Economic Growth Flashcards
What is Aggregate Demand, what are its components?
Is the total revenue of expenditure in an economy over a period of time.
AD = C + I + G + (X-M)
An increase in any aspect of AD will lead to an increase in GDP
What is consumption, the main influences on Consumption and how is it calculated?
Consumer spending by households on domestically produced goods and services. Makes up 50-60% of AD INFLUENCES: - Income - Consumer expectations - Interest Rates - Distribution of income - APC & APS CALCULATION: C=Co+cy (Co: Autonomous consumption, c: MPC, Y: National income)
What is investment and its influences?
Investment spending by businesses
It is the most volatile component of AD. Makes up 20% of AD
INFLUENCES:
- The cost of capital income (IR, Govt. Policies on tax, Price/Productivity of Labour)
- Business expectations (Future demand, Inflation)
What is government spending, and the fiscal policy employed?
Net government spending (G-T)
Makes up 20-25% of AD
Expansionary (economy is slow): Increased spending/reduced taxes
Contractionary (slow down economy): Reduce spending/increase taxes
What is (X-M) and its influences?
Exports Revenue - Spending on imports. Both Makes up 20-25% of AD
Usually, a deficit, detracting from EG
Higher ER reduces X and increases M
How is real GDP and economic growth measured?
GDP: Nominal GDP x 100/CPI
EG: Real GDP current - Real GDP Previous/Real GDP x 100
Overview of AD
Consumption (55%)
Investment (20%)
Government Expenditure (20%)
Net Exports (2%)
Increases in AD can only increase EG up until full capacity is reached, then it will pull up prices (inflation)
AD is managed by fiscal and monetary policies
What are the positive effects of EG
- Higher real per capita incomes and living standards and living standards. Increases productivity and resource use. Higher real income allows individuals to have greater purchasing power.
- Higher levels of saving. Compulsory superannuation (1991)
- Productivity growth and technological progress. More efficient resource use. Higher productivity.
- Employment creation
- Higher real GDP. increase taxation revenue
- Contribute to new business investment, higher consumption spending can have an ‘acceleration effect’ on net investment
- Increases in real output, export income can be used to finance imports
- Protection for the environment
- Addition leisure time
What are the negatives of economic growth?
EG should not be pursued as ends in itself but as a process to achieve higher living standards and improvements
- Damage caused to the natural environment
- Great technological and structural changes in production, can lead to structural unemployment
- Materialism and consumerism in society
- Inequality of the distribution of income. If the benefits of growth do not ‘trickle down’ to low and middle-income groups, Progressive taxation can be used by govt. to reduce income inequality
- Demand-pull and cost-push inflation as resources become scarce in relation to the increased demand for goods and services.
Current Account Deficit can increase, grows faster than trading partners, bad for external stability
Define Economic Growth
Occurs when there is a sustained increase in a country’s productive capacity over time. This is commonly measured by the percentage increase in Real Gross Domestic Product
What is the multiplier effect and how is it calculated?
Changes in any component of AD will increase or decrease the overall level of income by an amount larger than the initial change in the component
CALCULATION:
k=1/mps or 1/1-mpc
Define Aggregate Supply
- Is the total level of income in an economy over a given period of time
- The total productive capacity of an economy
What factors cause a change is AS
- Population growth
- Discovery of new resources
- Workers acquiring new skills
- Increased capital
- New technology
- Improved efficiency
- Govt. Policies - Microeconomic
What is equilibrium and when does it occur?
Occurs when AD=AS At Equilibrium: AS=AD Y=C+I+G+(X-M) S+T+M=I+G+X (Leakages=Injections)
