Topic 3 - Economic Growth

Question 1

What is economic growth?

Answer 1

EG is defined as an increase in the volume of g+s that an eco produces over a period of time

Question 2

How is EG measured?

Answer 2

EG is measured by the annual rate of change in Gross domestic product (GDP)

Question 3

How is EG (%) measured?

Answer 3

((Real GDP (current year) - real GDP (previous year)) / real GDP (previous year) ) *100

Question 4

What are the three different time periods to measure Australia’s rate of EG?

Answer 4

Quarterly EG

Year on year growth

Annual EG

Question 5

WHat is quarterly EG?

Answer 5

This is the EG calculated very three months by the ABS

Question 6

What is year on year growth?

Answer 6

It is a less volatile measure of EG which measures % change in GDP between one quarter and the corresponding quarter of the previous year

Question 7

What is annual EG?

Answer 7

Calculated during GDP statistics for the whole financial year (which runs from 1 July to 30 June

Question 8

Why do the different time periods of EG exist?

Answer 8

So that eco policymakers can use growth statistics for a wide range of purposes. For example, the RBA needs to know what the level of eco activity will be in the coming 12-18 months to forecast inflation

Question 9

What is Aggregate Demand (AD)

Answer 9

It is the total level of expenditure in an economy over a given period of time. It refers to the total demand for g+s within the economy.

Question 10

What are the components of AD?

Answer 10

C = Household Consumption
I = Business Investment
G = Government expenditure
X = Export revenue
M = spending on imports

Question 11

What is the AD equation?

Answer 11

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

Question 12

What is Aggregate Supply (Y)?

Answer 12

It refers to the total productive capacity of an economy; the potential output when all factors of production are fully utilised over a period of time. Part of national income is collected by the gov through taxation, and the rest is either spent on consumption or is saved

Question 13

What is the Y equation (AS equation) (What do the different components mean?)

Answer 13

Y = C + S + T

Y = Aggregate supply/ National income
C = Consumer spending by households
S = Savings by households
T = Taxation by the government

Question 14

When is the economy identified as in ‘equilibrium’?

Answer 14

When the level of AD is equal to Y into the equilibrium equation. Also, where leakages = injections

Question 15

What are the leakages in an economy?

Answer 15

S = Savings by households

T = Taxation by the government

M = Spending on imports

Question 16

What are the injections in an economy?

Answer 16

I = Business Investment

G= Government spending

X = Spending on Exports

Question 17

What is the equation for injections in an economy?

Answer 17

I + G + X

Question 18

What is the equation for leakages in an economy?

Answer 18

S + T + M

Question 19

What is the simple multiplier?

Answer 19

It is the greater than proportional increase in national income resulting from an increase in AD.

For example, when there is an improvement in business expectations for eco recovery, this means that there is an increased business I and expenditure –> increased income for individuals, who then consume more, which will further increase expenditure and income and so on. This iinitial increase in investment will have a MULTIPLIED IMPACT ON NATIONAL INCOME ; Hence the name, simple multiplier

Question 20

What is Marginal propensity to consume (MPC)?

Answer 20

The proportion of each extra dollar of income that is spent on consumer products

Question 21

What is the Marginal propensity to save (MPS)?

Answer 21

It is the proportion of each extra dollar of income that is saved

Question 22

What is the equation for MPC?

Answer 22

(Change in consumption) / (Change in income)

Question 23

What is the equation for MPS?

Answer 23

(Change in savings) / (Change in income)

Question 24

What is the mathematical relationship between MPC and MPS?

Answer 24

MPC + MPS = 1

Question 25

What is the equation for the simple multiplier ?

Answer 25

K = 1 / (1-MPC) (where K is the multiplier)

Or in other words:

K = 1/MPS

Question 26

What is aggregate supply?

Answer 26

The total productive capacity of an economy. The potential output when all factors of production are fully utilised

Question 27

What are the causes of the increases in AS?

Answer 27

Population growth
Discovery of new resources
Workers acquiring new skills
Increased capital
New technology
Improved efficiency
Government policies

Question 28

How does population growth contribute to changes in AS?

Answer 28

Labour is the main input in the production process, thus an increase in population there will be more workers available and the economy will be able to produce more G+S

Question 29

How does discovery of new resources contribute to changes in AS?

Answer 29

new mineral and metal deposits in Aus can be exploited to increase exports and increase eco growth

Question 30

How does workers acquiring new skills contribute to changes in AS?

Answer 30

More highly trained professionals will be able to complete tasks faster and more efficiently, increasing productivity

Question 31

How does increased capitial contribute to changes in AS?

Answer 31

nvestment in capital equipment which effectively replaces labour will increase a business’s capacity to produce goods in the long-term

Question 32

How does new technology contribute to changes in AS?

Answer 32

businesses providing customers with mobile phone apps to place orders and provision of customer service online, saving costs of agents needed to visit customers or speak to them on the phone→ reducing labour costs

Question 33

How does improved efficiency contribute to changes in AS?

Answer 33

Such as the introduction of international standards for size of shipping containers adopted by the transport industry with enormous improvements in the efficiency of freight transport allowing all containers to be carried on every form of transports

Question 34

How do government policies contribute to changes in AS?

Answer 34

Reforms to rules and regulations in an industry may increase competitive pressures, encouraging efficiency and thus an increase in production of G+S

Question 35

What are the influences on Consumption as a component of AD?

Answer 35

Level of i/r

Consumer expectations

Distribution of income

Question 36

How does level of i/r influence consumption?

Answer 36

An increase in the general level of i/r would discourage individuals from spending their money, as the cost of borrowing money is now higher, and therefore encourage them to save, there is also higher returns on savings. While a decrease in i/r would encourage spending and discourage saving.

Question 37

How does consumer expectations influence consumption?

Answer 37

Expectations about future price rises and the general availability of g+s will influence consumer’s decisions to spend or save their income. If consumers expect a rise in their incomes or in inflation, or if they anticipate future shortages of goods, they tend to spend more and save less in the ST. Meanwhile, if consumers expect their incomes to fall, or that prices might fall, or g+s might become more available in the future, then they are inclined to spend less and save more

Question 38

How does the distribution of income influence consumption?

Answer 38

The more equitable (even) the distribution of income, the higher the rate of overall spending, and vice versa for a more inequitable distribution of income. This is because people on lower incomes tend to spend proportionately more of their income than those on higher incomes

Question 39

What are the influences on Investment as a component of AD?

Answer 39

The cost of capital equipment

Business Expectations

Question 40

How do business expectations influence investment?

Answer 40

Changes in expected demand for their products; If entrepreneurs expected a future increase in D, they would be more inclined to purchase new capital equipment to boost production and satisfy the increased D

Changes in the general eco outlook; If EG is expected to increase, entrepreneurs will be more inclined to invest in capital equipment because a higher level of eco activity would improve the returns on investment

Inflation; Inflation leads to uncertainty about future prices and future costs of production, and this is likely to lead to reduced I in productive capital equipment

Question 41

How does the cost of capital equipment influence investment?

Answer 41

Inflation; Inflation leads to uncertainty about future prices and future costs of production, and this is likely to lead to reduced I in productive capital equipment

A change in gov policies relating to investment allowances and tax concessions on capital goods will influence costs of capital goods.

Changes in the price or productivity of labour or tech innovations; This will affect the relative cost of capital compared with labour. Fior example, if either the cost of labour increased or more advanced labour saving technologies became available at the same cost, then the relative cost of capital compared to labour would have decreased, making it more attractive

The cheaper the costs of capital equipment, the higher the likelihood of purchase of capital

Question 42

What are the influences on Gov spending and taxation as part of AD?

Answer 42

Business cycle - When Aus is experiencing a recession, Aus will typically employ an expansionary gov budget which includes an increase in gov spending to help stimulate AD –> improve EG and also contribute to various parts of society

Alternatively, goves may reduce their levels of spending and/or increase the level of taxation to reduce AD and EG

Question 43

What are the influences on exports and imports as a part of AD?

Answer 43

Level of overseas and domestic Y

Prices of X and M

Question 44

How does the level of overseas and domestic Y influence X and M?

Answer 44

WHen overseas Y levels rise, Aus X tend to rise as well, when Aus Y levels rise, Aus M tends to rise. Apart from Y levels, Aus Net X is also influenced by e/r inflation, levels of IC, protectionist policies of other countries and consumer tastes and preferences

Question 45

How does the prices of X and M influence X and M balance?

Answer 45

When prices of M decrease, there is an increase in purchase of M, and when prices of Aus X decrease, increased X. This is largely attributed to e/r, where an increase in e/r causes a fall in IC but a decrease in price of M –> greater M –> worsening X-M component, and same vice versa

Question 46

What is the importants of AS?

Answer 46

It provides a ‘productive capacity’ for the economy, even if AD is increasing a lot, EG can only increase until full capacity is reached

Question 47

What are the positive effects of EG?

Answer 47

Improved living standards

Increased employment

Question 48

How does EG cause an improved living standard

Answer 48

Faster eco growth results in an increase in real GDP per capita.

Real wages can rise and households have ↑ disposable Y and therefore higher material living standards→ Main reason that countries pursue higher levels of eco growth

Question 49

How does EG cause an increase in employment

Answer 49

Eco growth creates jobs (because labour is a derived demand) and in an economy that sustains strong eco growth, everyone who is willing and able to work should be able to find employment. Over the LT, higher rates of EG are associated with the development of new and more advanced industries. Countries with higher levels of eco growth therefore tend to create more highly paid and highly skilled jobs

HOWEVER, eco growth facilitates for better tech leading to higher structural UE

Question 50

What are the negative effects of EG?

Answer 50

Inflation

Ext Stability worsening

Income distribution

Environmental Impacts

Question 51

How does EG negatively impact inflation?

Answer 51

Higher eco growth can lead to price increases and larger wage claims, contributing to a rise in the level of inflation

Question 52

How does EG cause ext stability to worsen

Answer 52

Eco growth is accompanied by higher disposable incomes, leading to increased spending causing higher levels of imports, worsening the X-M component –> worsening ext stability

An excessive CAD can undermine confidence in an economy

Question 53

How does EG negatively impact income distribution

Answer 53

Eco growth often leads to increased inequality in income distribution as only those who own factors of production benefit

Question 54

How does EG cause detrimental environmental impacts?

Answer 54

If growth is pursued with little regard to its impact on the environment, it can result in pollution, depletion of non-renewable energy sources and damage to the local environment

An extremely high EG is typically seen to have detrimental impacts as well on the environment, as it may be considered an unsustainable EG

Question 55

What are the mixed benefits of EG?

Answer 55

Productivity growth and technological processes

Increased Tax revenue

Question 56

How does EG impact productivity growth and technological processes? WHy is it a mixed benefit?

Answer 56

Higher eco growth leads to higher rates of productivity growth and technological progress due to more efficient resource use, as producers are able to use cost reducing tech and innovations in keeping pace with the rising demand for G+S

Higher productivity can lead to increased demand for labour by employers, helping to reduce the level and rate of UE in the Labour Market

However, increased I into different tech for the aims of achieving higher productivity growth to meet high Demand from relatively high AD –> structural ue

Question 57

How does EG impact increased tax revenue? Why is it a mixed benefit?

Answer 57

Eco growth leads to higher real GDP leads to higher tax revenue for the govt (growth dividend)

Although this may seem bad for tax payers, this additional taxation revenue allows the gov to provide social and economic infrastructure, and to fund the social security and welfare system to provide income support for the aged and lower income earner