economic growth

Topics: Inflation, Unemployment, Economics Pages: 30 (9305 words) Published: February 24, 2014
Economic Issues
Economic Growth
Economic Growth involves an increase in the volume of goods and services that an economy produces over a period of time. It is measured by the annual rate of change in real Gross Domestic Product (GDP), i.e. the percentage increase in the value of goods and services produced in an economy over a period of time, usually one year, adjusted for inflation

Aggregate Demand
Aggregate Demand (AD) is the total level of expenditure in the economy over a given period of time. It includes consumption, investment, government spending and net export spending (export spending minus import spending). Aggregate Supply (Y) is the total level of income in the economy over a given period of time. Part of national income is collected by the government through taxation and the rest is either spent on consumption or is saved.

Sector of Economy
Equilibrium when
Conditions for equilibrium
1 sector
Y = C
(Y = C)
2 sector
Y = C + S
(S = I )
3 sector
Y = C + I + G
(G = T)
4 sector
Y = C + I + G + X
= C + S + T + M
(X = M)
Whole Economy
Y = C + I + G + X – M
Aggregate Supply = Aggregate Demand
(X – M = CA)

Changes in leakages and injections are what influence the level of economic activity. If injections are greater than leakages, the economy will grow, but if leakages are greater than injections, economic growth will decrease and the economy will contract. Injections and Withdrawals (I+G+X; S+T+M)

Influences on Consumption (C) and Savings (S)
Consumer expectations
The level of interest rates
The distribution of income
Consumption by households makes up 60% of AD
Influences on Investment (I)
The cost of capital equipment
Changes in interest rates
Changes in government policies relating to investment allowances and tax concessions on capital goods Changes in the price of productivity of labour (labour being a substitute for capital in the production process) Business expectations

Changes in expected demand for their product
Changes in general economic outlook
The discovery of new resources or technology
Inflation may lead to uncertainty
Investment makes up about 20% of AD but is very volatile and variable. Influences on Government Spending (G) and Taxation (T)
One of the main goals of government spending and taxation is to maintain a strong and stable rate of economic growth. That means that governments may increase/decrease spending or decrease/increase taxation to increase/decrease aggregate demand and hence boost/slow economic growth. Government spending makes up about 20 – 25% of AD

G will be used to compensate for volatility in investment
Influences on Exports (X) and Imports (M)
Because Australia’s trade balance is usually in deficit, net exports usually makes up a small negative contribution to aggregate demand. Australia’s exports and imports will be most influenced by levels of overseas income Overseas incomes rise  export revenue rise

Australia’s net exports are also influenced by the exchange rate, levels of international competitiveness and consumer tastes and preferences Weak exchange rate  domestic industries are more competitive  net exports higher  high aggregate demand  boosted economic growth Improving Australia’s trade performance is an important part of government policy to increase AD and improve economic growth prospects. Equilibrium

The equilibrium level of national income is the level of production at which national spending plans are satisfied by national production levels (that is aggregate demand = aggregate supply) and there is no tendency to change. Total leakages = total injections and if there is no autonomous change, the economy will remain at this increase level, which can be expressed in terms of its GDP. Keynes demonstrated however that this equilibrium level of income is not necessarily the same level of income that is required for full employment. A deflationary gap occurs...
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