Economic Growth: Basics Flashcards
What is economic growth?
An increase in GDP (which is the value of goods and services produced in a given period of time)
GDP will only increase if either…
…aggregate demand or aggregate supply increase
What is aggregate demand?
The total demand for all goods and services
AD = C + I + G + X - M
What is meant by ‘investment’ when talking about aggregate demand?
Spending by firms on increasing production capacity (e.g. spending on building a new factory or buying new capital)
Note: a person buying shares or foreigners lending money to Australians does NOT affect aggregate demand (unless firms actually spend that money)
What is aggregate supply?
The total productive capacity of the Australian economy
What are 2 reasons consumption might increase?
- Increased consumer confidence in an upturn
2. Lower interest rates
What are 2 reasons investment might increase?
- Increased investor confidence in an upturn
2. Lower interest rates
What are 2 reasons net exports might increase?
- A lower exchange rate
2. A higher ToT
What are 3 benefits of economic growth?
- Increased incomes and living standards
- Increased tax revenue for the government
- Decreased unemployment
What are 4 costs of economic growth?
- Increased demand inflation
- A worse BOGS and current account
- Worse environmental sustainability (from using more resources and more pollution)
- Wider inequality
What is the formula for MPC?
Change in consumption / change in income
What is the formula for the multiplier?
1 / MPS
What is the formula for the increase in GDP as a result of an injection?
Change in GDP = Injection x Multiplier
What are the 3 injections and what are the 3 leakages?
Injections: Investment, Government Spending, Exports
Leakages: Savings, Taxation, Imports
If injections are greater than leakages…
GDP will increase due to more AD
If leakages are greater than injections…
GDP will decrease due to less AD
If injections are equal to leakages…
The economy is in equilibrium and GDP stays the same
What are the main trends in Australia’s economic growth over the past 10 years?
2013-2019: Low GDP growth following the end of the mining boom
2020: Negative GDP growth due to lockdowns in the pandemic
2021-22: Strong GDP growth due to recovery from the pandemic, the ToT spike and macro policy
What are the main government policies to increase economic growth?
- Fiscal policy
- Monetary policy
- Microeconomic policy
What are the 3 types of budget outcome?
Surplus, balanced, deficit
What are the 3 types of fiscal stance?
Contractionary, neutral, expansionary
What is the difference between an expansionary fiscal stance and a budget deficit?
A deficit is a negative budget in one year, an expansionary stance is a worsening of the budget from one year to the next
What is the difference between a budget surplus and a contractionary fiscal stance?
A surplus is a positive budget in one year, a contractionary stance is an improvement of the budget from one year to the next
Two examples of a non-discretionary (or cyclical) change to the budget are…
- People earn more in a boom, so pay more in tax
2. Fewer people are unemployed in a boom, so fewer people receive unemployment payments (Jobseeker)
Two examples of a discretionary (or structural) change to the budget are…
- The government increases tax rates
2. The government cuts spending (e.g. on welfare or infrastructure)
How can fiscal policy improve economic growth?
During a downturn, the government can use it to increase aggregate demand
How can monetary policy improve economic growth?
During a downturn, the government can use it to increase aggregate demand
How can microeconomic reform improve economic growth?
The government use it to improve the efficiency of industries in the economy, increasing aggregate supply
Why is microeconomic reform a more sustainable policy for improving economic growth?
Micro improves efficiency and leads to less inflation, while macro (fiscal/monetary) increases AD leading to higher inflation
