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INFLATION
KEYFACTS:
DEFINITION: A general rise in the price level in the economy
TARGET: Currently in England the inflation rate is 2.0%
HOW MEASURED:A number of goods (600) that are representative of the economy, ranging from
bread to petrol to lip-gloss, are put together into what is referred to as a "market basket or basket
of goods." The cost of this basket is then compared over time. This results in a price index, which is
the cost of the market basket today as a percentage of the cost of that identical basket in the
starting year. For example, the first year may be assigned the value 100, and then a 4% increase in
the next year would become 104. Also, a family expenditure survey is sent out each year to
determine which goods are most bought in the average household and helps inform the weightings.
The Office of National Statistics collects data from 120,000 retailers and measures increases
month on month.
NOT ALL PRODUCTS ARE EQUAL: Households generally spend more on things like petrol than
they do on things like postage stamps. Therefore, petrol is WEIGHTEDdifferently. An increase in
price of petrol will affect the overall inflation rate more than the same price increase in postage
stamps.
DIFFERENCE BETWEEN RPI and CPI: The RPI includes things related to housing such as the
interest on mortgages and council tax. These are not included in CPI. Therefore, the Government
sometimes prefer to use RPI as it looks better!
WHO SETS THE INFLATION TARGET: The Government decide the inflation target, but theMonetary Policy Committee at the Bank of England are in charge of making interest rate decisions to
try and keep to it! The aim is to stay within 1% +/- the actual target at all times.
WHAT CAUSES INFLATION?Two main things there is DEMAND PULLinflation this is when
the economy cannot supply enough products and services to keep up with demand, so prices are
forced upwards. There is also COST PUSH INFLATIONwhich is where supply shocks such as an
increase in price of oil increases the costs of many other products, leading to overall inflation.
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UNEMPLOYMENT AND GROWTH
WHY DOES IT MATTER?
SHOE LEATHER COSTS-the sheer cost of having to shop around for the best deal as
people no longer have a firm idea of what is a fair price. This also includes the cost of time spent
moving money into and out of bank accounts as the interest rate changes (to try and tackle inflation)
MENU COSTS- When prices change, businesses need to pay to print new menus, new
brochures, leaflets, price tags etc. This can get even more expensive when taking into account ticket
machines/vending machines etc
PSYCHOLOGICAL AND POLITICAL COSTS:People feel worse if prices go up, even
if their income has also increased. They can also impact poor/rich people in different ways and
disrupt the distribution of income and wealth
REDISTRIBUTIONAL COSTS:If people are on a fixed rate of pension, price increases mean their
pension is worth less than before. Similarly, if workers cannot negotiate pay increases, they will be
able to buy less with their salary than they did before. Also if interest rates change this affects
rich and poor in very different ways (savers/borrowers)If there is not a subsequent change in tax
rates in line with inflation, this can also lead to people being worse off than before.
UNEMPLOYMENT AND GROWTH:Inflation increases the cost of business
projects and means it can be hard for businesses to work out how much they can make. This
uncertain environment can lead to a decline in investment, which can dampen growth. This in turn can
lead to unemployment. If UK inflation is higher than other countries, our goods and services become
less competitive, and imports will become more attractive. This can impact the balance of goods and
services, leading to more withdrawals and less growth in the UK.
ASSESS QUESTIONS YOU COULD GET ASKED!!!!!!!!!!!!PROBLEMS WITH CPI AND RPI
RPI can be misleading if interest rates are low it can make inflation look less of a problem than it
actually is because this reduces mortgage payments (i.e. at the moment interest rates are low but
inflation is high!)
Some people do not complete the survey the weightings are based on, so the actual weightings may
not represent what the average household spends on each type of good
It has been reported that sometimes information used to calculate inflation is not calculated
regularly meaning they are inaccurate.
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ECONOMIC GROWTH (and GDP)
BOTH OF THESE GRAPHS ILLUSTRATE ECONOMIC GROWTH!
UNEMPLOYMENT
KEY FACTS:
DEFINITION: An increase in the productive capacity of an economy (the ability to produce goods and services)
HOW IT IS MEASURED:GDP or GNP are measured from one year to the next and any growth is expressed as a
percentage
IT CAN BE IN REAL OR NOMINAL TERMS: Real Economic Growth holds prices CONSTANT. This means that any growth is
real growth in productive capacity, and not just a result of inflation. Nominal growth makes no calculation for changes in
inflation. This means that the economy in question may not have grown at all, and the increase is purely inflation.
DIFFICULTY IN MEASURING: It can be difficult to identify whether there has been an increase in the actual capacityof
the economy i.e it is now capable of producing more than before, or whether there has just been an increase in utilising
resources. For example, using resources that are currently laying idle can lead to an increase in GDP from one year to
the next, but is not technical economic growth as the CAPACITY of the economy remains the same.
PROBLEMS:
Does not show us how income is distributed (are lots rich, but also many poor, or is it more equal?)
Only takes into account size of country if you calculate PER CAPITA (economic growth/population/Health)
Barter economies may be misrepresented as not recorded transactions
High growth does not always equal quality of life (pollution/too long working hours etc)
Developing countries may have more scope to grow than developed countries who have already technologically expanded. i.e
we are at different stages of development
The purchasing power of money can be different in different countries. So even if a country has a lower GDP than ours, you
may be able to buy more for your money in the other country, meaning their standard of living is not lower.(Thailand is a
good example of this)
SSESS QUESTIONS YOU MAY GET ASKED!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
ENEFITS: Widely recognised and understood so makes it easy to compare countries
ata is widely available
We do not have many other options available to us for measuring growth!
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UNEMPLOYMENT
KEY FACTS:
DEFINITION: Those who are currently without a job but who are seeking work at current wage rates.
HOW MEASURED: The International Labour Organisation (ILO) conducts a survey (post/phone) of the population aged 16-65.
To be classed as unemployed you need to have looked for work in the last 4 weeks and be ready to start in 2. The measure is
internationally recognised but is only a sample of the country. In the UK they also use the CLAIMANT COUNT which is the
number of people that are claiming benefits such as job seekers allowance. It looks at people aged between 18 and 65. The
UK main measure is the ILO survey.
ASSESS QUESTIONS YOU MAY BE ASKED!
COSTS OF UNEMPLOYMENT
COSTS TO THE UNEMPLOYED PERSON AND DEPENDANTSObviously there is a cost of loss of income. However, there
are many costspeople may suffer with stress, a breakdown, marriage breakdown, illness and mental issues as a result
of being unemployed. They may feel worthless and a failure. Also the longer they are out of work, the less likely they are
to have a job as they lose their skills and potential employers are put off by their lack of recent work experience
COSTS TO LOCAL COMMUNITIESIf there is high unemployment, the area may become run down. Unemployed may
turn to drugs, crime and violence. Shops may have to close down if the high unemployment means they do not have
enough sales to stay open.
COSTS TO TAX PAYERSUnemployed are no longer paying taxes and are now costing the government through benefits
COSTS TO THE ECONOMY AS A WHOLELoss of output now people are not working, and social costs associated with
increased crime/depression etc
ASSESS QUESTIONS YOU MAY BE ASKED!
Why does unemployment persist even as an economy recovers?
Unemployment is a LAGGINGfactori.e it happens after an economy has started
performing badly
Contracts and negotiations may mean there is a time delay between a drop in sales
for a business and the laying off of staff
Making people redundant is costly and causes bad publicity, and recruiting and
training new people if the economy recovers is expensive, so many businesses hold
out as long as possible to see if the situation improves
People may not believe the recession is over and therefore continue not to
consume, meaning sales fall further and firms have to make cuts
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ASSESS QUESTIONS YOU MAY BE ASKED!!!!!!!!!!!!!!!!!!!!!!!!!!!!
PROBLEMS WITH CLAIMANT COUNT:
Xit does not take into account people who are looking for work, but are not entitled to claim benefits, for
example because they are too wealthy
Xit takes into account people who ARE working but are claiming benefits illegally
BOTH measures may underestimate unemployment because they dont look at people who are in part time
work but want full time work, those training when they would prefer to be working or those that are not
actively seeking work, but if offered a job would take them.
On the other hand, it includes people that have no qualifications, or may have physical or mental disabilities
that some would argue makes them unemployable and therefore they should not be included as unemployed.
ASSESS QUESTIONS YOU MAY GET ASKED!!!!!!!!!!!!!
MIGRATION CAN HAVE A DAMAGING AFFECT ON EMPLOYMENTThe UK is seen as a favourable place to
live. In addition, it is quite easy to move here as many countries used to be part of the common wealth, or
are in the EU so can move here without restriction. This means that many people are attracted to the
country and, especially the benefits we give. These people may register as unemployed and have no real
intention of getting a job.
MIGRATED WORKERS MAY NOT HAVE THE RIGHT SKILLSLanguage barriers, differences in qualifications or
lack of skills/experience may make it difficult for migrants to find a job and therefore they add to the
unemployment of the country.
MIGRATION CAN HAVE A POSITIVE IMPACT The UK is an attractive place to live and is seen to have lots of
opportunitiestherefore entrepreneurs and business people may migrate. They are likely to invest money
and consume a lot of goods and services which should generate jobs and reduce unemployment in a number
of ways.
Migration increases the supply of labour. This can decrease the wage rate which may mean businesses are
willing to hire more people, leading to a rise in employment
Migrants may be able to fill jobs that we cannot fill with domestic people because they either do not have
the right skills or do not want to job. Therefore employment levels will go up.
Increased population means increased consumption which may create even more jobs
TYPES: FRICTIONAL (between jobs), CYCLICAL (boom/bust) , SEASONAL
(summer/winter), STRUCTURAL (mining), GEOGRAPHICAL (less jobs up
north)
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Balance of Payments
WHAT CAUSES CURRENT ACCOUNT DEFICITS AND WHY ARE THEY
BAD?
High inflation makes domestic goods expensive, so consumers may choose
to buy abroad. But this can lead to flows of money out of the country,
meaning a fall in AD In the long run, if everyone is changing up their pounds to foreign
currency, the supply of pounds increases, meaning the value drops. When
this happens, it is cheaper for other countries to buy from us and
cheaper for tourists to visit, so in the long run this may improve the
balance of payments
Some countries do not have the capacity to supply AD and have to resort
to importing, or may be unable to produce many goods and services
KEY FACTS:
DEFINITION: a record of all the financial dealings over a period of time between economic agents of one
country and all other countries. It comprises of the CURRENT ACCOUNT(purchases of goods and services)
and the CAPITAL ACCOUNT( money related to saving/investment etc)
A CURRENT ACCOUNT DEFICITrefers to when exports are smaller than imports. i.e more money is flowing
out of the economy (withdrawal) than in (injection) This is not always a problem, if the deficit is only small
or short term.
LONG TERM CURRENT ACCOUNT DEFICITS Can be bad as it means we own money to other countries.
They may decide that they do not think we are going to pay them back and refuse to sell to us until we pay
it back. This leads to less goods being available in the country. This can be further the case if the we start
exporting to try and reduce the deficit, meaning less goods available in our domestic economy.
LONG TERM CURRENT ACCOUNT SURPLUSESCan be good because it stores up wealth for times when the
economy may need funds in the future.(Japan did this to fund pensions as the population ages) However,
these resources could be used elsewhere, such as for investment. Also it can cause friction with other
countries as they may feel they cannot develop their own businesses because they are reliant on exports
THIS IS NOT THE GOVERNMENT DEFICIT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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THE HUMAN DEVELOPMENT INDEX
OTHER MEASURES OF DEVELOPMENT
PERCENTAGE OF ADULT MALES IN LABOUR IN AGRICULTURE (shows how developed the
country is in terms of tertiary sector)
ACCESS TO CLEAN WATER
ACCESS TO MOBILE PHONES
ACCESS TO SANITATION
PAVED ROADS
KEY FACTS:
DEFINITION: The Human Development Index (HDI) is a composite statistic used to rank countries by level of "human
development it takes into account the life expectancy rate, literacy rate, school enrollment and GDP per capita in acountry (ppp). It is between 0 and 1 and countries are ranked.
COUNTRIES WITH LOW HDI: Ethiopia, Congo,
COUNTRIES WITH HIGH HDI: UK, Germany, USA
ASSESS QUESTIONS YOU MAY GET ASKED!
ADVANTAGES OF HDI
QUICK AND EASY TO COLLECT EASY TO COMPARE COUNTRIES
LOOKS NOT ONLY AT GDP, BUT HOW IT IS BEING USED (I.E HEALTH CARE AND EDUCATION)
GIVES A LONGER TERM VIEW (I.E LIFE EXPECTANCY AND EDUCATION CAN INDICATE WHETHER GROWTH IS
SUSTAINABLE/HUMAN CAPITAL IS IMPROVING)
DISADVANTAGES OF HDI
NO ACCOUNT OF HOW INCOME IS DISTRIBUTED
IGNORES OTHER FACTORS LIKE WAR AND POLITICAL PROBLEMS
JUST BECAUSE LIFE EXPECTANCY IS HIGH DOES NOT ALWAYS MEAN QUALITY OF LIFE IS HIGH
SCHOOL ENROLLMENT IS ONLY EFFECTIVE IF EDUCATION IS OF A HIGH QUALITY DOES NOT REPRESENT LEVEL OF EQUALITY IN A COUNTRY
http://en.wikipedia.org/wiki/Human_development_(humanity)http://en.wikipedia.org/wiki/Human_development_(humanity)http://en.wikipedia.org/wiki/Human_development_(humanity)http://en.wikipedia.org/wiki/Human_development_(humanity)http://en.wikipedia.org/wiki/Human_development_(humanity)http://en.wikipedia.org/wiki/Human_development_(humanity)8/10/2019 As Unit 2 Revision Part 1
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Formula: Withdrawal = Net Savings + Net Taxes + Imports
INVESTMENTCAN INCREASE PRODUCTION AND CONSUMPTION (MORE
JOBS&INCOME)
EXPORTSCAN IMPROVE BALANCE OF PAYMENTS AND INCREASE CONSUMPTION
AND INVESTMENT AS MORE MONEY IN ECONOMY
SAVINGS/IMPORTS/TAX REDUCE DOMESTIC CONSUMPTION
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AGGREGATE DEMAND
REMEMBER TO ALWAYS LABEL YOUR AXIS!!!!!!
National output=National expenditure=National Income
AS PRICE LEVEL INCREASES, DEMAND FALLS BECAUSE:
CONSUMPTION FALLS: People will not be able to afford to buy as much and will have to borrow
money. This extra demand will increase interest rates, making borrowing expensive. As a result,
people will have to consume less
Also, the WEALTH EFFECT will mean peoples assets now make them feel less wealthy as
everything is now more expensive. Feeling less rich makes people spend less!
INVESTMENT FALLS: As interest rates rise (due to increased demand for borrowing) investments
become more expensive and less attractive to businesses. The risk is greater.
DEFINITION: Total of all demands/expenditures in the economy at any given price.
COMPRISES OF: Consumption (spending by households on goods and services)
Investment(Spending by firms on investment goods)
Government Spending (on current spending such as wages and investment such as roads)
Exports minus imports(foreigners spend money on domestic goods, so this money is part of our
National expenditure but consumption on inputs does not contribute to our national income or
Relate to national output)
THEREFORE: AD=C+I+G+(X-M)
IMPORTANT FACT: CONSUMPTION MAKES UP 65% of AGGREGATE DEMAND!
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An increase in businesses profitabilitywill give firms more money to use for investment
GOVERNMENT SPENDING MAY RISE AT ANY PRICE BECAUSE:
Government policy has changed (maybe because a new party have come into power. For example,
when Margaret Thatcher was prime minister government spending was cut dramatically, but has
since increased.
EXPORTS AND IMPORTS MAY CHANGE AT ANY PRICE BECAUSE:
Quality of domestic goods has increasedmaking them more attractive to both foreigners and
domestic customers
The exchange rate has fallenmeaning our exports are more competitive and imports are more
expensive
ASSESSMENT QUESTIONS YOU MAY BE ASKED!!!!
A strong exchange rate may not impact exportsdepends on price elasticity of demand
Interest rates may not impact investment if confidence is low (look at the moment!)
Investment does not just depend on the interest rate, it also depends on availability of
credit (are banks lending money freely)
If people do not think tax breaks are permanent, or expect them to be followed by a further
increase in tax, they may not consume more (they may save the money)
The multiplier effect may mean that changes to some components of Aggregate demand
affect overall rate more than others
The impact of any exchange rate change is also dependent on what is happening in the
world economy.
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CONSUMPTION IN DETAIL
DEFINITION: Spending on consumer goods and services over a period of time. These
include DURABLE (i.e cars) and NON-DURABLE (i.e food).
KEY FACTS: Consumption is linked to a persons DISPOSABLE INCOME, which
includes salaries and benefits. It is also dependent on how much people choose
to SAVE from their income. How much individuals save and how much they spend
is referred to as the MARGINAL PROPENSITY TO CONSUME:
%change consumption
% change in income
FACTORS WHICH EFFECT CONSUMPTION:
WEALTHif house prices of stocks and shares values go up, people feel
they are richer and so will spend accordingly.
INFLATIONInflation reduces the value of money a household has.
They therefore may decide to save their money rather than spend it. On
the other hand, inflation may actually encourage people to spend more,
buying goods before prices increase any further.
INTEREST RATE-An increase in the interest rate leads to more money
having to be spent on mortgage and loan repayments, leaving less for
buying goods. Also, if interest rates are high, this may put off consumers
borrowing money to buy things
AVAILABILITY OF CREDIT are banks lending (i.e they are not at the
moment, so it is irrelevant if interest rates are low!)
EXPECTATIONS if people think the economy is booming, they willspend, expecting future increases in wages. The reverse is true in a
recession
THE AGE RANGE IN THE COUNTRY young borrow, middle aged save
and old people spend their savings! (on average)
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THEORIES OF CONSUMPTION
NAME: CONSUMPTION FUNCTION
BY: JOHN KEYNES
THEORY:Income is most important factor in determining short term consumption.
People do not change patterns significantly due to interest rate or wealth changes.
As people get higher incomes, they will spend less and less of it. So the rich getting
richer does not add to consumption. Therefore he thought the economy would stagnate
WRONG OR RIGHT:There is little evidence to prove this theory right!
NAME: THE LIFE CYCLE HYPOTHESIS
BY: FRANCO MODIGLIANI
THEORY:Consumption is not to do with current income. Households form an opinion
about their likely income over their lifetime and base current spending on that. This is
like you borrowing money to go to uni, because you believe you will get a job with a high
enough wage to pay it back. As you get older, you will save for your retirement, then
when you stop working, spend your savings.
WRONG OR RIGHT: There is substantial evidence which supports this theory
THEORY: THE PERMANANT INCOME HYPOTHESIS
BY: MILTON FRIEDMAN
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THEORY: Develops on Modiglianis idea. He said consumption was based on
PERMANANTincome. This is affected by wealth, interest rates and income increases.
He said that people spend all of their income over their lifetime. He argued that
current income does affect consumption, unlike Keynes. However, he said how it affects
consumption depends on whether it is deemed permanent or not. I.e a lottery win willleave to saving and spreading out consumption over the persons lifetime. In contrast, a
income rise will lead to a larger increase in current consumption, as this income will be a
permanent increase.
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INVESTMENT
DEFINITON: addition to the capital stock of the economy, such as factories,
machines, offices and stock. IN ECONOMICS INVESTMENT AND SAVING
ARE NOT THE SAME THING!!!!!!!!!!!!!!
Net investment is very importantbecause this shows how much has been
added, once replacing worn out capital has been taken into account. For
example, replacing a broken computer does not add to the capital stock, it
just maintains it.
Investment can be physical(machines, buildings) and human(training,
education)
WHAT EFFECTS INVESTMENT?Cost of capital goodsthe higher the price, the lower the amount of
investment
Technological changeif technological change makes capital more
productive, investment will lead to greater returns than before. This will
provide an incentive for firms to invest, so they will invest more than
before.
Expectations whether firms are optimistic or dubious about the future
will effect whether they think investments are viable options.Government policy The government can set rules and regulations that
makes investment easier or more attractive.
Profits does the firm have money to invest?
Availability of investment projects is there favourable projects
available for investment?
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ECONOMIC GROWTH CONTINUED
DEFINITION:The change in the productive capacity of an economy.
HOW DO WE MEASURE IT?It is impossible to produce a figure for
the value of machinery, workers etc. Therefore GDP changes are
measured to give an indication.
THE OUTPUT GAP:
GDP may not actually be a good indication of an economies capacity. In
times of recession, the economy is likely to be working below their
potential (NEGATIVE OUTPUT GAP), on the other hand, in times of
growth, the economy may be working above its true capacity (payingworkers overtime, opening factories for longer hours) this is not
sustainable and therefore is not a true reflection of the economies
capacity.
In the graph above the blue line shows the productive potential of the
economy over time, whereas the red line shows where actual GDPis at
various points. The difference between these lines is the OUTPUT GAP.
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CAUSES OF ECONOMIC GROWTH
LAND finding oil resources/reclaiming land from the sea
LABOUR-Increase in number of young people joining the
labour force
Increase in amount of women joining the labour force
ImmigrationEducation of workers
Flexibility (which is linked to education ie being able to do more than one
job)
CAPITAL Investment leads to economic growth.However, not in all cases. Housing is an investment, but it does not lead to
increase in output in the future. Also, some investment does not work out,
leading to a poor rate of return.
TECHNOLOGICAL PROGRESSAs technology improves,
the average cost of production will fall. This increases efficiency and the
amount businesses can produce. Also, new products coming to market
encourage consumption, as consumers want to buy new products. Without
this, there may be no new spending, and no economic growth (as no money
available for investment)
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WHY IS THE UKS GROWTH RATE A LITTLE BIT RUBBISH
CATCHING UP It can be argued that it is obvious that countries like
China are going to have higher growth rates than the UK, because we have
already grown and developed so much. The UK has already moved from
agriculture, to manufacturing, to tertiary sectors, so a lot of our
potential for growth has already been realised
EDUCATION AND TRAININGIt has been suggested that the UK
focuses too much on the more able students and neglects the lower
ability students. This can mean these students become unemployed and
are not contributing to the countries output.
FLEXIBLE LABOUR MARKERSthe EU, and the UK particularly are seen
to have many rules and regulations. This makes it harder for firms to hire
and fire people and as a result efficiency can be affected.
TAXES The UK has high levels of taxes. Corporation tax puts people
off starting businesses or aiming to achieve really high profits. National
insurance makes hiring workers expensive and can discourage firms taking
on new workers. All of this reduces the amount of investment and
enterprise in the country, which also means missed growth opportunities
SHORT TERMISMshareholders want quick returns, they are not
interested in where the firm will be in ten years. Therefore, firms may
focus too much on the short term, for fear of upsetting their investors if
they do not see returns quickly. Similarly, banks will only lend for a few
years, which can hinder long term investment plans of businesses.
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WHY IS GROWTH SOMETIMES BAD?
Negative externalities migrants leaving their families in search of
jobs, often living in poor conditions/may not be happier even if income has
increased EV: BUT WERE THE GOOD OLD DAYS REALLY THAT
GOOD AFTER ALL, LIFE EXPECTANCY HAS INCREASESUGGESTED BETTER STANDARDS NOW
Growth is not sustainable resources will run out/pollution will get out
of control/greenhouse gases will increase EV:BUT THE GOVERNMENT
ARE ADDRESSING THIS WITH HYBRID CARS AND GREEN
SOURCES OF ENERGY
EV: IT IS ALL VERY WELL FOR THE RELATIVELY RICH PEOPLE OFTHE SOUTH TO CLAIM GROWTH IS BAD, BUT IF GROWTH
STOPPED FOREVER, WHAT WOULD BECOME OF THE DEVELOPING
COUNTRIES WHO STILL SUFFER FROM POVERTY IF NO FURTHER
GROWTH OCCURED?