Economic Growth

A recession is a period of negative economic growth — specifically two consecutive quarters (six months) in which real GDP falls (1). Output and incomes decline and unemployment usually rises (1).

Real GDP per head divides real GDP by the population, so it shows the average output (and roughly the average income) available per person (2). Total real GDP can rise simply because the population has grown, even if each person is no better off; a large country may have a high total GDP but a low standard of living per person. By measuring output per person, GDP per head shows whether average living standards are actually rising, which is why it is the better measure (2).

Investment is spending by firms on capital goods such as machinery, factories and equipment. An increase in investment means the economy has more and better capital, which raises the productive capacity of the economy. With more capital, workers become more productive — each worker can produce more output per hour — so total output rises. On a production possibility curve this is shown by the whole curve shifting outward, meaning more goods and services can be produced. Higher investment can also bring newer technology, further raising productivity and lowering costs. As productive capacity and output rise, real GDP increases, which is economic growth. So investment causes growth by increasing both the quantity and quality of capital, raising the economy's ability to produce.

Economic growth means producing more goods and services, and this higher level of production tends to harm the environment in several ways. First, more pollution: factories and power stations burn more fossil fuels, releasing carbon dioxide and other emissions that cause air pollution and climate change. Second, resource depletion: growth uses up more non-renewable resources such as oil, coal and minerals, leaving less for the future. Third, habitat loss: expanding industry, farming and housing can lead to deforestation and the destruction of natural habitats. These are examples of negative externalities — costs of production borne by third parties and future generations rather than the producer. So while growth raises output and incomes, it can impose serious environmental costs that reduce long-term welfare.

Economic growth usually reduces unemployment, but 'always' is too strong. Why it usually does: when the economy grows, firms are producing more goods and services, so they need more workers to meet the higher demand; rising output therefore tends to create jobs and lower unemployment, and higher incomes lead to more spending, creating still more jobs (a multiplier effect). Why it might not always: growth can be driven by better technology and automation, which raises output while replacing workers rather than hiring them; the unemployed may lack the skills the growing industries need (structural unemployment), so jobs go unfilled even as the economy grows; and growth that is very capital-intensive may create few jobs. There can also be a time lag before firms take on extra workers. Judgement: economic growth usually reduces unemployment because firms need more workers to produce more, but it does not always do so — it depends on how the growth is achieved (labour-intensive vs automated) and on whether workers have the right skills. So growth lowers unemployment in most cases, but automation and skills mismatches mean it cannot be guaranteed.

Whether the benefits of growth outweigh its costs is a matter of judgement. Benefits: growth raises real incomes and living standards, creates employment, reduces poverty, and increases tax revenue, allowing governments to fund healthcare, education and infrastructure; over time growth has lifted millions out of poverty. Costs: growth can cause environmental damage — pollution, emissions and the depletion of non-renewable resources; the gains may be unequally distributed, so inequality widens; rapid growth can cause demand-pull inflation; and resources used for growth today may leave less for the future, so growth may not be sustainable. Judgement: for a low-income country, the benefits of growth — lifting people out of poverty and funding basic services — are likely to outweigh the costs, because raising living standards is urgent. For a rich country already enjoying high incomes, the environmental and inequality costs may weigh more heavily, so the case is less clear-cut. Overall, growth is usually worth the costs if it is managed to be sustainable and inclusive, but unrestrained growth that ignores the environment and distribution may not be. So the answer depends on the type of growth and the country's level of development.