Topic 3 Flashcards
formula: income
y = C + I + G + (X - M)
formula: equilibrium
S + T + M = I + G + X
formula: K multiplier
1/ mps
1/ (1-mpc)
k: **only savings and investment considered
formula: mpc
change of consumption / change of income
formula: mps
change of savings / change of income
formula: multiplier process
K x change of AD = change of gdp
formula: gdp growth (% change)
gdp growth = (GDP2 - GDP1) / GDP1 x 100
formula: real gdp growth
real gdp growth = (GDP2real - GDP1real) / GDP1 real
formula: unemployment rate
unemployed/ labour force x 100
Economic growth
an increase in the volume of goods and services due to increases in productive capacity
that an economy produces over a period of time.
time. It is considered to be the most important measure of an
economy’s performance as it creates employment which has a number of knock-on effects.
Aggregate Demand (AD)
total demand for G&S within the economy over a given period of time
Y = C + S + T
S = I
Aggregate Supply (Y)
the total goods and services produced by the economy, which generates the total level
of income in the economy over a given period of time (i.e. the potential output when all
factors of production are fully utilised)
Equilibrium occurs when:
Y = AD and using substitutions,
S + T + M = I + G + X
Components of AD
consumption
o Consumer expectations of future prices/incomes
o Interest rates
o Distribution of income (more equitable = more spent)
investment o Business expectations Expected D Economic outlook Inflation o Cost of capital Interest rates Government policies Cost and productivity of labour Cost of technology
government expenditure/taxation
o Fiscal Policy
exports less imports
o Exchange rates
o Consumer preferences
AS can be increased through
o Discovery of new resources o Population growth o New skills o New technology o Increased efficiency (e.g. standardised shipping containers)
measures to improve efficiency tackle capacity constraints: o Skill shortages o Infrastructure bottlenecks o Dealt w/ using microeconomic policy AS is necessary for strong medium to long-term growth
Multiplier
the greater than proportional increase in national income resulting from an increase in
aggregate demand. It is an economic concept developed by Keynes that calculates the impact of an initial
change in autonomous expenditure on the equilibrium level of national income.
Measurement of Growth through Changes in Real Gross Domestic Product
Measured by the annual rate of change in real GDP i.e. % increase value of G&S produced in an economy
over a period of time, adjusted for the rate of inflation.
3 different time periods to measure
rate of Australia’s economic growth
Quarterly – highly volatile e.g. quarterly growth in the ‘March quarter’ is % increase in GDP since
previous December quarter.
Year-on-year growth – measures % change in GDP between one quarter and the corresponding
quarter of the previous year.
Annual economic growth – calculated each year using GDP statistics for the financial year (1st July –
30th June).
2 sources of economic growth
aggregate demand and aggregate supply
An increases in AD tends to
lead to short-term economic growth whilst an increase in AS leads to long-term economic growth.
Positives of economic growth
o Improvements in economic development
o Reduction in cyclical unemployment
o Government taxation
Negatives of economic growth:
Higher rates of inflation (if capacity is reached, ^ demand only adds to inflation)
o Increase in income inequality
o Deterioration of environmental quality
o Worsening of the CAD (external stability)
Macroeconomic policies
aimed to manipulate aggregate demand in order to stimulate economic growth.
Fiscal policy
the use of the government budget as well as taxation in order to achieve economic objectives.
Monetary policy
manipulating the cash rate to influence levels of aggregate demand.
Loose monetary policy is implemented to encourage business and consumer spending and investment e.g. during the GFC, the government reduced interest rates to 3%.
