these questions. 9

There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls. 10 Economic goods and services are those that can be produced and that are scarce in relation to the demand for them. They stand in contrast to free goods, like sunlight, which are abundant, or those many important aspects in our lives that cannot be produced, like friendships. 11 Our everyday language has this right: we don’t refer to the sun or our friendships as a good or service that we ‘produce’.

An economic good or service is provided by people to each other as a solution to a problem they are faced with, and this means that they are considered useful by the person who demands it.

A last characteristic that helps decide whether you are looking at an economic product is “delegability”. An activity is considered to be production in an economic sense if it can be delegated to someone else. This would include many of the goods and services on that long list we considered earlier but would exclude your breathing, for example.

Because economic goods are scarce in relation to the demand for them, human effort is required to produce them. 12 A shorter way of defining growth is, therefore, to say that it is an increase in the production of those products that people produce for each other.

The majority of goods and services on that long list above are uncontroversially of the economic type – everything from the light bulbs and furniture in your home to the roads and bridges that connect your home with the rest of the world. They are scarce in relation to the demand for them and have to be produced by someone; their production is delegable, and they are considered useful by those who want them.

It’s worth recognizing that many of the difficulties in defining the production boundary arise from the effort to make measures of economic production as comparable as possible.

To give just one concrete example of the type of considerations that make the discussion about specific definitions so difficult, let’s look at how the production boundary is drawn in the housing sector.

Imagine two countries that are identical except for one aspect: home ownership. In Country A, everyone rents their homes, and the total sum of annual rent amounts to €2 billion per year. In Country B, everyone owns their own home, and no one pays rent. To provide housing is certainly an economic service, but if we only counted monetary transactions, then we would get the false impression that the value of goods and services in Country A is €2 billion higher than in Country B. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions. In National Accounts, statisticians take into account the “imputed rental value of owner-occupied housing” – those households who own their home get assigned an imputed rental value. In the imagined scenario, these imputed rents would amount to €2 billion in Country B so that the prosperity of people in these two countries would be judged to be identical.

It is the case more broadly that National Account figures (like GDP) do include important non-market goods and services that are not included in household survey measures of people’s income. GDP does not only include the housing services by owner-occupied housing but also the provision of most goods and services that are provided by the government or nonprofit institutions.

How can we measure economic growth?

Many discussions about economic growth are extraordinarily confusing. People often talk past one another.

I believe the key reason for this is that the discussion of what economic growth is gets muddled up with how it is measured .

While it is straightforward enough to define what growth is, measuring growth is very, very difficult.

In the worst cases, measures of growth are mixed up with a definition of growth. Growth is often measured as an increase in income or inflation-adjusted GDP per capita. But these measures are not the definition of it – just like life expectancy is a measure of population health but is certainly not the definition of population health.

To see how difficult it is to measure growth, take a moment to think about how you would measure it. How would you determine whether the quantity and quality of all economic goods and services produced by a society increased or decreased over time?

Finding a measure means that you have to find a way to express a huge amount of relevant information in a single metric. As the sketch shows, you have to first measure the quantity and quality of all the many, many goods and services that get produced and then find a way to aggregate all of these measurements into one summarizing metric. No matter what measure you propose for such a difficult task, there will always be problems and shortcomings in any proposal you might make.

In the following section, I will show four possible ways of measuring growth and present some data for each of them to see how they can inform us about the history of material living conditions.

Measuring economic growth by tracking access to particular goods and services

One possible way to measure growth is to make a list of some specific products that people want and to see what share of the population has access to them.

We do this very often at Our World in Data . The chart here shows the share of the world population that has access to four basic resources. All of these statistics measure some particular aspect of economic growth.

You can switch this chart to any country in the world via the “Change country” option. You will find that, judged by this metric, some countries achieved rapid growth – like Indonesia – while others only saw very little growth, like Chad.

The advantage of measuring growth in this way is that it is concrete. It makes clear what exactly is growing, and it’s clear which particular goods and services people gain access to.

The downside is that it only captures a small part of economic growth. There are many other goods and services that people want in addition to water, electricity, sanitation, and cooking technology. 13

You could, of course, expand this approach of measuring growth to many more goods and services, but this is usually not done for both practical and ethical considerations:

One practical reason is that a list of all the products that people value would be extremely long. Keeping lists that track people’s access to all products would be a daunting task: hundreds of different toothbrushes, thousands of different dentists, hundreds of thousands of different dishes in different restaurants, and many millions of different books. 14 If you wanted to measure growth across all goods and services in this way, you’d soon employ half the country in the statistical office.

In practice, any attempt to measure growth as access to particular products, therefore, means that you look only at a relatively small number of very particular goods and services that statisticians or economists are interested in. This is problematic for ethical reasons. It should not be up to the statisticians or economists to determine which few products should be considered valuable.

You might have realized this problem already when you read my list at the beginning of this text. You might have disagreed with the things that I put on that list and thought that some other goods and services were missing. This is why it is important to track incomes and not just access to particular goods: measuring people’s income is a way of measuring the options that they have rather than the choices that they make. It respects people’s judgment to decide for themselves what they find most important for their lives.

On our site, you find many more such metrics of growth that capture whether people have access to particular goods and services:

This chart shows the share of US households having access to specific technologies.
This chart shows the share that has health insurance.
This chart shows access to schools.

Measuring economic growth by tracking the ratio between people’s income and the prices of particular goods and services

To measure the options that a person’s income represents, we have to compare their income with the prices of the goods and services that they want. We have to look at the ratio between income and prices.

The chart here does this for one particular product – books – and brings us back to the history of growth in the publishing sector that we started with. 15 Shown is the ratio between the average income that a worker receives and the price of a book. It shows how long the average worker had to work to buy one book. Note that this data is plotted on a logarithmic axis.

Before the invention of the printing press in the 15th century, the price was often as high as several months of work. The fact that books were unaffordable for almost everyone should not be surprising. It corresponds to what we’ve seen earlier that it took a scribe several months to produce a single book.

The chart also shows how this changed when the printing press increased the productivity of publishing. As the labor required to produce a book declined from many months of work to less than a day, the price fell from months of wages to mere hours.

This shows us how an innovation in technology raises productivity and how an increase in production makes it more affordable. How it increases the options that people have.

Global inequality: How do incomes compare in countries around the world?

In the previous section, we measured growth as the ratio between income and the price of one particular good. But of course, we could do the same for all the many goods and services that people want. This ratio – the ratio between the nominal income that people receive and the prices that people have to pay for goods and services – is called ‘real income’ . 16

Real income = Nominal income / price of goods and services

Real income grows when people’s nominal income increases or when the prices of goods and services decrease.

In contrast to many of the other metrics on Our World in Data, a person’s real income does not matter for its own sake but because it is a means to an end. A means to many ends, in fact.

Economic growth – measured as an increase in people’s real income – means that the ratio between people’s income and the prices of what they can buy is increasing: goods and services become more affordable, and people become less poor. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity.

The two most prominent measures of real income are GDP per capita and people’s incomes, as determined through household surveys.

They are shown in this chart.

Before we get back to the question of economic growth, let’s see what these measures of real income tell us about the economic inequality in the world today.

Both measures show that global inequality is very large. In a rich country like Denmark, an average person can purchase goods and services for $54 a day, while the average Ethiopian can only afford goods and services that cost $3 per day.

Both measures of real incomes in this chart are measured in international dollars, which means that they take into account the level of prices in each country (using purchasing power parity conversion factors). This price adjustment is done in such a way that one international-$ is equivalent to the purchasing power of one US-$ in the US . An income of int.-$3 in Ethiopia, for example, means that it allows you to purchase goods and services in Ethiopia that would cost US-$3 in the US . All dollar values in this text are given in international dollars, even though I often shorten it to just the $-sign.

If you are living in a rich country and you want to have a sense of what it means to live in a poor country – where incomes are 20 times lower – you can imagine that the prices for everything around you suddenly increase 20-fold. 17 If all the things you buy suddenly get 20-times more expensive your real income is 20-times lower. A loaf of bread doesn’t cost $2 but $40, a pair of jeans costs $400, and an old car costs $40,000. If you ask yourself how these price increases would change your daily consumption and your day-to-day life, you can get a sense of what it means to live in a poor country.

The two shown measures of real income differ:

The data on the vertical axis is based on surveys in which researchers go from house to house and ask people about their economic situation. In some countries, people are asked about their income, while in other countries, people are asked about their expenditure – expenditure is income minus savings. In poor countries, these two measures are close to each other since poor people do not have the chance to save much.
On the other hand, GDP per capita starts at the aggregate level and divides the income of the entire economy by the number of people in that country. GDP per capita is higher than per capita survey income because GDP is a more comprehensive measure of income. As we’ve discussed before, it includes an imputed rental value of owner-occupied housing and other differences, such as government expenditure.

Income as a measure of economic prosperity is much more abstract than the metrics we looked at previously. The comparison of incomes of people around the world in this scatterplot measures options, not choices. It shows us that the economic options for billions of people are very low. The majority of the world lives on very low incomes of less than $20, $10, or even $5 per day. In the next section, we’ll see how poverty has changed over time.

GDP per capita vs. Daily income of the poorest 10%
GDP per capita vs. Daily average income

Global poverty and growth: How have incomes changed around the world?

Economic growth, as we said before, is an increase in the production of the quantity and quality of the economic goods and services that a society produces. The total income in a society corresponds to the total sum of goods and services the society produces – everyone’s spending is someone else’s income. This means that the average income corresponds to the level of average production, so that the average income in a society increases when the production of goods and services increases.

Average production = average income

In this final section, let’s see how incomes have changed over time, first as documented in survey incomes and then via GDP per capita.

Measuring economic growth by tracking incomes as reported in household surveys

The chart shows the income of people around the world over time, as reported in household surveys. It shows the share of the world population that lives below different poverty lines: from extremely low poverty lines up to $30 per day, which corresponds to notions of poverty in high-income countries .

Many of the poorest people in the world rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians who produce these figures estimate the monetary value of their home production and add it to their income.

Again, the prices of goods and services are taken into account: these are measures of real incomes. As explained before, incomes are adjusted for price differences between countries, and they are also adjusted for inflation. As a consequence of these two adjustments, incomes are expressed in international dollars in 2017 prices, which means that these income measures express what you would have been able to buy with US dollars in the US in 201 7.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. In 2000 two thirds of the world lived on less than $6.85 per day. In the following 19 years, this share fell by 22 percentage points.

In 2020 and 2021 — during the economic recession that followed the pandemic — the size of the world economy declined, and the share of people in poverty increased . As soon as global data for this period is available, we will update this chart.

The data shows that global poverty has declined, no matter what poverty line you choose. It also shows that the majority of the world still lives on very low incomes. As we’ve seen, we can describe the same reality from the production side: the global production of the goods and services that people want has increased, but there is still not enough production of even very basic products. Most people in the world do not have access to them.

An advantage of household survey data over GDP per capita is that it captures the inequality of incomes within a country. You can explore this inequality with this chart by switching to see the data for an individual country via the ‘Change country’ button.

Measuring economic growth by tracking GDP per capita

GDP per capita is a broader measure of real income, and in contrast to survey income, it also takes government expenditures into account. A lot of thinking has gone into the construction of this very prominent metric so that it is comparable not only over time but also across countries. This makes it especially useful as a measure to understand the economic inequality in the world, as we’ve seen above. 18

Another advantage of this measure is that historians have reconstructed estimates of GDP per capita that go back many centuries. This historical research is an extremely laborious task , and researchers have dedicated many years of work to these reconstructions. The ‘Maddison Project’ brings together these long-run reconstructions from various researchers, and thanks to these efforts, we have a good understanding of how incomes have changed over time.

The chart shows how average incomes in different world regions have changed over the last two centuries. Looking at the latest data, you see again the very large inequality between different parts of the world today. You now also see the history of how we got here: small increases in production in some world regions and very large increases in those regions where people have the highest incomes today.

One of the very first countries to achieve sustained economic growth was the United Kingdom. In this chart, we see the reconstructions of GDP per capita in the UK over the last centuries.

It is no accident that the shape of this chart is very similar to the chart on book production at the beginning of this text – very low and almost flat for many generations and then quickly rising. Both of these developments are driven by changes in production.

Average income corresponds to average production, and societies around the world were able to produce very few goods and services in the past. There were no major exceptions to this reality. As we see in this chart, global inequality was much lower than today: the majority of people around the world were very poor.

To get a sense of what this means, you can again take the approach we’ve used to understand the inequality in the world today. When incomes in today’s rich countries were 20 times lower, it was as if all the prices around you today would suddenly increase 20-fold. But in addition to this, you have to consider that all the goods and services that were developed since then disappeared – no bicycle, no internet, no antibiotics. All that’s left for you are the goods and services of the 17th century, but all of them are 20 times more expensive than today. The majority of people around the world, including in today’s richest countries, live in deep poverty.

Just as we’ve seen in the history of book production, this changed once new production technologies were introduced. The printing press was an exceptionally early innovation in production technology; most innovations happened in the last 250 years. The starting point of this rise out of poverty is called the Industrial Revolution.

The printing press made it possible to produce more books. The many innovations that made up the Industrial Revolution made it possible to increase the production of many goods and services. Compare the effort that it takes for a farmer to reap corn with a scythe to the possibilities of a farmer with a tractor or a combined harvester, or think of the technologies that made overland travel faster – from walking on foot to traveling in a horse buggy to taking the train or car; or think of the effort it took to build those roads that the buggies once traveled on with the modern machinery that allows us to produce the corresponding public infrastructure today .

The production of a myriad of different goods and services followed trajectories very similar to the production of books – flat and low in the past and then steeply increasing. The rise in average income that we see in this chart is the result of the aggregation of all these production increases.

In the past, before societies achieved economic growth, the only way for anyone to become richer was for someone else to become poorer; the economy was a zero-sum game. In a society that achieves economic growth, this is no longer the case. When average incomes increase, it becomes possible for people to become richer without someone else becoming poorer.

This transition from a zero-sum to a positive-sum economy is the most important change in economic history (I wrote about it here ) and made it possible for entire societies to leave the extreme poverty of the past behind.

Conclusion: The history of global poverty reduction has just begun

The chart shows the global history of extreme poverty and economic growth.

In the top left panel, you can see how global poverty has declined as incomes increased; in the other eight panels, you see the same for all world regions separately. The starting point of each trajectory shows the data for 1820 and tells us that two centuries ago, the majority of people lived in extreme poverty, no matter where in the world they were at home.

Back then, it was widely believed that widespread poverty was inevitable. But this turned out to be wrong. The trajectories show how incomes and poverty have changed in each world region. All regions achieved growth – the goods and services that people need saw their production and quality increase – and the share living in extreme poverty declined. 19

This historical research was done by Michail Moatsos and is based on the ‘cost of basic needs’-approach as suggested by Robert Allen (2017) and recommended by the late Tony Atkinson. 20 The name ‘extreme poverty’ is appropriate as this measure is based on an extremely low poverty threshold. It takes us back to what I mentioned at the very beginning; this historical research tells us – as the author puts it – that three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.”

Since then, all world regions have made progress against extreme poverty – some much earlier than others – but in particular, in Sub-Saharan Africa, the share of people living in deep poverty is still very high.

The last two centuries were the first time in human history that societies have achieved sustained economic growth, and the decline of global poverty is one of the most important achievements in history. But it is still a very long way to go.

This is what we see in this final chart. The red line shows the share of people living in extreme poverty that we just discussed. Additionally, you now also see the share living on less than $3.65, $6.85, and $30 per day. 21

The world today is very unequal, and the majority of the world still lives in poverty: 47% live on less than $6.85 per day, and 84% live on less than $30. Even after two centuries of progress, we are still in the early stages. The history of global poverty reduction has only just begun.

That the world has made substantial progress but nevertheless still has a long way to go is the case for many of the world’s very large problems. I’ve written before that all three statements are true at the same time: The world is much better, the world is awful, and the world can be much better. This is very much the case for global poverty. The world is much less poor than in the past, but it is still very poor, and it remains one of the largest problems we face.

Some writers suggest we can end poverty by simply reducing global inequality. This is not the case. I’m very much in favor of reducing global inequality, and I hope I do what I can to contribute to this. But it is important to be clear that a reduction of inequality alone would still mean that billions around the world would live in very poor conditions. Those who don’t see the importance of growth are not aware of the extent of global poverty. The production of many crucial goods and services has to increase if we want to end it. How much economic growth is needed to achieve this? This is the question I answered in this recent text .

To solve the problems we face, it is not enough to increase overall production. We also need to make good decisions about which goods and services we want to produce more of and which ones we want less of. Growth doesn’t just have a rate, it also has a direction, and the direction we choose matters – for our own happiness and for achieving a sustainable future .

I hope this text was helpful in making clear what economic growth is. It is necessary to remind ourselves of that because we mostly talk about poverty and growth in monetary terms. The monetary measures have the disadvantage that they are abstract, perhaps so abstract that we even forget what growth is actually about and why it is so important. The goods and services that we all need are not just there – they need to be produced – and economic growth means that the quality and quantity of these goods and services increase, from the food that we eat to the public infrastructure we rely on.

The history of economic growth is the history of how societies leave widespread poverty behind by finding ways to produce more of the goods and services that people need – all the very many goods and services that people produce for each other: look around you now.

Acknowledgments: I would like to thank Joe Hasell and Hannah Ritchie for very helpful comments on draft versions of this article.

Our World in Data presents the data and research to make progress against the world’s largest problems. This article draws on data and research discussed in our topic pages on Economic Inequality , Global Poverty , and Economic Growth .

Version history: In October 2023, I copy-edited this article; it was a minor update, and nothing substantial was changed.

Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

At the time when material prosperity was so poor, living conditions were extremely poor in general; close to half of all children died .

Historian Gregory Clark reports the estimate that scribes were able to copy about 3,000 words of plain text per day.

See Clark (2007) – A Farewell to Alms: A Brief Economic History of the World. Clark (2007). In it, Clark quotes his earlier working paper with Patricia Levin as the source of these estimates. Gregory Clark and Patricia Levin (2001) – “How Different Was the Industrial Revolution? The Revolution in Printing, 1350–1869.”

There are about 760,000 words in the bible (it differs between various translations and languages; here is an overview of some translations).

This implies that the production of one copy of the Bible meant 253.3 days (8.3 months) of daily work.

Copying the text was not the only step in the production process for which productivity was low. The ink had to be made, parchment had to be produced and cut, and many other steps involved laborious work.

Wikipedia’s article about scribes reports sources that estimate that the production time per bible was even longer than 8 months.

Clark himself states in the same publication that “Prior to that innovation, books had to be copied by hand, with copyists on works with just plain text still only able to copy 3,000 words per day. Producing one copy of the Bible at this rate would take 136 man-days.” Since the product of 136 and 3000 is only 408,000, it is unclear to me how Clark has arrived at this estimate – 408,000 words are fewer words than in the Tanakh and other versions of the bible.

The data is taken from Eltjo Buringh and Jan Luiten Van Zanden (2009) – Charting the “Rise of the West”: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth through Eighteenth Centuries. In The Journal of Economic History Vol. 69, No. 2 (June 2009), pp. 409-445. Online here .

Western Europe in this study is the area of today’s Great Britain, Ireland, France, Belgium, Netherlands, Germany, Switzerland, Italy, Spain, Sweden, and Poland.

On the history and economics of book production, see also the historical work of Jeremiah Dittmar.

I’ve relied on several sources to produce this list. One source was the simple descriptions of the consumption bundles that are relied upon for CPI measurement – like this one from Germany’s statistical office . And I have also relied on the national accounts themselves.

This list is also inspired partly by this list of Gwern and I’m also grateful for the feedback that I got via Twitter to earlier versions of this list. [ Here I shared the list on Twitter ]

This is Hans Rosling’s talk on the magic of the washing machine – worth watching if you haven’t seen it.

Of course all of these transfer payments have a service component to them, someone is managing the payment of the disability benefits etc.

Because smoking causes a large amount of suffering and death I do not find cigarettes valuable, but my opinion is not what matters for a list of goods and services that people produce for each other. Whether some good is considered to be part of the domestic product depends on whether it is a good that some people want, not whether you or I want it. More on this below.

Very similar to the definitions given above is the definition that Kimberly Amadeo gives: “Economic growth is an increase in the production of goods and services over a specific period.”

“Economic growth is an increase in the production of economic goods and services, compared from one period of time to another” is the definition at Investopedia .

Alternatively, to my definition, I think it can be useful to think of economic growth as not directly concerned with the output as such but with the capacity to produce this output. The NASDAQ’s glossary defines growth in that way: “An increase in the nation's capacity to produce goods and services.”

Wikipedia defines economic growth as follows: “Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.” Definitions that are based on how growth is measured strike me as wrong – just like life expectancy is a measure of population health and hardly the definition of population health. I will get back to this mistake further below in this text.

An aspect that I emphasize more explicitly than others is the quality of the goods and services. People obviously do just care about the number of goods, and in the literature on growth, the measurement of changes in quality is a central question. Many definitions speak more broadly about the ‘value’ of the goods and services that are produced, but I think it is worth emphasizing that growth is also concerned with a rise in the quality of goods and services.

OECD – Measuring the Non-Observed Economy: A Handbook .

The relevant numbers are not small. For the US alone, “illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion” if they were to be included in the US National Accounts. This is according to the report by Rachel Soloveichik (2019) – Including Illegal Activity in the U.S. National Economic Accounts . Published by the BEA.

Ironmonger (2001) – Household Production. In International Encyclopedia of the Social & Behavioral Sciences. Pages 6934-6939. https://doi.org/10.1016/B0-08-043076-7/03964-4

Or for some longer run data on the US: Danit Kanal and Joseph Ted Kornegay (2019) – Accounting for Household Production in the National Accounts: An Update, 1965–2017 . In the Survey of Current Business.

Helpful references that discuss how the production boundary is drawn (and how it changed over time) are: Lequiller and Blades – Understanding National Accounts (available in various editions) Diane Coyle (2016) – GDP: A Brief but Affectionate History https://press.princeton.edu/books/paperback/9780691169859/gdp

The definition of the production boundary by Statistics Finland

Itsuo Sakuma (2013) – The Production Boundary Reconsidered. In The Review of Income and Wealth. Volume 59, Issue 3; Pages 556-567.

Diane Coyle (2017) – Do-it-Yourself Digital: The Production Boundary and the Productivity Puzzle. ESCoE Discussion Paper 2017-01, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2986725

A more general way of thinking about free goods and services is to consider them as those for which the supply is hugely greater than the demand.

Their production, therefore, has an opportunity cost, which means that if someone obtains an economic good, someone is giving up on something for it – this can either be the person themselves or society more broadly. Free goods, in contrast, are provided with zero opportunity cost to society.

It is also the case that the international statistics on these measures often have very low cutoffs for what it means ‘to have access’; this is, for example, the case for what it means to have access to energy.

10 years ago, Google counted there were 129,864,880 different books, and since then, the number has increased further by many thousands of new books every day.

This chart is from Jeremiah Dittmar and Skipper Seabold (2019) – New Media New Knowledge – How the printing press led to a transformation of European thought . I was unfortunately not able to find the raw data anywhere and could not redraw this chart; if someone knows where this (or comparable) data can be found, please let me know.

In the language of economists, the nominal value is measured in terms of money, whereas the real value is measured against goods or services. This means that the real income is the income adjusted for inflation (it is adjusted for the changes in prices of goods and services). Thereby, it allows comparisons that tell us the quantity and quality of the goods and services that people were able to purchase at different points in time.

I learned this way of thinking about it from Twitter user @Kirsten3531, who responded with this idea to a tweet of mine here https://twitter.com/Kirsten3531/status/1389553625308045317

We’ve discussed one such consideration that is crucial for comparability when we consider how to take into account the value of owner-occupied housing.

Whether economic growth translates into the reduction of poverty depends not only on the growth itself but also on how the distribution of income changes. The poverty metrics shown in this chart and in previous charts take both of these aspects – the average level of production/income and its distribution – into account.

Jutta Bolt and Jan Luiten van Zanden (2021) – The GDP data in the chart is taken from The Long View on Economic Growth: New Estimates of GDP, How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

The latest data point for the poverty data refers to 2018, while the latest data point for GDP per capita refers to 2016. In the chart, I have chosen the middle year (2017) as the reference year.

The ‘cost of basic needs’-approach was recommended by the ‘World Bank Commission on Global Poverty’, headed by Tony Atkinson, as a complementary method in measuring poverty.

The report for the ‘World Bank Commission on Global Poverty’ can be found here .

Tony Atkinson – and, after his death, his colleagues – turned this report into a book that was published as Anthony B. Atkinson (2019) – Measuring Poverty Around the World. You find more information on Atkinson’s website .

The CBN-approach Moatsos’ work is based on what was suggested by Allen in Robert Allen (2017) – Absolute poverty: When necessity displaces desire. In American Economic Review, Vol. 107/12, pp. 3690-3721, https://doi.org/10.1257/aer.20161080 .

Moatsos describes the methodology as follows: “In this approach, poverty lines are calculated for every year and country separately, rather than using a single global line. The second step is to gather the necessary data to operationalize this approach alongside imputation methods in cases where not all the necessary data are available. The third step is to devise a method for aggregating countries’ poverty estimates on a global scale to account for countries that lack some of the relevant data.” In his publication – linked above – you find much more detail on all of the shown poverty data. The speed at which extreme poverty declined increased over time, as the chart shows. Moatsos writes, “It took 136 years from 1820 for our global poverty rate to fall under 50%, then another 45 years to cut this rate in half again by 2001. In the early 21st century, global poverty reduction accelerated, and in 13 years, our global measure of extreme poverty was halved again by 2014.”

These are the same global poverty estimates – based on household surveys – we discussed above.

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Between 2000 and 2008, access to high-speed, broadband internet grew significantly in the United States, but there is debate on whether access to high-speed internet improves or harms wellbeing. We find that a ten percent increase in the proportion of county residents with access to broadband internet leads to a 1.01 percent reduction in the number of suicides in a county, as well as improvements in self-reported mental and physical health. We further find that this reduction in suicide deaths is likely due to economic improvements in counties that have access to broadband internet. Counties with increased access to broadband internet see reductions in poverty rate and unemployment rate. In addition, zip codes that gain access to broadband internet see increases in the numbers of employees and establishments. In addition, heterogeneity analysis indicates that the positive effects are concentrated in the working age population, those between 25 and 64 years old. This pattern is precisely what is predicted by the literature linking economic conditions to suicide risk.

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U.S. job growth accelerated again in May, defying expectations for a slowdown, even as the unemployment rate rose to the highest level in more than two years.

Employers added 272,000 jobs in May, the Labor Department said in its monthly payroll report released Friday, easily topping the 185,000 gain forecast by LSEG economists. But the unemployment rate unexpectedly inched higher to 4% against expectations that it would hold steady at 3.9%. It marked the highest level for the jobless rate since January 2022.

Wage growth also remained strong last month, with average hourly earnings — a key measure of inflation — rising 0.4%, more than expected. On an annual basis, wages increased 4.1% in May.

"The May jobs report sent conflicting messages," said Bill Adams, chief economist for Comerica Bank. "Payrolls rose solidly, and wage growth picked up, signs the labor market is still running hot. On the other hand, the unemployment rate rose, recent job growth has been concentrated in part-time jobs, and temp jobs fell, signs the labor market is cooling."

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Markets are closely watching the report for evidence that the labor market is continuing to soften after months of solid job gains as Federal Reserve policymakers weigh when to start cutting interest rates. Although inflation has fallen sharply from a peak of 9.1%, progress has cooled sharply since the summer.

Policymakers have signaled that they are in no rush to cut, and that incoming economic data will guide their decision.

SMALL BUSINESSES ARE RACKING UP CREDIT CARD DEBT, RAISING SOME CONCERNS

"One step forward, two steps back," said Seema Shah, chief global strategist at Principal Asset Management. "Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut. Not only has jobs growth exploded again, but wage growth has also surprised to the upside – both moving in the opposite direction to what the Fed needs to begin easing policy. "

Security	Last	Change	Change %
DOW JONES AVERAGES	38868.04	+69.05	+0.18%
NASDAQ COMPOSITE INDEX	17192.528907	+59.40	+0.35%
S&P 500	5360.79	+13.80	+0.26%

Stocks sank following the data before easing some of the losses, but the report dashed investor hopes for more imminent rate cuts, while bond yields spiked. The odds of a September rate hike fell to about 56% after the surprisingly hot report, according to the CME Group's FedWatch tool, which tracks trading. That marks a decline of about 12 percentage points from the previous date.

Continued job growth "could help keep inflation more buoyant and delay Fed rate cuts to later this year or into next year," said Kathy Bostjancic, Nationwide chief economist. "We had been anticipating the start of rate cuts in September, totaling 50 basis points of cuts this year, but the persevering strong employment gains raises the likelihood of later rate cuts."

May Jobs Report

Health care: +68,000

Government +43,000

Leisure and hospitality +42,000

Professional, scientific and technical services +32,000

Source: BLS

Health care continued to lead the way in job creation, onboarding 68,000 new workers in May. Other sectors showing notable growth included the government (43,000), leisure and hospitality (42,000), and professional, scientific and technical services (32,000).

Construction at the Toll Brothers Borello Ranch Estates housing community in Morgan Hill, California on Tuesday, June 4, 2024. (Photographer: David Paul Morris/Bloomberg via Getty Images / Getty Images)

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The report also showed modest revisions. Job gains for March were revised down by a total of 5,000 jobs to 310,000, the government said, while April's gain also came in slightly lower at 165,000 jobs.

The labor market has remained historically tight over the past year, defying economists' expectations for a slowdown.

Economists say it is beginning to cool after last year's blistering pace, but it is still nowhere near breaking.

Americans Are Thinking About Immigration All Wrong

Population growth, economic growth, and income growth can be mutually reinforcing.

Listen to this article

Produced by ElevenLabs and News Over Audio (NOA) using AI narration.

W hat’s the United States’ most important problem? For the past three months, Americans have offered the same answer : immigration. More than inflation or political polarization, Americans are vexed by the influx of migrants. Republicans’ concerns spiked after the most recent southern-border crisis. But they’re not alone. In April, the number of independents who said immigration was the country’s biggest problem reached a high in Gallup polling dating back to 2014.

Scolding Americans for their alarm is pointless. The state of U.S. immigration policy is objectively chaotic. When Joe Biden became president, he rolled back some Trump-era restrictions , at the same time that migrants began to take greater advantage of loopholes in asylum law to stay in the country longer. Meanwhile, a sharp rise in crime in parts of Central and South America , combined with the strong U.S. economy, created the conditions for migration to surge. In 2022, illegal crossings hit a record high of 2.2 million. As asylum seekers made their way north, cities struggled to house them. In New York City, so many hotel rooms are taken up by migrants that it has created a historic shortage of tourist lodging .

In a perfect world, the brokenness of America’s immigration system would inspire Congress to swiftly pass new legislation convincing voters that the U.S. controls whom we let in and keep out of the country. The basic contours of this grand bargain have been fairly clear for decades. In exchange for expanded opportunities for legal immigration—more visas, more green cards, and targeted policies to increase immigration in technology and science—liberals would agree to stricter enforcement and control at the border. But major immigration reform is stuck. Changing the law requires Congress, and in the latest example of feckless delay, Donald Trump has instructed congressional Republicans to sandbag negotiations with the White House, to avoid giving the Biden administration an election-year win. What we’re left with is the perception of immigration chaos, anger about the chaos, and dithering in the face of it.

If American politicians are ever going to think about immigration policy through the lens of long-term opportunity planning rather than immediate crisis response, they first need to convince the American people that those long-term opportunities exist. This case is actually easy to make. Cheaper and more plentiful houses, higher average wages, more jobs, more innovation, more scientific breakthroughs in medicine, and more state government revenue without higher taxes—all while sticking it to our geopolitical adversary, China—require more immigration . Across economics, national security, fiscal sustainability, and geopolitical power, immigration is the opposite of America’s worst problem. It holds clear solutions to America’s most pressing issues.

I mmigration has for decades , even centuries, created a temporal paradox in American discourse: pride in the country’s history of immigration coming up against fears of its present and future. Benjamin Franklin, whose father was born in England, complained that migration from Central Europe would swarm the young nation’s Anglican culture with undue German influence. In the late 1800s, a more Germanic nation feared the influence of incoming Italians. A century later, a nation that had fully embraced Italian Americans bemoaned the influence of incoming Mexicans.

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Although this brisk history of nativism might seem to make light of today’s anti-immigrant sentiment, ignoring the fears that people have about a sudden influx of migrants is counterproductive. The border crisis is not just a news-media illusion, or a platform for empty grandstanding. It really has endangered thousands of migrants and drained city and state resources, causing a liberal backlash even in deep-blue places. Last September, New York City Mayor Eric Adams predicted that the migrant crisis would “destroy New York.” As tens of thousands of migrants moved into Chicago, the city spent hundreds of millions of dollars to provide them with housing and education, building resentment among Black residents . What’s more, papering over anxieties about competition from foreign-born workers is not helpful. The Harvard economist Gordon Hanson asked me to think about the experience of a barber in an American city. If immigrants moving into his area open barber shops, they might reduce his ability to retain customers, raise prices, or make rent. The logic of fear is understandable: More competition within a given industry means less income for its incumbents.

Many Americans—and, really, many residents of every other nation—think about immigration through this lens of scarcity . If the economy includes a fixed number of jobs, then more foreign-born workers means less work left for Americans. If America contains a fixed number of houses, more immigrants mean less space for Americans to live.

But the truth is that no nation comprises a fixed amount of work or income. Population growth, economic growth, and income growth can be mutually reinforcing. “At the national level, immigration benefits from a more-is-more principle,” Hanson told me. “More people, and more density of people, leads to good things happening, like more specialization of labor.”

Specialization of labor might sound drab and technical. But it’s a key part of why immigration can help even low-income workers earn more money over time. Last month, the economists Alessandro Caiumi and Giovanni Peri published a new paper concluding that, from 2000 to 2019, immigration had a “positive and significant effect” on wage growth for less educated native workers. The key mechanism, they found, is that, over time, immigrants and natives specialize in different jobs that complement one another. As low-education immigrants cluster in fields such as construction, machine operation, and home-health-aid work, native-born workers upgrade to white-collar jobs with higher pay. To take the example of the American barber, let’s imagine that his son decides to go to a trade school or college to increase his skills in response to intense competition for barbers. He might be better off, making a higher wage than he would have had he remained in the profession. Although such specialization can be difficult for some people who switch out of their parents’ fields, it can lead to a more dynamic economy with higher wages for all.

For the past few years, I have been thinking and writing about an abundance agenda to identify win-win policies for Americans in housing, energy, health care, and beyond. Immigration is an essential ingredient in this agenda. The U.S. must contend with a national housing shortage that has contributed to record-high living costs and bone-dry inventory in some major metros. This is a story not merely about overregulation, zoning laws, and permitting requirements, but also about labor supply. The construction industry is short several hundred thousand jobs . In the largest states—such as California, Texas, and New York—two in five construction workers are foreign-born, according to estimates by the National Association of Home Builders. “The biggest challenge that the construction industry is facing [is] that people don’t want their babies to grow up to be construction workers,” Brian Turmail, the vice president of public affairs at the Associated General Contractors of America, has said . If Americans want more houses, we might very well need more foreign-born workers to build them. Achieving clean-energy abundance requires immigrants too. One in six solar and photovoltaic installers is an immigrant, according to the Bureau of Labor Statistics, and “23 percent of all green job workers are foreign born,” according to a report by the Mercatus Center at George Mason University .

T he debate over low-skill immigration and its effect on the economy can get a bit technical, if you’re an economist, and emotional, if you’re an anxious native worker. But even if Republicans and Democrats can’t agree on the complex macroeconomics of letting less educated migrants enter the U.S. in higher numbers, we cannot let that disagreement hold hostage the obvious benefits of expanding our recruitment of foreign-born talents into the U.S.

Immigration-as-recruitment is a particularly useful framework as the U.S. embraces a new kind of industrial policy to build more chips and clean-energy tech domestically. As The Wall Street Journal ’s Greg Ip wrote , America’s new economic strategy has three parts. The first is subsidies to build products in the U.S. that are crucial to our national security and energy independence, such as advanced semiconductor chips and electric vehicles. The second part is tariffs on cheap Chinese imports in these sectors. The third is explicit restrictions on Chinese technology that could be used to surveil or influence U.S. companies and people, such as Trump-era laws against Huawei equipment and the Biden-era law to force the sale of TikTok.

But this newly fashioned stool is missing an essential leg. If the U.S. is going to become more strategically selfish about protecting key industries such as computer-chip manufacturing from foreign competition, we need to revamp our high-skill-immigration policy too. In fact, the new American economic paradigm doesn’t make any sense otherwise. As a rich country, the U.S. will be at a disadvantage in semiconductor manufacturing because of our higher labor costs. If we can’t win on costs, we have to win on brains. That means staffing our semiconductor factories with the world’s most talented workers.

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Semiconductor manufacturing requires a highly specialized workforce that is distributed around the world and concentrated in Asia. A large share of workers in advanced-chip manufacturing live in India and China . But green-card caps limit their ability to move to the U.S. As a result, we’re at risk of spending tens of billions of dollars on factories and products without a plan to staff them. “The talent shortage is the most critical issue confronting the semiconductor industry today,” Ajit Manocha, the president of the industry association for semiconductor equipment and materials manufacturers, said in 2022. This is a fixable problem. The Economic Innovation Group, a centrist think tank, has proposed a “Chipmaker’s Visa” that would annually authorize an accelerated path to a green card for 10,000 immigrants with specialized skills in semiconductor manufacturing.

What’s true for chipmaking is also true for AI development. According to the Federation of American Scientists , more “ top-tier ” AI researchers are born in China than in any other country in the world. But two-thirds of these elite researchers work in the U.S. The number could probably be even higher if the U.S. had a smarter, future-looking immigration policy regime. The administration has already taken small steps forward. In October, Biden issued an executive order that asked existing authorities to streamline visa criteria for immigrants with expertise in AI. More could be done with congressional help.

If the U.S. is in the early stages of a new cold war with the authoritarian axis of China, Russia, and Iran, we can’t logically pursue an industrial policy without an equally purposeful immigration policy. Immigration policy is industrial policy, because immigrants have for decades been a linchpin in our technological growth. As Jeremy Neufeld, a fellow at the Institute for Progress, has written , 30 percent of U.S. patents, almost 40 percent of U.S. Nobel Prizes in science, and more than 50 percent of billion-dollar U.S. start-ups belong to immigrants. And yet, we’ve allowed waiting times for green cards to grow, while the number of applicants stuck in immigration backlogs has gotten so large that some talented immigrants have stopped waiting and left the U.S. entirely. This is madness. Failing to solve the immigration-recruitment kludge as we spend hundreds of billions of dollars on technology subsidies is about as strategic as training to run a marathon while subsisting on a diet of donuts. When it comes to high-skill-immigration policy, we are getting in our own way.

I mmigration is central to America’s national security, industrial policy, abundance agenda, affordability crisis, and technological dominance. Without a higher number of foreign-born workers, the U.S. will have less of everything that makes us materially prosperous. But none of these advantages should distract immigration proponents from the fact that failure to secure the border is a gift to immigration restrictionists. Border chaos is horrendous branding for the pro-immigration cause.

“Immigration is too important to be chaotic,” Hanson, the economist, told me. “Chaos leads to short-term policy fixes. But you don’t want a 10-month immigration policy for the U.S. You want a 100-year immigration policy.”

Taking that 100-year view leads to perhaps the most powerful case for expanding immigration. The Lancet recently published an analysis of global population trends through the end of the 21st century. By 2064, the worldwide human population will peak, researchers projected, at which point almost every rich country will have been shrinking for decades. Fertility is already below replacement level in almost every rich industrialized country in the world. In Japan and South Korea, there are already fewer working-age adults with every passing year. China’s birth rate has fallen by 50 percent in just the past decade. Within a few years, immigration will be the only dependable lever of population growth for every rich industrialized nation.

The U.S. faces a stark choice. Politicians can squander the fact that the U.S. is the world’s most popular destination for people on the move . They can frame immigration as a persistent threat to U.S. national security, U.S. workers, and the solidity of U.S. culture. Or they can take the century-long view and recognize that America’s national security, the growth of the U.S. labor force, and the project of American greatness all depend on a plan to demonstrate enough control over the border that we can continue to expand immigration without incurring the wrath of restrictionists.

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Development Economics Essay Plan: Savings and Growth

Last updated 15 Jan 2020

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Here is a suggested answer to a past exam question on savings and economic growth in advanced and developing countries.

In 2014 gross savings as a proportion of GDP were 47% in Singapore but only 16% in Brazil and 10% in Kenya. Assess whether a low savings ratio is the most significant constraint on economic growth in developing countries. (25)

KAA Point 1

One reason why a low gross savings ratio such as the 10% figure in Kenya might be a constraint on economic growth is that domestic savings can play a key role in financing capital investment. Singapore for example is a high-income advanced nation with an ageing population which allows household, corporate and government savings to be much higher (the government for example runs a large budget surplus each year). These savings flow into a sophisticated banking system where there is a high level of trust which can then be reallocated for other agents who need to borrow to fund investment projects (e.g. companies raising money on the Singaporean stock exchange or borrowing from a commercial bank). Thus a surplus of saving keeps down the rate of interest on borrowed money and makes more investment projects viable. Singapore has surplus savings and has established a sovereign wealth fund to invest some of money in domestic and overseas projects. In stark contrast, in Kenya (a lower middle-income country with a per capita GNI of just $3,000), savings are much lower, and businesses might not be able to get the loans they need at a viable rate of interest. This can then hold back planned investment which in turn is a factor influencing labour productivity and - ultimately - gains in real per capita incomes. Kenyan firms and the government might therefore become increasingly reliant on external finance such as debt issued to overseas investors. Given the risks involved in lending to volatile economies such as Kenya; investors will demand a risk premium on the interest rate perhaps making domestic investment even less attractive. The Harrod-Domar model helps to explain why high gross savings can help fund investment which is a key component of aggregate demand and long run aggregate supply.

Evaluation Point 1

However, a low level of gross saving relative to the investment needs of a country can often be overcome by sizeable net inflows of overseas aid and foreign direct investment. In the case of Brazil for example, a period of high global commodity prices caused the terms of trade to move in their favour and stronger growth prospects lead to a sharp rise in inflows of FDI especially in industries such as farming, forestry and tourism. This was helped by Brazil being chosen to host the Olympic Games. In a globalised world, businesses and governments are no longer constrained by the level of savings in their own financial system. Many emerging countries have opted to introduce supply-side reforms to make their economy more attractive to FDI. Countries such as Kenya have attracted sizeable investment from China (to build a new narrow-gauge railway) and the government has also considered issuing Eurobonds (albeit at high interest rates) to finance infrastructure projects.

KAA Point 2

A second reason why low savings can hold back growth is that savings provide an important buffer for when global macroeconomic conditions create negative external shocks. In the case of Kenya for example, a large percentage of their GDP comes from the agricultural sector and this primary sector dependence makes their growers vulnerable to fluctuations in global demand and costs. Kenya is a major net exporter of fresh flowers to the European Union. A recession in the EU or perhaps a steep rise in world fuel prices might damage the profitability of Kenyan growers and threaten large falls in real incomes and employment. If gross savings are low, households may find it difficult to smooth their spending on goods and services in response to this shock, thereby increasing the risk of recession. Many smaller scale producers do not have the savings to tide them over difficult times and the majority may have no insurance. Households with scarce savings might be forced to pull children out of school or become exposed to lenders who charge exorbitant interest rates. Thus, low savings can cause macroeconomic instability and a recession have a negative effect on a country’s trend economic growth rate.

Evaluation Point 2

However the question states that a low savings ratio is the most significant constraint on economic growth. Economic growth in countries such as Brazil and Kenya are usually constrained by a combination of factors and it is difficult to conclude that one is more important than another. For example, the major limit on growth in Brazil might be the endemic corruption which makes their economy much less attractive to overseas investors. Corruption also limits the tax revenues that the Brazilian government can raise to public and merit goods and welfare provision. In Kenya, one might point to the low level of economic diversification as a major barrier allied to the challenges facing Kenyan growers when selling their products to monopsonistic transnational corporations who extract most of the value added from production and often pay little in tax themselves because of shadow pricing and other forms of tax avoidance.

Final Reasoned Comment

As countries grow richer and per capita incomes rise, the absolute level of savings tends to increase too which provides an important flow of funds into a country’s financial system. So in the long run savings are important particularly for countries with very heavy investment needs, perhaps because they lack critical infrastructure. If savings are allocated efficiently, then the capital stock can grow (explained in the traditional Solow Model) and productivity will improve over time. However in a globalised world, countries can look well beyond their national borders if they are experiencing a savings gap. The key is to make effective use of the external debt they accumulate and the inflows of FDI and aid they might attract. For many development economists such as Stiglitz, there is a virtuous cycle between economic growth and saving. Kick-starting faster growth can often generate the extra savings if it successfully raises per capita incomes and lowers the scale of extreme poverty measured by the percentage of the population living on less than $3.10 a day (PPP).

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It finally looks like the US economy is sticking its soft landing

US economic data points to a soft landing as the labor market and inflation gradually cool.
Until recently those two forces were holding back a soft-landing narrative.
The US seems on track for lower price growth without a recession.

You might have heard the US is not in a recession , but the good news about the economy doesn't stop there. A soft landing is on the horizon — or already here, depending on who you ask — and recent data reinforces that.

Two of the most glaring signals of an economy still running hot — inflation and a strong labor market — have in the past week showed signs of cooling. That's fueled hopes of interest-rate cuts and a subsequent soft landing, generally defined as when interest rates reduce inflation without causing runaway unemployment or hurting economic growth.

The data marks the firmest sign to date that the US economy — shepherded by the Federal Reserve's interest-rate decisions — has threaded the needle and avoided a sharp downturn.

"The economic rebalancing that we thought was necessary a couple years ago largely looks like it's been achieved," Joseph Briggs, an economist at Goldman Sachs, told Business Insider. "Provided that we stay on this current course, I expect that we will be increasingly transitioning to a more normal economic environment."

Briggs also said that achieving a soft landing would help avoid "some of the economic hardships that often come if you were to see the economy enter a more significant slowdown."

A slowly cooling economy heading back to normal

The economy has been confusing because the labor market has stayed pretty hot and inflation has been stubborn despite the Fed's trying to slow down borrowing and spending.

The Fed reacted to sky-high inflation a few years ago by hiking interest rates and holding them at that elevated level . The next Federal Open Market Committee meeting is next week, and the CME FedWatch Tool showed that as of Wednesday morning traders overwhelmingly thought rates were likely to stay at their target.

Data indicates the US labor market isn't too hot, meaning the Fed is unlikely to go back to raising rates and keeping the door open for cuts later this year. There were 175,000 jobs added in April . March's job growth was almost twice as large, with a gain of 315,000. Those figures could be revised in the report from the Bureau of Labor Statistics on Friday.

Job-openings data out on Tuesday from the Bureau of Labor Statistics showed that they continued their downward trend in April, suggesting businesses are slowing their hiring plans. Plus, the number of job openings per unemployed person has been moving downward in 2024.

The soft landing might already be here

David Kelly, the chief global strategist at J.P. Morgan Asset Management, believes the US has already achieved a soft landing.

"To me, a soft landing is when the unemployment rate has basically hit its full-employment level and the inflation rate is gradually coming down to a rate that's acceptable," Kelly said. "With this Friday's jobs report, we expect a 30th consecutive month in which the unemployment rate is at or below 4%.

"It sounds to me that the plane basically landed 2 1/2 years ago and it's just been cooling down ever since," Kelly said, adding that "the economy continues to grow, but it's been in a soft landing for some time."

Jason Draho, the head of asset allocation Americas at UBS Global Wealth Management, said in a new note that the "differences of opinion between investors on the outlook for the US economy are getting smaller" — but also that some forecasters think a recession isn't out of the picture. Draho said the consensus was that "growth is slowing but not cracking, inflation is stubborn but the trend is still lower, and the bar for Fed rate cuts is low while hikes are effectively off the table."

"In other words, a fairly comfortable soft landing with occasional turbulence," Draho added.

It's still a tough economic environment for many people.

"I think it's a very good economy for the top 10% of households, not quite so good for everybody else," Kelly said.

Watch: How tech layoffs could affect the economy

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UN DESA Policy Brief No. 153: India overtakes China as the world’s most populous country

Two “population billionaires”, China and India, face divergent demographic futures

The latest estimates and projections of global population from the United Nations, indicate that China will soon cede its long-held status as the world’s most populous country. In April 2023, India’s population is expected to reach 1,425,775,850 people, matching and then surpassing the population of mainland China (figure 1).

India’s population is virtually certain to continue to grow for several decades. By contrast, China’s population reached its peak size recently and experienced a decline during 2022. Projections indicate that the size of the Chinese population will continue to fall and could drop below 1 billion before the end of the century.

Censuses are key sources of information about population size and characteristics

Both China and India conduct regular population and housing censuses to enumerate and document their national populations, and both countries use the information obtained to inform their development planning. In China, the most recent census was taken in November 2020. More than a decade has passed since India’s most recent census in 2011. India’s planned 2021 census was delayed due to challenges associated with the COVID-19 pandemic and is now scheduled for 2024.

To estimate and project the size of the Indian and Chinese populations for subsequent years after their last censuses, the United Nations relies on information about levels and trends in fertility, mortality and international migration obtained from vital records, surveys and administrative data (United Nations, 2022b). Uncertainty associated with the resulting estimates and projections implies that the date on which India is expected to surpass China in population size is approximate and subject to revision as more data become available.

Current population trends in China and India are determined largely by fertility levels since the 1970s

In 2022, at 1.2 births per woman, China had one of the world’s lowest fertility rates; India’s fertility rate, at 2.0 births per woman, was just below the “replacement” threshold of 2.1, the level required for population stabilization in the long run. According to the United Nations’ latest projections, India’s population is expected to reach its peak size around 2064 and then to decline gradually.

China and India offer contrasting examples of national trajectories through the demographic transition towards longer lives and smaller families. The timing, speed and intensity of the demographic transition have differed markedly across countries and regions, depending on multiple factors of human development. Key determinants include improvements in nutrition and public health, which reduce mortality especially among children; increased levels of education, particularly for girls and women, often associated with declining levels of mortality and fertility; urbanization; expanded access to reproductive health-care services, including for family planning; and women’s empowerment and labour force participation.

Population policies in China and India had different impacts

Many factors contributed to falling birth rates in China and India, but the relative contributions of each remain a matter of debate (Bongaarts and Hodgson, 2022). During the second half of the twentieth century, both countries made concerted efforts to curb rapid population growth through policies that targeted fertility levels. In China, the most notable policies were the “later, longer, fewer” campaign of the 1970s, which promoted later marriage, longer intervals between births and fewer children overall, as well as the stricter “one-child” policy, in effect from 1980 until 2015, which limited couples to one or two children with some exceptions (Wang and others, 2016). These policies, together with investments in human capital, changing roles for women and other factors, contributed to China’s plummeting fertility rate in the 1970s and to the more gradual declines that followed in the 1980s and 1990s.

India also enacted policies to discourage the formation of large families and to slow population growth, including through its national family welfare programme beginning in the 1950s. However, under India’s federal structure, state governments were able to set their own policy priorities, resulting in varied impacts across different parts of the country. In Kerala and Tamil Nadu, where state governments emphasized socio-economic development and women’s empowerment, fertility declined earlier and at a more rapid pace, falling below the replacement level two decades before the country as a whole. Those states that invested less in human capital, especially for girls and women, experienced slower reductions in fertility, despite controversial mass sterilization campaigns and other coercive measures in some locations (Gupte, 2017; May 2012). India’s lower human capital investment and slower economic growth during the 1970s and 1980s, contributed to a more gradual fertility decline compared to China and, consequently, to more rapid and persistent population growth.

Population ageing echoes historical declines in fertility

The ageing of human populations is an inevitable consequence of the demographic transition. Both China and India are experiencing a shift in their populations towards older ages. In fact, most countries are experiencing some degree of population ageing, though with important differences that stem from the varied pace and timing of the demographic transition (United Nations, 2017b, 2023).

The divergent demographic paths taken by China and India since the 1970s are visible in the current age profiles of the two countries. In 1970, both countries had youthful populations, as illustrated by the pyramidal shape of their age and sex structures (figure 4). At that time, children and youth under age 25 comprised the largest age group, accounting for 60 per cent of the total population of both countries, whereas older persons aged 65 years or over made up less than 4 per cent.

China’s rapid fertility decline in the 1970s is echoed in its age distribution for 2023, wherein there are twice as many adults aged 25-64 years compared to children and youth below age 25. This surge in the proportion of population in the working age range facilitated an acceleration of economic growth on a per capita basis over this period (Yuan and Gao, 2020). Projections indicate that the percentage of China’s population aged 25-64 will peak in the coming years, closing the window of opportunity created by the changing age distribution.

Population ageing is unfolding more gradually in India than in China, and at a varied pace across states. Overall, the number of adults aged 25-64 in India exceeds the number of children and youth under age 25 by around 20 per cent. The number of adults of working age is projected to continue increasing both in number and as a proportion of the total population through mid-century, ensuring a continuing positive contribution of demographic change to per capita economic growth. Moreover, labour migration from the youthful northern and eastern states could bolster the size of the workforce in the relatively older southern states, prolonging the demographic dividend in those regions. Maximizing the potential benefits of the favourable demographic situation will depend critically on investments in the education and health of adolescents and youth and on policies to facilitate their productive employment and to ensure equal opportunities for women and girls (UNFPA India, 2018).

Both China and India are experiencing imbalances in the sex ratio at birth, with millions more boys than girls born since the 1980s. These skewed ratios are motivated by a strong preference for sons, which is achieved primarily through sex-selective abortion, a practice that has been outlawed in both countries. In some regions of India, post-natal discrimination continues to result in higher mortality rates for girls than for boys (Alderman and others, 2021), further exacerbating the imbalanced sex ratio. Among persons younger than 25 years in 2023, there are 116 males for every 100 females in China and 110 males per 100 females in India. Such imbalances may portend challenges for adult partnerships and family formation, with potential adverse consequences for social cohesion and intergenerational support, especially in communities where the patrilineal family-household is the traditional source of care and support for older persons (Srinivasan and Li, 2018).

Both China and India must prepare for growing numbers of older persons

The number of older persons is growing rapidly in both China and India. This growth is linked to increasing numbers of births around the middle of the last century, as those cohorts are now reaching older ages, and to falling mortality risks that allow more people to survive to advanced ages. Between 2023 and 2050, the number of persons aged 65 or over is expected to nearly double in China and to more than double in India, posing significant challenges to the capacity of healthcare and social insurance systems.

By 2040, persons aged 65 or over in China will outnumber those under age 25; and by 2050 they could comprise 30 per cent of the total population (figure 5). Countries like Japan and the Republic of Korea have experienced similar rapid population ageing, but at higher levels of economic development than has been achieved in China. In India, the ratio of older persons to those of working age is expected to remain lower than in China, reflecting the slower pace of population ageing in India.

Planning for and adapting to demographic change is essential for achieving the Sustainable Development Goals

Together, China and India are home to more than one third of the world’s population. For many decades, the size and growth of the Chinese and Indian populations have been a focus of global concerns about the rapid growth of the human population and its implications for sustainable development (United Nations, 2022c).

Meeting people’s needs in these two largest countries is critical for the world to achieve the Goals and targets of the 2030 Agenda for Sustainable Development and for ensuring that no one is left behind. To eliminate poverty and improve well-being, India’s youthful population requires scaled-up investments in health and education and enabling conditions for productive and sustainable employment. Meanwhile, both countries should commit to social protection and other measures to secure the health and well-being of growing numbers of older persons.

All countries must ensure that policies and programmes aimed at influencing fertility level are grounded in principles of reproductive rights, ensuring that all individuals and couples are free to decide how many children to have and when to have them, and that they have the information and means to do so. Family-friendly policies that provide support to parents and promote gender equality within households can ease some of the challenges of childrearing, especially for working women, and help people to have the number of children they desire.

The success of global efforts to ensure environmental sustainability will depend critically on developments in China and India. As both countries continue to pursue sustained economic growth and prosperity for their people, it is essential that increasing per capita incomes do not undermine efforts towards more sustainable consumption and production. To protect and preserve the planet for future generations, the economies of the two countries – and of the world – must urgently transition away from the current overdependence on fossil-fuel energy.

Author: Sara Hertog, Patrick Gerland and John Wilmoth, UN DESA Population Division.

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Benefits of economic growth

Economic growth means an increase in real GDP – an increase in the value of national output, income and expenditure. Essentially the benefit of economic growth is higher living standards – higher real incomes and the ability to devote more resources to areas like health care and education.

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The benefits of economic growth include

Higher average incomes . Economic growth enables consumers to consume more goods and services and enjoy better standards of living. Economic growth during the Twentieth Century was a major factor in reducing absolute levels of poverty and enabling a rise in life expectancy.
Lower unemployment. With higher output and positive economic growth, firms tend to employ more workers creating more employment.

UK unemployment rises during a recession – falls during periods of economic growth.

Lower government borrowing. Economic growth creates higher tax revenues, and there is less need to spend money on benefits such as unemployment benefit. Therefore economic growth helps to reduce government borrowing. Economic growth also plays a role in reducing debt to GDP ratios.

A long period of economic growth in the post-war period helped reduce the UK debt to GDP ratio.

Improved public services . Higher economic growth leads to higher tax revenues and this enables the government can spend more on public services, such as health care and education e.t.c. This can enable higher living standards, such as increased life expectancy, higher rates of literacy and a greater understanding of civic and political issues.
Money can be spent on protecting the environment. With higher economic growth a society can devote more resources to promoting recycling and the use of renewable resources. The Kuznets curve suggests that initially economic growth worsens the environment, but after a certain point of growth, the damage to the environment will fall. This theory is controversial. But, it is possible for higher growth to be consistent with improved environmental outcomes.
Investment. Economic growth encourages firms to invest, in order to meet future demand. Higher investment increases the scope for future economic growth – creating a virtuous cycle of economic growth/investment.
Increased research and development. High economic growth leads to increased profitability for firms, enabling more spending on research and development. This can lead to technological breakthroughs, such as improved medicine and greener technology. Also, sustained economic growth increases confidence and encourages firms to take risks and innovate.
Economic development . The biggest factor for promoting economic development is sustained economic growth. Economic growth in south-east Asia over the past few decades has played a major role in reducing levels of poverty, increasing life expectancy and enabling more economic prosperity.
More choice. In less developed economies, a large proportion of the population work in agriculture/subsistence farming, economic growth enables a more diverse economy with people able to work in service sector, manufacturing and having a greater choice of lifestyles.
Decline in absolute poverty . Economic growth has played a crucial role in reducing absolute poverty (people with insufficient income to meet basic needs)

Economic growth and fall in poverty

Poverty since 1820

Source: OurWorldinData.org

Evaluation of economic growth

For developing economies in Sub-Saharan Africa, economic growth enables countries to escape the worst levels of poverty. Even a small level of economic growth can facilitate higher living standards and an improvement in life expectancy. In the developed world, economic growth is less essential.
It depends on the nature of economic growth. For example, if economic growth leads to more pollution and congestion, then living standards can fall.
It also depends on the distribution of economic growth – who benefits from economic growth? If growth benefits primarily the richest in society, growth may do little to overcome poverty.
Economic growth can be very damaging to the environment. If it leads to greater use of non-renewable resources and Carbon emissions, then it will contribute to potentially very severe environmental problems which will increasingly impact future generations.
When countries have low GDP, economic growth brings a high marginal benefit. But, for developed countries with high GDP, the marginal benefit of economic growth is lower. There is a diminishing marginal utility of extra income and at higher levels, the problems of growth may outweigh the benefits.
Costs of economic growth
Causes of economic growth
Does economic growth bring increased living standards?
Latest growth figures in the UK

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A State-Ranker’s Guide to Writing 20/20 Economics Essays

1. Introduction to this Guide

2. The Correct Way to Write

Phrasing should be understandable and concise

“Understandable” does not mean slang or lacking in terminology

Analysis should be done using low modality

3. How to use Statistics

4. Must Have Insightful “However”s

Theoretical “However”s

Contemporary “However”s

5. How to Interpret the Question

Knowing your verbs

Linking to the syllabus

Digging into the source

6. Putting it All together — Structuring your essay

Introduction

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Body Paragraphs

8. How to Answer Source Questions

9. Plan You Essay

10. How to Prepare for Essays in the Exam

Maximise Your Chances Of Coming First At School

AS and A level Economics Past Papers

What is economic growth? And why is it so important?

A list of goods and services that people produce for each other

What is economic growth?

What are economic goods and services?

How can we measure economic growth?

Measuring economic growth by tracking access to particular goods and services

Measuring economic growth by tracking the ratio between people’s income and the prices of particular goods and services

Global inequality: How do incomes compare in countries around the world?

Global poverty and growth: How have incomes changed around the world?

Measuring economic growth by tracking incomes as reported in household surveys

Measuring economic growth by tracking GDP per capita

Conclusion: The history of global poverty reduction has just begun

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