impact of economic growth on equity and equality

Economic Growth, Equity, Equality and Sustainability – Cambridge 9708 Syllabus

Learning objectives (AO1‑AO3)

• AO1 – Knowledge & understanding: Define key concepts, explain how growth is measured, describe the main drivers of growth and the links to equity, equality and sustainability.
• AO2 – Application: Use diagrams, formulas and real‑world examples to illustrate the relationships between growth, distribution and the macro‑economy.
• AO3 – Analysis & evaluation: Analyse the distributional effects of growth, evaluate policy options and assess the sustainability of outcomes.

1. Basic Economic Ideas (AS 1.1‑1.6)

• Scarcity & choice: Limited resources force societies to make choices; the opportunity cost of a choice is the value of the next best alternative.
• Production‑possibility frontier (PPF) – shows maximum feasible output of two goods given current resources and technology.
  • Points on the curve = efficient use of resources.
  • Points inside = inefficiency (unemployment, under‑utilised capital).
  • Outward shift = growth (increase in K, L or TFP).
• Classification of goods: private vs. public, rival vs. non‑rival, excludable vs. non‑excludable – the basis for market failure analysis.

2. Micro‑economics (AS 2‑3, A 7‑8)

2.1 Demand and supply (2.1)

• Law of demand: Q_D ↓ when P ↑ (ceteris paribus).
• Law of supply: Q_S ↑ when P ↑.
• Market equilibrium: intersection of D and S curves; price‑elasticity determines the size of consumer/producer surplus.

2.2 Market failure and government intervention (2.2)

• Externalities – negative (pollution) or positive (education). Government can use taxes, subsidies or regulation to internalise them.
• Public goods – non‑rival and non‑excludable; supplied by the state (e.g., national defence).
• Information asymmetry – adverse selection, moral hazard; possible remedies include certification, regulation.

2.3 Elasticities (2.3)

• Price elasticity of demand (PED) = %ΔQ_D / %ΔP.
  Implications for tax incidence and revenue.
• Income elasticity of demand (YED) – distinguishes normal and inferior goods.
• Cross‑price elasticity – relevance for substitution/complementarity between goods.

3. Macroeconomics – Aggregate Demand & Supply (AS 4‑5, A 9‑10)

3.1 Aggregate‑demand (AD) curve

• AD = C + I + G + (X‑M). Downward‑sloping because of the wealth effect, interest‑rate effect and exchange‑rate effect.
• Factors shifting AD: fiscal stimulus, monetary easing, changes in consumer confidence, exchange‑rate movements.

3.2 Aggregate‑supply (AS) curves

• Short‑run AS (SRAS) – upward sloping; price‑level changes affect output because some input prices are sticky.
• Long‑run AS (LRAS) – vertical at potential output (Y*). Determined by the quantity and quality of resources (K, L, TFP).

3.3 Inflation and unemployment

• Demand‑pull inflation – AD shifts right faster than LRAS.
• Cost‑push inflation – SRAS shifts left (e.g., wage‑price spiral).
• Unemployment types: frictional, structural (often linked to skill‑biased growth), cyclical (related to AD gaps).

3.4 Fiscal and monetary policy (AS 5, A 10)

Policy tool	Objective	Typical effect on AD/AS	Potential trade‑off
Expansionary fiscal policy (increase G or cut taxes)	Boost output, reduce unemployment	AD shifts right	May increase inflation or crowd‑out private investment
Contractionary fiscal policy (reduce G or raise taxes)	Control inflation	AD shifts left	Can raise unemployment
Expansionary monetary policy (lower interest rates, quantitative easing)	Stimulate investment & consumption	AD shifts right	Risk of asset‑price bubbles, currency depreciation
Contractionary monetary policy (higher rates, sell bonds)	Reduce inflation	AD shifts left	Higher borrowing costs, possible recession

4. International Trade & Balance of Payments (AS 6, A 11)

• Comparative advantage – a country should specialise in goods with the lowest opportunity cost; gains from trade raise world output.
• Protectionist measures – tariffs, quotas, subsidies; can protect domestic jobs but raise consumer prices and provoke retaliation.
• Balance of payments (BOP) components:
  • Current account (trade in goods & services, income, transfers).
  • Capital & financial account (direct investment, portfolio flows).
  • Official reserves.
• Exchange‑rate regimes – fixed, floating, managed float; affect export competitiveness and capital flows, thus influencing growth.

5. Development, Indicators and Sustainability (A 11.3‑11.5)

5.1 Development indicators

Indicator	What it measures	Relevance to growth & equity
GDP per capita (real)	Average economic output per person	Core growth measure; does not capture distribution.
Human Development Index (HDI)	Composite of life expectancy, education, GNI per capita	Combines income with health and education – a broader view of progress.
Multidimensional Poverty Index (MPI)	Deprivations in health, education and living standards	Highlights depth of poverty beyond income.
Gini coefficient	Degree of income inequality (0 = perfect equality, 1 = perfect inequality)	Direct measure of equality.

5.2 The Kuznets Curve (A 11.4)

Hypothesised inverted‑U relationship between income per capita and inequality (Gini). Early stages of growth often increase inequality; later stages may reduce it as more of the population benefits.

5.3 Sustainability and the environment

• Sustainability: meeting present needs without compromising future generations’ ability to meet theirs.
• Natural‑capital accounting – includes depletion of resources and environmental degradation in growth accounting.
• Policy tools: carbon pricing, pollution taxes, subsidies for clean R&D, cap‑and‑trade schemes.

6. Growth, Equity and Equality – Core Concepts (AO1‑AO3)

6.1 Definitions

• Economic growth: sustained increase in real output (usually real GDP per capita).
• Real vs. nominal growth: real adjusts for inflation; nominal does not.
• Potential (trend) growth: the rate achievable when all resources are fully employed (shown by LRAS).
• Equity: fairness in the distribution of economic benefits and burdens (e.g., progressive taxation, social security).
• Equality: uniformity of outcomes such as income, wealth or access to services; measured by Gini, Lorenz curve, poverty rates.
• Sustainability: ability to maintain economic activity over the long term without depleting natural resources or harming the environment.

6.2 Measuring growth (AO1)

Aggregate	What it measures	Typical A‑Level use
GDP (real)	Total market value of final goods & services produced domestically, adjusted for inflation.	Primary output measure.
GNI	GDP + net primary income from abroad.	Important for economies with large remittances or foreign‑owned firms.
NNI	GNI – depreciation of capital stock.	Shows income that can be consumed without reducing capital.
GDP (PPP) per capita	GDP adjusted for purchasing‑power parity, divided by population.	International living‑standard comparisons.

Growth‑rate formula (used throughout the syllabus):

\[ \Delta \ln Y \;=\; \frac{Y_{t}-Y_{t-1}}{Y_{t-1}} \] where \(Y\) may be real GDP, real GDP per capita, etc.

6.3 Sources of economic growth (AO1)

6.4 Inclusive growth (AO1‑AO3)

• Definition: Growth that raises average living standards while simultaneously improving the distribution of income, reducing poverty and protecting the environment.
• Policy mix: combines growth‑enhancing measures (infrastructure, R&D) with redistributive tools (progressive taxes, universal services).

7. How Growth Affects Equity and Equality (AO2‑AO3)

7.1 Factor‑income distribution

• Capital‑intensive growth (e.g., automation, AI) raises the marginal product of capital → higher returns to capital (r) relative to wages (w). Can widen the equity gap.
• Labour‑intensive growth (e.g., tourism, construction) raises wages faster than capital returns, potentially narrowing equity gaps.

7.2 Public‑revenue channel

• Higher real GDP expands the tax base, allowing larger fiscal transfers (unemployment benefits, NHS funding, education).
• The distributional impact depends on the tax structure:
  • Progressive income tax → more redistribution.
  • Regressive consumption taxes (VAT) → may increase inequality.

7.3 Labour‑market dynamics

• Job creation improves equity when jobs are decent, secure and well‑paid.
• Growth that creates mainly low‑skill, precarious employment (e.g., gig‑economy) can increase inequality despite higher employment rates.

7.4 Empirical relationship between growth and inequality

Typical regression used in textbooks:

\[ \Delta G \;=\; \beta_0 \;+\; \beta_1 \Delta \ln(Y) \;+\; \varepsilon \] where \(G\) is the Gini coefficient. Interpretation of \(\beta_1\):

• \(\beta_1<0\) – growth reduces inequality (trickle‑down).
• \(\beta_1>0\) – growth increases inequality (skill‑biased or sector‑biased growth).

7.5 Illustrative case studies

• China (1990‑2015): Real GDP per capita grew >10 % per year; Gini rose from ~0.30 to >0.45 – growth was pro‑inequality, driven by export‑oriented, capital‑intensive manufacturing.
• South Korea (1960‑1990): Rapid industrialisation; Gini fell from ~0.38 to ~0.30 – growth was pro‑equality, aided by land reform, universal primary education and strong labour unions.
• Germany (post‑2008): Modest growth; Gini remained relatively stable (~0.29) due to strong social‑security system and active labour‑market policies.

8. Policy Levers to Influence Equity, Equality and Sustainability (AO3)

Goal	Policy instrument	Mechanism	Typical AO level
Improve equity	Progressive income tax & wealth tax	Higher rates on larger incomes/wealth → redistribution via transfers.	AO3 – evaluation of fiscal impact.
Improve equity	Minimum wage & collective bargaining	Raises the earnings floor, compresses wage distribution.	AO2 – diagram of labour‑market supply/demand.
Improve equity	Targeted social transfers (e.g., universal credit, child benefit)	Directly raises disposable income of low‑earning households.	AO3 – cost‑benefit analysis.
Improve equality	Universal access to quality education & health	Equalises human‑capital endowments → long‑run convergence of earnings.	AO2 – human‑capital diagram.
Improve equality	Regional development funds (e.g., EU Cohesion Policy)	Invests in lagging areas, reducing geographic income differentials.	AO3 – assessment of regional spill‑overs.
Support sustainability	Carbon pricing (tax or cap‑and‑trade)	Internalises negative externalities, incentivising greener production.	AO3 – evaluation of environmental effectiveness.
Support sustainability	R&D subsidies for clean technology	Boosts TFP while decoupling growth from resource use.	AO2 – link to the production function.

9. Trade‑offs and Policy Dilemmas (AO3)

• Growth vs. equity: Higher corporate tax rates can fund redistribution but may deter investment and slow potential growth.
• Growth vs. equality: Subsidising high‑tech sectors accelerates GDP growth but can widen skill‑based wage gaps.
• Growth vs. sustainability: Expanding output without environmental safeguards leads to resource depletion and long‑run welfare loss.
• Equity vs. sustainability: Generous social safety nets increase public spending; without efficient financing (e.g., green taxes) they may crowd out climate‑friendly investment.
• Fiscal vs. monetary policy: Coordinated policy can avoid crowding‑out; however, fiscal expansion financed by borrowing may raise interest rates, limiting monetary stimulus.

10. Suggested diagrams for AO2

1. PPF with outward shift – illustrates potential growth from increases in K, L or TFP.
2. Lorenz curve before and after growth – visualises changes in equality (Gini).
3. Three‑axis model – horizontal axis = Economic growth, vertical axis = Equity, depth axis = Sustainability; the “optimal zone” lies in the region of high values on all three axes.
4. Labour‑market supply‑demand diagram – shows skill‑biased technological change shifting demand for skilled labour rightward, widening wage differentials.
5. AD/AS diagram with fiscal/monetary policy shifts – demonstrates how policy can move the economy toward or away from potential output.
6. Production‑function (Cobb‑Douglas) graph – illustrates marginal products of capital and labour and the effect of TFP growth.

11. Conclusion (AO3)

Economic growth is a necessary but not sufficient condition for a fair, prosperous and sustainable society. Its impact on equity and equality depends on:

• The structure of growth – capital‑intensive growth tends to favour owners, labour‑intensive growth favours workers.
• The tax‑and‑transfer system – progressivity determines how the extra output is shared.
• Investment in human capital and regional development – reduces long‑run inequality.
• Environmental regulation and green‑technology support – ensures that higher output does not erode natural capital.

Achieving “inclusive and sustainable” growth therefore requires a coordinated policy mix that simultaneously raises the level of output, narrows distributional gaps and protects the resource base for future generations.