Economic Growth - Daniel Flashcards
Define economic growth
an increase in the volume of goods and services that an economy can produce over a period of time
How is economic growth measured?
by the annual rate of change in real Gross Domestic Product
What are the ways in which economic growth can be measured?
Quarterly
Year-on-Year
Annual
What is the formula for aggregate demand?
- Define It
What is the formula for aggregate supply?
- Define It
What is the formula for equilibrium?
C+I+G+(X-M)
- The total level of expenditure in an economy over a period of time
C+S+T
- The total level of income in an economy over a period of time
S+T+M = I+G+X
What period does aggregate demand drive growth?
The short to medium term
What are the four areas that make up aggregate demand?
Consumption
Investment
Government Spending & Taxation
Exports & Imports
What percentage of expenditure does consumption make up?
55-60%
What are the four influences on consumption?
Level of Income
Consumer Expectations
Level of Interest Rates
Distribution of Income
What percentage of expenditure does investment make up?
10-15%
What are the two influences on investment?
Cost of Capital Equipment
Business Expectations
What influences the cost of capital equipment?
Changes in Interest Rates
Changes in Government Policy
Change in Price/Productivity of Labour
What influences business expectations?
Expected Demand
General Economic Outlook
Inflation
What percentage of expenditure does government spending make up?
20-25%
What percentage of income does taxation make up?
20-25%
What percentage of aggregate demand are exports and imports equal to?
20-25%
What influences Australia’s net exports/imports?
Overseas Incomes
Exchange Rates/Level of International Competitiveness
Define the simple multiplier
The greater-than-proportional increase in national income resulting from an increase in aggregate demand
What is the formula for the simple multiplier?
K=1/MPS
OR
K=1/1-MPC
What is the formula for calculating the impact of an investment?
Change in Y=k*change in aggregate demand
What period does aggregate supply drive growth?
The long-term
What determines aggregate supply?
The quantity and quality of the factors of production in an economy
When does aggregate supply increase?
When a higher level of output can be produced for the same cost
When there is an increase in quantity or an improvement in the quality of the factors of production
What changes can increase aggregate supply?
Population Growth
Discovery of New Resources
Workers Acquiring New Skills
Increased Capital
The Adoption of New Technology
Measures to Improve Efficiency
Government Policies
What is the result of an increase in aggregate demand without a corresponding increase in supply?
Inflation
How does economic growth impact living standards?
Leads to an increase in GDP per capita - Australia’s three decades of growth saw annual growth of 1.6%
Households have higher wages and disposable incomes, leading to improvements in quality of life
How does economic growth impact unemployment?
Because it increases output, economic growth creates jobs
Long term economic growth leads to the development of new and more advanced industries
How does economic growth impact inflation?
Economic growth leads to price increases & inflation
High levels of spending means aggregate supply cannot keep pace with aggregate demand
Macroeconomic policy aims to keep growth at a level that does not create rapid inflation
How does economic growth impact external stability?
Higher disposable incomes leads to increased spending on imports
If Australia is growing faster than trading partners, this will lead to an increase in the CAD
An excessive CAD can undermine confidence in an economy
This is better known as the ‘balance of payments constraint’
How does economic growth impact income distribution?
Benefits of growth often flow disproportionately to higher-income earners or capital owners
Thus, rapid economic growth can lead to increased income inequality
Absolute poverty will fall, but relative poverty will rise
How does economic growth impact the environment?
Growth is often pursued with little regard to the natural environment
This can lead to pollution, depletion of non-renewables and climate change
Environmental economists urge governments to take on ‘ecologically sustainable development’
What are recent statistics with regard to Australia’s economic growth?
Australia enjoyed 28 year of economic growth between 1991-2019 until it went into a recession in 2019-20 due to the impact of the COVID-19 pandemic (a fall of 7% GDP in the June 2020 Quarter)
During this period it averaged a per annum growth rate of 2.9%, although this fell to 2.4 and 2% during the 2010s
What were the factors that contributed to Australia’s record economic growth?
1) A Favourable Global Economy
- Exports benefit from Chinese demand
2) Structural Improvements in Terms of Trade
- TOT reached their highest level in 140 years in Sep. 2011, adding 15% to Australian national income
3) Successful Macroeconomic Management
- During the period, inflation averaged 2.75% of GDP
4) Pre-emptive Monetary Policy
- Used by the RBA to lower inflation
5) Active Fiscal Policy
- Used during periods of downturns to boost growth
6) Higher Population Growth
- In 2019, net migration contributed 60.2% to Australia’s economic growth
7) Large Increase in Asset Prices
- increased the wealth of household, encouraging greater borrowing and consumption (the wealth effect)
8) Slowdown in Productivity Growth
- Labour productivity was just 1.2% p/a in 2000s, and 1% in 2010s
How can macroeconomic policy influence growth?
Influences growth in the short to medium term
Fiscal Policy: influencing the level of demand through government expenditure and taxation
Monetary Policy: the RBA influences demand through interest rates
How can microeconomic policy influence growth?
Influences growth in the long term
Focuses on increasing aggregate supply
Deregulation a major factor in Australia’s eco growth
