Created by O. McIntosh, Newstead Campus, Tasmanian Academy Federal Budget 2012: Goods, services, distribution, economic growth and the business cycle.

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Created by O. McIntosh, Newstead Campus, Tasmanian Academy Federal Budget 2012: Goods, services, distribution, economic growth and the business cycle

Key people in the Budget 2012 Created by O. McIntosh, Newstead Campus, Tasmanian Academy

Terms you should know Goods and servicesGross Domestic Product (GDP) Factors of productionGDP per capita Standard of living (including HDI) Equitable distribution of output/production Infrastructure (social overhead capital) Inequitable distribution of output/production

Created by O. McIntosh, Newstead Campus, Tasmanian Academy RESOURCEREWARD Natural resources (land)? Labour? Capital? Enterprise?

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Equilibrium Equilibium occurs in the circular flow when the sum of all the leakages is equal to the sum of all the injections to the economy. Savings (S) + Taxation (T) + Imports (M) = Investment (I) + Government expenditure (G) + Exports (X) LEAKAGES = INJECTIONS

Created by O. McIntosh, Newstead Campus, Tasmanian Academy The business cycle GDP Time × × A B Although this economy is generally growing, it will experience downswings or recessions (point A) and upswings or booms (point B).

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Impacts of the business cycle RecessionBoom Falling production of goods and services. Falling levels of consumption and investment. Rising unemployment. Falling income levels. Falling quality of life. Increasing production of goods and services. Rising levels of consumption and investment. Falling unemployment. Rising income levels. Rising quality of life.

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Government policy aims … To minimise fluctuations in the business cycle. For a low rate of inflation. For a low rate of unemployment. For stable, sustainable economic growth. Government policies are known as MACROECONOMIC or COUNTER- CYCLICAL.

A balanced budget This occurs when total government revenue is equal to total government expenditure Created by O. McIntosh, Newstead Campus, Tasmanian Academy

Budget surplus and deficit Surplus: a positive balance, where total government revenue is greater than total government expenditure Deficit: a negative balance, when total government expenditure exceeds total government revenue Created by O. McIntosh, Newstead Campus, Tasmanian Academy

Measuring economic growth To measure the annual rate of change in real GDP: Real GDPcy – Real GDPpy x 100 Real GDPpy 1 Where cy stands for current year and py stands for previous year Between 1990 and 2003, Australia sustained the second highest average economic growth rate in the industrial world (OECD members), averaging 3.8 per cent.

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Aggregate demand (AD) AD is the total demand for goods and services within the economy over a given period of time. AD = C + I + G + (X – M) where C is consumer spending, I investment spending by business, G government expenditure and (X – M) net exports.

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Aggregate supply (Y) Y is the total productive capacity of an economy. Y = C + S + T Where C is consumer spending, S is savings and T is taxation.

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Equilibrium Exists when AD = Y Or When leakages = injections

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Influences on consumption Consumer expectations/confidence Level of interest rates Distribution of income Average propensity to consume (APC) Average propensity to save (APS) Marginal propensity to consume (MPC) Marginal propensity to save (MPS)

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Influences on investment The cost of capital equipment (taking into account interest rates, government policies, price or productivity of labour). Business expectations (demand, outlook, new resources, technology). Inflation.

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Multiplier process Measures the number of times an increase in national income exceeds the aggregate demand that caused it. Example: An initial increase in national income is $10,000. MPC = 0.8, which means MPS is 0.2.

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Calculating the multiplier effect K is the multiplier K = 1 = 1 = 5 MPS 0.2 If the initial increase in national income is $10,000. ∆ Y = k x ∆ AD = 5 x $10,000 = $50,000

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Think about it … If the government wanted to increase national income by $25 million, by how much would it have to increase its own spending levels? Information: MPC = 0.8 ?

Created by O. McIntosh, Newstead Campus, Tasmanian Academy Effects of economic growth Living standards (increase in real GDP per capita) Employment (high labour participation rate) Inflation (government aims for sustainable rate of economic growth) External stability (watch that imports do not threaten current account deficit) Environmental impacts (externalities)