Does economic growth always raise living standards?

Q:  Discuss the view that economic growth always raises living standards in a country. (15m)

ANS:

(Introduction: definitions and objectives of essay)
Economic growth refers to increases in the output level of an economy, as measured by the real GDP. Economic growth may lead to improvements in the standard of living, defined as the general well-being of households in an economy. There are two aspects to SOL – the material and non-material aspects. Whether economic growth always raises living standards in a country will be discussed below.

Thesis: increases in real GDP improves standard of living
Material SOL refers to the availability of goods and services for households to consume in an economy. With economic growth, the national income level rises. Households now have a higher level of purchasing power, which allows them to purchase more goods and services. In addition, since there are more goods and services produced now, there is an increased availability of them for consumption. Material SOL thus improves for households.

Non-material sol refers to the qualitative aspects of living. With the increase in real GDP, the government may then collect more tax revenue from the higher incomes earned by factors of production. This allows them to spend more on merit goods, such as education and healthcare, which then improves non-material SOL. For instance, when more schools are built, the access to education is improved, and literacy rates raised.

With both material and non-material SOL improved, the overall SOL improves from the increase in real GDP.

Anti-thesis: increases in real GDP does not improve standard of living
However, economic growth may also result in worsening of the SOL.

With economic growth, material SOL may also worsen. This is when Aggregate demand increases initially, which also resulted in demand-pull inflation along with economic growth. A higher general price level would result in a fall in real income, indicating a fall in purchasing power. Households can afford less goods and services now, and thus become worse off. Material SOL worsens.

Non-material SOL may also worsen with economic growth. For instance, in some developing countries, the higher output levels yearly have also resulted in more pollution, such as in the air and water. Households may see a deterioration in their health, as they get exposed to such pollutants. They become worse off.

Evaluation
In conclusion, economic growth will unlikely always raise SOL. While generally economic growth will lead to improvements in SOL, there may be several factors that lead to worsening of SOL, such as those mentioned above. The governments will then attempt to implement policies to negate the negative effects of economic growth on SOL, so that there is an overall beneficial effect.

Need more help in understanding Economics?
Join Afterskool’s Economics tuition classes for tips and tricks to master the subject.
Click here to enrol.