Economic growth Flashcards
Intro
current trends in economics growth
P1 (demand, consumers)
Consumption spending (households)
Consumer expectations
* Expect income increase/price of goods increase → consumption = growth
* Increased living standards
* Higher levels of savings due to real income increase = reduce debt
* Make the distribution more uneven
Distribution of income
* Equitable distribution → more lower income earners → consumption
* Lower income earners spend proportionally more of their income than higher earners
* When income increases, MPC decreases, because higher income earners don’t need to spend proportionally as much of their income to live
* MPC graph
Interest rates
* i/r increase → discourage consumption → increase savings → decrease consumption
* Cost of borrowing is higher, less loans undertaken, firms pass increased costs to consumer
* Reduced demand → increase in prices
* Taxation and government policy
eg. econ recession in 2020
* Financial contagion led to reduced confidence in aus economy via international border closure, closure of nonessential firms
* Overall = C decreased, I expenditure decreased, evident with 13% DROP in consumer confidence in 2020 (abs)
* e/g -> -6.0% in Jun 2020.
* contraction of GDP by around 10%
* Decrease in AD diagram
P2 (demand, firms)
Cost of capital
* Interest rates
* decrease i/r → decrease cost of borrowing → consumption → pass reduced costs on
* Return cash to investors → consumption
* Government policies ie. government subsidies
* Decrease cost of capital → consumption
* Change in price/productivity of labour ie. labour as a substitute for capital
1. * Increase price labour → decrease cost of capital
1. * Increase price capital → decrease cost of labour
1. * Increase availability of labour saving tech → increase cost of labour
* Business expectations (see above)
* Increase in consumption → increase demand for labour (derived demand)
P3 (demand, govt spending)
- State of the economy (stable → spend on health, welfare, defence, education, etc)
- Contractionary and expansionary stance
- Increased revenue (income tax, GST) → increase infrastructure + welfare → increased standards of living
- Increase the multiplier effect - any increase in an injection will increase the income in the economy by a multiplied amount, money is spent - it will become someone’s income, part of this will be saved and then respent, which leads to an increase in someone else’s income
P4 (demand, net exports)
- Exports affected by world income and EG
- Imports affected by domestic income (domestic EG increase → demand for M increase)
- Other factors: exchange rates, tariffs, quotas, international competitiveness
eg. econ growth in 2017-2019
* Counteracting rise in trade liberation: quick increase in protectionism: us-china trade war, trump tariffs, brexit.
* Global change shifted trade away from efficient to inefficient nations: this is trade diversion. BAD.
* Decreased GWP and china e/g -> reduced D for Aus X.
* As a result, AD and ST e/g decreased from 3.2% (jun 18) to 1.7% (jun 19). You can say that because CN and USA weren’t trading, they looked to Aus, but ultimately we had a slowdown.
eg. 2021-23 growth
* 2021-23, global recovery post-covid! Via opening borders and strong global macro policy has ^ e/g.
* Specifically, CN strong 18.3% GDP growth in March 21, supported a derived deamdn increase in Australia’s commodities exports = AD^
* Tourism services exports demand increased with border opening, = AD^, recovery of 10.3% GDP growth Jun 2021
P5 (supply)
Increase aggregate D will increase EG (short term) → when economy reaches full capacity, an increase in demand = inflation
Need to improve aggregate supply (increase productive capacity) for sustainable growth
Supply supply graph
* Land: new resources
* Labour: acquire new skills, migration, population growth, labour force participation rate
* Capital: foreign investment, new technology
* Enterprise: management training, migration
effects of economic growth
Living standards: POSITIVE
Income + consumption increased → improved living standards
Higher levels of savingsàreduces savings-investment gap = reduced debt
Employment: POSITIVE
Consumption = demand for labour increases (derived) → unemployment decreases
Government revenue: POSITIVE
Increased revenue (tax, GST) = increased infrastructure spending + welfare – multiplier effect
Inflation: NEGATIVE
If economy is close to full employment of resources, increases in demand = demand pull inflation § May lead to an increase in imports
Gov. aim to keep within 2-3% so it doesn’t push CAD higher
External stability: NEGATIVE
Strong EG =#demand for Màworsens BOGs + CAD
Income distribution: NEGATIVE
Increases gap between rich and poor
Returns on physical and financial assets (e.g. art + shares)àcapital gains benefit higher income earners
Environmental impacts: NEGATIVE
EG obtained by increases in S can lead to the depletion of resources
Negative externalities e.g. pollution, deforestation = damage environment
policies (fiscal)
Economic Growth
* AUTOMATIC STABILISERS!!!
* Infrastructure projects (2019/20) = good for AS + long term growth (Explain)
* 311bn temporary COVID Supplements = very effective at boosting growth (Explain)
DIAGRAM: RECESSIONARY GAP FOR RATIONALE FOR EXPANSIONARY FISCAL POLICY
* Pros: very effective. -6% (2019/20) because 3.9% became 5.9%
* Cons: global influences (COVID 19 reflected the broader limitation of fiscal policy which is its inability to prevent global influences). Also mention costs of growth, in COVID’s case this was HIGH INFLATION (peak: 7.4%)
policies (monetary)
Monetary policy involves the RBA’s use of OMO to influence the vernal interest rate levels and hence aggregate demand
loosen MP = lowering interest rate e.g. GFC i/r lowered to 3%. COVID 19 . Interest rates lowered to 0.1% November 2020
When economy is overheating (i.e. growth and inflation are too high) = government forced to tighten monetary policy e.g. MIB I, i/r rose to a peak of 7.25% (2007)
