Economic Growth Flashcards
EG
Factors that influence C:
Savings – the MPC and MPS:
The MPC and MPS of a person will determine what proportion of their income is going to be spent and what proportion is going to be saved. Higher the MPC (lower the MPS) will result in higher consumption.
Consumer Confidence / Expectations:
If a consumer expects a rise in income/inflation or expects a future shortage of goods, they will consume more and save less. On the other hand, if a consumer expects a future decline in income/inflation and expecting goods and services will be more available in the future they will save more and spend less.
Interest Rates:
An increase in interest rate would discourage spending as the cost of borrowing is higher and the return of saving is higher, whilst a decline in interest rate will do the opposite
The Distribution of Income and Wealth:
The more even the distribution of income, the higher the rate of overall spending, vice versa for a more unequal distribution.
EG
Factors that influence I:
Interest Rate (cost of borrowing to invest) A fall in interest rate would make it cheaper to borrow funds for investment which encourages investment. An increase in interest rate would result in a vice versa effect.
Cost of inputs (e.g. labour)
Any change in the price or productivity of labour or technological innovations will affect the relative cost of capital compared with labour. If labour cost becomes higher than business will choose to invest in capital as a substitute for labour.
Government Policy
Government policies such as tax cuts or asset write-off that decreases firms’ cost will lead to an increase in investment, as they have higher liquidity to do so.
Business Confidence / Expectations
Expected changes in future demand for their products, general economic outlook and inflation will impact on the firms’ decision to invest. Generally, if the economy is doing well, firms will choose to invest.
EG
Factors that influence G:
Stabilisation of Economic Activity:
One of the main goals of the government is to maintain a sustainable rate of economic growth which helps to achieve the goals of low unemployment and inflation. Therefore, the government expenditure will vary depending on the economic outlook to decide whether it needs to expand or contract the economy.
minimise fluctuation in the business cycle
Redistribution of Income:
Another factor that influences government spending is the goal to achieve income and wealth equality for further economic development. Government’s target in those areas will affect the amount of government spending and how they spend it.
as the government is providing more social welfare payments, government spending will increase
Resource Allocation (i.e. govt. expenditure in various sectors in the economy)
Government’s objective of resource allocation between different sectors of the economy will also affect how much the government expenditure will be. For example, the government might decide to reduce subsidiaries to reallocate resources to more efficient industries.
in areas such as public infrastructure/public goods → increase in government expenditure
EG
Factors that influence X/M:
International Competitiveness – Relative Prices:
Relative prices of domestic firms will affect the international competitiveness of Australian exports. If relative price is high than international competitiveness is low, reducing exports and increasing imports. The vice versa effects occur when relative price is low.
if price level falls/prices overseas increase → lower relative price → increase X and decrease M → fall in AD/GDP
vice versa
International Competitiveness – the Exchange Rate
The exchange rate also affects the international competitiveness in the long run. If there is a depreciation in AUD, Australian exports will become more competitive as AUD is cheaper to purchase and Australian consumers will find foreign currencies more expensive to purchase. Therefore, a depreciation will result in an increase in export and decrease in import in the long run volume effect. The opposite occurs when currency appreciates.
if depreciates → export becomes cheaper and imports becomes more expensive → increase AD
vice versa
EG
Keynesian economic thought
output (and therefore growth) is determined by expenditure of consumers, firms, the government and exports = aggregate demand
EG
AD and AS
• Aggregate demand refers to the total level of demand for goods and services within an economy
• Calculated by the addition of household consumption, business investment, government expenditure and net exports:
AD = C + I + G + (X — M)
• Aggregate supply refers to the total productive capacity of an economy
• Calculated through the addition of consumer spending, household saving and government taxation:
Y = C + S + T
• When aggregate demand is equal to aggregate supply, the economy is in equilibrium as leakages (savings, taxation and imports) will then be equal to injections (government spending, investment and exports)
• An imbalance in leakages and injections will influence the level of economic activity: if injections are greater than leakages, the economy will grow (expansion) / if leakages are greater than injections, economic growth will contract (contraction)
EG
Factors influencing the average propensity to consume:
- Consumer expectations – expectations about future prices rise and the general availability of goods
- level of interest rates – changes in the level of interest rates will encourage or discourage spending or saving.
- The distrbution of income –the more equitable or inequitable the distribution of income is in an economy will influence the level of spending
- Governments can increase or decrease their level of spending through taxation and expenditure decisions – aim is to maintain strong and stable economic growth.
EG
The simple multiplier: k = 1/(1–MPC)
The multiplier process explains how an initial amount of stimulus spending will result in a final amount of generated national income via successive rounds of spending.
The multiplier process explains how an initial change in an injection or leakage leads to a multiplied effect on the economy and national income i.e. there will be a more than proportional increase or decrease in national income (Y) as a result of an increase/decrease in expenditure.
EG
Induced and autonomous consumption
consumption dependent on levels of income
However, consumers will spend even without income in order to satisfy their basic wants, and this is funded by past savings or credit and is called autonomous consumption
EG
Nominal GDP
Nominal GDP is the calculation of the total value of all output produced in an economy over a period of time.
EG
Real GDP
Real GDP is the total value of all output produced in an economy over a period of time, adjusted for the rate of inflation or price level.
- it is a more accurate measure of economic growth in an economy.
EG definition
Economic growth refers to an increase in a country’s productive capacity by changes in real GDP over time.
