Practise analysing environmental, inflationary, distributional, trade and opportunity costs of growth, then judge their significance against its benefits.
From 2004 to 2018 the Ethiopian economy grew at an average rate of over 10% per year. Over this period there has been significant deforestation in the country. Forests have been cleared to make space for farming and the wood has been used for fuel and construction.
Evaluate whether the costs of economic growth outweigh the benefits.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance.
The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
Knowledge, Application and Analysis ( 12 marks) - indicative content
- Understanding of economic growth
- High rate of economic growth in Ethiopia has been accompanied by a high rate of deforestation
The costs of economic growth include:
- Environmental costs:
- deforestation has made climate change worse and caused soil erosion
- increased use of non-renewable resources, including fossil fuels
- climate impacts from the burning of fossil fuels
- Inflation - increases in AD as consumption, investment, government spending and possibly exports increase, will increase demand-pull inflationary pressures in the economy, leading to a range of possible issues.
- Opportunity costs - production of consumer goods may need to be sacrificed in the short term so that capital goods can be produced. This may lead to lower living standards in the short term.
- Balance of trade deficits:
- as average incomes rise, consumers are likely to respond by buying more imported goods, worsening the country's trade balance
- increased production of goods and services may require more raw materials and components to be imported, worsening the country's trade balance
- Increased inequality as the returns to economic growth are unequally distributed, with those who already own more factors of production receiving a greater increase in income
- Lower living standards, for e.g. related to environmental costs such as pollution, congestion, over-development
NB Candidates may use costs of growth as analysis and the benefits of growth as evaluation, or they may analyse both costs and benefits, and then evaluate the significance of the points made.
NB Award a maximum of Level 3 for answers with no application.
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.
Use of generic material or irrelevant information or inappropriate examples.
Descriptive approach which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
Significance of costs of growth:
- It depends if it is actual or potential economic growth
- Increased government tax revenues may not translate to improved
public services: the government may have to pay off debt, have other
priorities, or suffer from corruption
- Discussion of how sustainable the economic growth is, e.g. to what
extent are non-renewable resources being used;
or is it the
manufacturing or services sector of the economy which are growing most
- Trade balance may not worsen if it is export-led growth
- Effects on income inequality depend on government fiscal policy
responses also
- Effects on inflation depend on:
- the original level of spare capacity in the economy (possible
discussion of Keynesian vs. classical LRAS curves)
- the extent to which the growth leads to higher levels of
investment
- the government/central bank's monetary policy response
- Short-run vs. long-run effects, e.g. changes in Ethiopia were over a 14-year period
- The answer may be different for different countries and at different times
- It depends on the level/speed of economic growth, e.g. economic
growths of over 10\% for 14-year period are relatively extreme
The benefits of economic growth:
- Higher average incomes leading to higher living standards as consumers
can buy goods and services, or afford to send their children to school, as
in Ethiopia
- A higher value of goods and services being produced, which are available
for consumption
- Lower unemployment rates meaning that:
- the country is utilising its resources more efficiently, moving
closer to its PPF and closing the negative output gap
- higher average incomes leading to higher living standards, as in Ethiopia
- social benefits such as lower crime rates and better health
- lower levels of government spending are required on means-
tested/unemployment benefits, improving the government's
budget balance or allowing this money to be allocated elsewhere,
e.g. improving access to clean water, as in Ethiopia
- less loss of skills/workers becoming inactive due to long term
unemployment
- Increased sales/revenues/profits for firms meaning that they may:
- expand and take on more workers, further reducing the rate of
- undertake more investment, boosting AD and LRAS, leading to
non-inflationary economic growth in the future
- pay more tax on profits to the government
- Higher levels of investment, leading to:
- more jobs being created
- better quality products being produced
- increased AD and LRAS, meaning non-inflationary economic
growth in the future
- Increased tax revenues from a wide range of taxes, leading to an
improved government budget position, or increased government
spending, e.g. improved access to clean water in Ethiopia
- Improved public services financed by the increased tax revenue, for
example education or healthcare
Level
Mark Descriptor
Level 0
Level 1
1-3
Level 2
4-6
Level 3
7-8