Economic GrowthEconomic Growth

• Measuring GDPMeasuring GDP

Expenditure methodExpenditure method

Incomes methodIncomes method

Output methodOutput method

Why? Why?

Y = O = EY = O = E

income= output= expenditureincome= output= expenditure

Equilibrium Equilibrium

Demand = SupplyDemand = Supply

Total Leakages = Total InjectionsTotal Leakages = Total Injections

S + T + M = I + G + XS + T + M = I + G + X

Real GDPReal GDP

Real GDP = Real GDP = money GDP money GDP 100100

CPI x 1CPI x 1

real GDP = constant GDP = price deflated GDPreal GDP = constant GDP = price deflated GDP

money GDP= current GDP = nominal GDPmoney GDP= current GDP = nominal GDP

Aggregate DemandAggregate Demand

Y = C + I + G + (X-M)Y = C + I + G + (X-M)

Keynesian Economics is based on Keynesian Economics is based on

Demand managementDemand management

WHY? WHY?

Explain the consumption functionExplain the consumption function

Injections and the Injections and the multiplier effectmultiplier effect

K = K = ___1______1___ or ___1______1___

MPS 1-MPCMPS 1-MPC

Injection X K = Growth in GDPInjection X K = Growth in GDP

Influences on Influences on Consumption p158Consumption p158

• Consumption vs savingsConsumption vs savings• Consumer expectationsConsumer expectations• Level of interest ratesLevel of interest rates• Distribution of incomeDistribution of income

Influences on Investment Influences on Investment p159p159

• Cost of capital equipmentCost of capital equipment• Business expectationsBusiness expectations

• Influences on Government Taxation Influences on Government Taxation and Spending- will do later!!!and Spending- will do later!!!

Influences on exports & Influences on exports & imports p160imports p160

• Overseas demandOverseas demand• Exchange rateExchange rate• Trade policiesTrade policies

Sources of Economic Sources of Economic GrowthGrowth

• Demand sideDemand sideConsumption (60%)Consumption (60%)Investment (20% and volatile)Investment (20% and volatile)Govt Spending (20%)Govt Spending (20%)Exports – ImportsExports – Imports• Supply sideSupply sideIncreased efficiency(shift supply curve to Increased efficiency(shift supply curve to

right)right)• Role of government as a regulator Role of government as a regulator

Positive effects of Positive effects of Economic growthEconomic growth

• Increased real GDP, income and living Increased real GDP, income and living standardsstandards

• Decreased unemploymentDecreased unemployment• Higher tax revenue and improved Higher tax revenue and improved

infrastructureinfrastructure• Increased leisure timeIncreased leisure time• Care of environmentCare of environment• Increased savings and investmentIncreased savings and investment

Negative effects of Negative effects of economic growtheconomic growth

• Environmental consequences – use Environmental consequences – use of resources and negative of resources and negative externalitiesexternalities

• InflationInflation• Increased income inequalityIncreased income inequality• Increased imports and trade Increased imports and trade

imbalanceimbalance

Business CycleBusiness Cycle

• Strong economic growth has enabled Strong economic growth has enabled Australia to experience a prolonged Australia to experience a prolonged upswing period.upswing period.

• Economic growth has been fuelled by Economic growth has been fuelled by domestic consumption and exportsdomestic consumption and exports

• Investment has remained volatile but Investment has remained volatile but strong in mining sectorstrong in mining sector

• Government spending is returning to a Government spending is returning to a neutral stance after GFCneutral stance after GFC

• Fiscal Policy played an important role as Fiscal Policy played an important role as a counter-cyclical demand management a counter-cyclical demand management tool during the GFCtool during the GFC

• Monetary Policy became less importantMonetary Policy became less important• Australia’s business cycle will probably Australia’s business cycle will probably

experience a downswing due to a slow experience a downswing due to a slow global economy and an appreciating global economy and an appreciating AUD. AUD.

• X>M has tended to expand the X>M has tended to expand the economy economy

• Strong foreign investment has Strong foreign investment has provided funds to bridge the I > S provided funds to bridge the I > S gap. gap.

ConclusionConclusion

If economic growth is always the If economic growth is always the answer. What are the questions?answer. What are the questions?• How can cyclical u be reduced?How can cyclical u be reduced?• Why are imports > exports?Why are imports > exports?• Why is the environment exploited?Why is the environment exploited?• Why do interest rates increase?Why do interest rates increase?• Why do interest rates decrease?Why do interest rates decrease?• Why does inflation increase during a boom?Why does inflation increase during a boom?• How do living standards increase? How do living standards increase?