Economic Issues. Essay

6179 words - 25 pages

7 ECONOMIC GROWTHEconomic Growth involves an increase in the volume of goods and services that an economy can produce over a period of time. It is measured by the annual rate of change in real GDP ie. The % increase in the value of goods and services over a period of one year, adjusted for the rate of inflation.The ABS uses a variety of approaches for measuring GDP in Australia. These measures are known as the GDP(Income), GDP(Production) & GDP(Expenditure) methods. The official measure of economic growth takes an average of these 3 indicators of growth and is known as GDP(A)7.1 The Components of Aggregate DemandJohn Maynard Keynes, developed a theory which stated that the most important influence on economic growth was the total level of spending in the economy - that is, the level of aggregate demand. If households and business firms were generally pessimistic about the future economic outlook, housholds would tend to spend less on consumer goods and save more and business firms would be reluctant to invest in capital goods. This would result in an overall decline in aggregate demand, with falling production and rising unemployment.The economy is in equilibrium where:AD = C + I + G + (X-M)Aggregate Supply = Aggregate DemandThe Circular Flow Model reveals that, based on the aggregate demand equation above, certain economic factors can be identified that are either leakages or injections to the overall level of economic activity. The economy is in equilibrium when leakages(S,T,M) = injections(I,G,X)An increase in leakages causes a downturn in the level of economic growth, and an increse in injections causing an upturn.Influences on consumptionConsumer expectationsIf consumers expect a higher rate of inflation, higher real incomes or future shortages of goods then they would tend to spend more and save less in the short term and vice versa.The level of Interest RatesAn increase in the general level of interest rates would discourage individuals from spending their money and therefore encourage them to save, while a decrease in interest rates would encourage spending and discourage saving.The Distribution of IncomeGenerally speaking, the more equitable (even) the distribution of income, the higher the rate of overall spending, and vice versa for a more inequitable (uneven) distribution of income. Eg a person with a net income of $200 per week might have to spend it all on basic costs of living, whereas someone receiving a net income of $2000 per week might comfortably save half of that level of income.Income Levels and Consumption PreferencesThe income levels of consumers are the most significant single determinant of how much consumers spend.·The Marginal Propensity to Consume(MPC) i.e. the proportion of each dollar of income that is spent on consumer goods·The Marginal Propnsity to save (MPS) i.e. the proportion of each dollar of income that is saved.Influences on InvestmentThe cost of Capital EquipmentThe cost, or relative cost...

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