sustainable economic growth: definition of sustainable economic growth

Economic Growth and Sustainability

Objective

To understand what sustainable economic growth means, how it differs from short‑run or unsustainable growth, and how it links to the other macro‑economic objectives set out in the Cambridge AS & A‑Level Economics (9708) syllabus.

Syllabus Context (9.2 Economic growth and sustainability)

• Distinguish actual from potential growth.
• Explain the output‑gap and its relevance to the business‑cycle.
• Identify the four phases of the business‑cycle (expansion, peak, contraction, trough) and the typical policy response at each phase.
• Contrast inclusive growth with sustainable growth.
• Show how sustainable growth interacts with the other macro‑objectives: price stability, low unemployment and external balance.
• Embed the seven key concepts required by the syllabus: progress & development, efficiency & inefficiency, equity, time, scarcity, marginal analysis, equilibrium.

Key Concepts Embedded in This Topic

1. Progress & Development – an increase in real output per person together with improved living standards.
2. Efficiency & Inefficiency – producing more output with the same or fewer resources (resource‑use efficiency) versus wasteful production that creates avoidable externalities.
3. Equity – distribution of growth benefits across groups (inclusive growth) and inter‑generational fairness (sustainable growth).
4. Time – distinction between short‑run (actual) and long‑run (potential) growth paths.
5. Scarcity & Marginal Analysis – optimal use of limited natural resources; the marginal benefit of an extra unit of output must outweigh the marginal environmental cost.
6. Equilibrium – the point where aggregate demand (AD) meets long‑run aggregate supply (LRAS), i.e. the economy’s sustainable output level.
7. Progress & Development (applied) – when assessing a new green‑technology project, we compare the marginal increase in real GDP with the marginal reduction in carbon emissions (marginal analysis).

Definition of Sustainable Economic Growth

Sustainable economic growth is a long‑run rate of increase in real output (usually expressed as real GDP per capita) that can be maintained without compromising:

• the ability of future generations to meet their own needs (inter‑generational equity),
• the integrity of the natural environment (pollution, biodiversity, climate thresholds),
• the availability of natural resources (avoiding irreversible depletion of non‑renewables), and
• social well‑being and equity (reducing poverty and inequality).

In formulaic terms the sustainable growth rate gₛ can be written as:

\( g_{s}= \frac{\Delta Y}{Y}\quad\text{subject to}\quad \begin{cases} \text{Resource use}\leq\text{Renewable supply}\\[4pt] \text{Environmental impact}\leq\text{Acceptable thresholds}\\[4pt] \text{Social outcomes}\geq\text{Minimum standards} \end{cases}\)

Measuring Sustainable Growth

While conventional GDP measures total market value, the syllabus expects students to be aware of alternative indicators that incorporate environmental and social dimensions:

• Green‑GDP – adjusts GDP for environmental costs (e.g. subtracts estimated damage from pollution).
• Ecological Footprint – expresses the amount of biologically productive land and sea required to supply the resources consumed and to absorb the waste generated.
• Genuine Progress Indicator (GPI) – adds value for household and volunteer work, subtracts costs of crime, pollution, and loss of leisure.
• Human Development Index (HDI) – combines life expectancy, education and per‑capita income, highlighting the “progress & development” concept.

Actual vs. Potential Growth

• Potential growth – the maximum output the economy can sustain in the long run when labour, capital and technology are fully employed **and** resource use stays within ecological limits.
• How it is estimated:
  • Trend‑growth model (extrapolating the long‑run trend line of real GDP).
  • Solow‑type production function: \(Y = A \cdot K^{\alpha} L^{1-\alpha}\) where \(A\) (total factor productivity) is assumed to grow at a constant rate.
  • Statistical techniques such as the Hodrick‑Prescott filter to separate trend from cycle.
• Actual growth – the observed change in real GDP in a given period.

Output Gap and Its Relevance to the Business‑Cycle

Output gap = Actual output – Potential output.

• Positive gap (boom): actual > potential → risk of demand‑pull inflation, resource over‑use and environmental stress.
• Negative gap (recession): actual < potential → under‑utilised resources, higher unemployment, but also a window for green investment without overheating.

Numerical example (UK, Q2 2023):

The positive gap explains why the Bank of England raised interest rates to curb inflation while also warning about rising energy consumption.

Diagram suggestion: AD/AS diagram showing a short‑run AD intersecting LRAS above the LRAS level (positive gap) and a second equilibrium below LRAS (negative gap). Caption should link the gap to business‑cycle phases and sustainability concerns.

Business‑Cycle Phases, Sustainability Implications & Typical Policy Response

Diagram suggestion: A boom‑bust AD/AS diagram with arrows indicating the four phases and the corresponding policy arrows (tightening, neutral, stimulus).

Inclusive Growth vs. Sustainable Growth

• Inclusive growth focuses on the distribution of growth – reducing poverty, improving health and education, and narrowing income inequality (equity).
• Sustainable growth adds a long‑run environmental and resource‑availability dimension (inter‑generational equity, scarcity, efficiency).
• Both concepts together satisfy the Cambridge macro‑objective of “high living standards for all”.

Interaction with the Other Macro‑Objectives

• Price stability → Sustainable growth keeps the economy close to potential, limiting demand‑pull inflation; efficient resource use reduces cost‑push pressures from energy‑price volatility.
• Low unemployment → Stable, green‑sector jobs are created when growth is resource‑efficient and long‑run, avoiding the rapid hiring/firing of boom‑bust cycles.
• External balance → Reducing dependence on imported non‑renewables and exporting clean‑technology improves the current‑account and buffers against commodity shocks.

Key Characteristics of Sustainable Economic Growth

1. Long‑run focus – Emphasis on maintaining growth over decades rather than short‑term spikes.
2. Resource efficiency – Higher output per unit of natural‑resource input (e.g., GDP per tonne of oil).
3. Environmental stewardship – Minimal negative externalities such as greenhouse‑gas emissions, waste and biodiversity loss.
4. Inclusive prosperity – Benefits of growth are broadly shared across society and across generations.

Comparison: Sustainable vs. Unsustainable Growth

Policy Implications for Achieving Sustainable Growth

Cambridge‑style policy tools are grouped into fiscal, regulatory and market‑based measures.

• Fiscal measures
  • Green public investment (renewable‑energy infrastructure, energy‑efficiency retro‑fits).
  • Green public procurement – government contracts favour low‑carbon products.
  • Progressive taxation combined with targeted transfers to protect low‑income households from carbon‑price impacts.
• Regulatory measures
  • Mandatory emissions standards for industry and transport.
  • Resource‑management licences (e.g., sustainable forestry, water abstraction caps).
  • Building‑code requirements for energy‑efficient construction.
• Market‑based measures
  • Carbon tax (price signal on CO₂ emissions).
  • Emissions‑trading scheme (cap‑and‑trade) – allocates tradable permits.
  • Subsidies or tax credits for R&D in low‑carbon technologies.
  • Green bonds to finance sustainable projects.

Suggested Diagrams for Revision

1. AD/AS with Output Gap – Show a positive and a negative gap, label the gap, and annotate the sustainability implications (resource pressure vs. idle capacity).
2. Business‑Cycle AD/AS shifts – Four panels (expansion, peak, contraction, trough) with arrows indicating typical policy responses (tightening, neutral, stimulus).
3. Sustainable vs. Unsustainable Growth Curves – A steady upward line staying within an “environmental & resource limits” band versus a steep boom‑bust line that breaches the band and collapses.
4. Indicator Dashboard – Mini‑chart comparing GDP, Green‑GDP, Ecological Footprint and GPI for a hypothetical country over 20 years.