Economic Growth Measuring GDPMeasuring GDP Expenditure method Incomes method Output method Why? Y = O = E Y = O = E income= output= expenditure

Equilibrium Demand = Supply Total Leakages = Total Injections S + T + M = I + G + X

Real GDP Real GDP = money GDP 100 CPI x 1 CPI x 1 real GDP = constant GDP = price deflated GDP money GDP= current GDP = nominal GDP

Aggregate Demand Y = C + I + G + (X-M) Keynesian Economics is based on Demand management WHY? Explain the consumption function

Injections and the multiplier effect K = ___1______1___ K = ___1___ or ___1___ MPS 1-MPC MPS 1-MPC Injection X K = Growth in GDP

Influences on Consumption p158 Consumption vs savingsConsumption vs savings Consumer expectationsConsumer expectations Level of interest ratesLevel of interest rates Distribution of incomeDistribution of income

Influences on Investment p159 Cost of capital equipmentCost of capital equipment Business expectationsBusiness expectations Influences on Government Taxation and Spending- will do later!!!Influences on Government Taxation and Spending- will do later!!!

Influences on exports & imports p160 Overseas demandOverseas demand Exchange rateExchange rate Trade policiesTrade policies

Sources of Economic Growth Demand sideDemand side Consumption (60%) Investment (20% and volatile) Govt Spending (20%) Exports – Imports Supply sideSupply side Increased efficiency(shift supply curve to right) Role of government as a regulatorRole of government as a regulator

Positive effects of Economic growth Increased real GDP, income and living standardsIncreased real GDP, income and living standards Decreased unemploymentDecreased unemployment Higher tax revenue and improved infrastructureHigher tax revenue and improved infrastructure Increased leisure timeIncreased leisure time Care of environmentCare of environment Increased savings and investmentIncreased savings and investment

Negative effects of economic growth Environmental consequences – use of resources and negative externalitiesEnvironmental consequences – use of resources and negative externalities InflationInflation Increased income inequalityIncreased income inequality Increased imports and trade imbalanceIncreased imports and trade imbalance

Business Cycle Strong economic growth has enabled Australia to experience a prolonged upswing period.Strong economic growth has enabled Australia to experience a prolonged upswing period. Economic growth has been fuelled by domestic consumption and exportsEconomic growth has been fuelled by domestic consumption and exports Investment has remained volatile but strong in mining sectorInvestment has remained volatile but strong in mining sector Government spending is returning to a neutral stance after GFCGovernment spending is returning to a neutral stance after GFC

Fiscal Policy played an important role as a counter-cyclical demand management tool during the GFCFiscal Policy played an important role as a counter-cyclical demand management tool during the GFC Monetary Policy became less importantMonetary Policy became less important Australia’s business cycle will probably experience a downswing due to a slow global economy and an appreciating AUD.Australia’s business cycle will probably experience a downswing due to a slow global economy and an appreciating AUD.

X>M has tended to expand the economyX>M has tended to expand the economy Strong foreign investment has provided funds to bridge the I > S gap.Strong foreign investment has provided funds to bridge the I > S gap.

Conclusion If economic growth is always the 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?