Aggregate Demand =
C + I + G + X - M
push up - Stage three tax cut - minimum wage increase
push down ad high intrest rates more incetive to save - more expensive to borrow - less williing and able to spend - lower discretionary income - decrease consumption - decrease ad
Aggregate Supply
As pushed up - skilled immigration/ educational program (free tafe)
As pushed down - productivity down
DMG -
def measurement calc consequences
if too high other macro goals living standards
Micro Vs Macro
Microeconomics
- Individual Markets
- Effect on price of a good
- Individual labour markey
- Individual consumer behaviour
- Supply of good
Macroeconomics
- Whole economy
- Inflation
- Employment/Unemployment
- Aggregate Demand
- Productive capacity of the economy
Living Standards
Material Living Standards – The level of economic wellbeing influenced by the annual levels of per capita GDP, incomes and the consumption of goods and services.
- Access to G&S
- Measured/impacted by: real gdp, disposable income, unemployment
- More GDP more G&S more living standards
Non-material Living Standards – Includes personal happiness, self-fulfilment, low crime and death rates, absence of pollution and political freedom.
- Quality of life
- Enviroment, physical, mental, life expectancy, crime, literacy.
The difference: Material measures access to goods and services. Non-material considers intangible characteristics.
Economy
An Economy is the system for deciding how scarce recources are used so that goods and services can be produced and consumed.
Economic activity refers to production, income and expenditure that takes place across the whole economy.
Production - value place on G&S produced
Income - Earned by workers
Expenditure - Amount spent on G&S
Want it to be equal in an economy
Circular flow
Leakage/Injection
Flow 1 - Household to Buisness
Flow of productive natural, capital and labour recources supplied
Flow 2 - Business to Household
Flow of incomes to owners selling recources
Flow 3 - Household to Business
Flow of total spending on Australian production - AD = C + I + G + X - M
Flow 4 - Business to Household
Flow of final goods and services sppliec or produced
Savings - Financial Sector - Investment Spending
Taxes - Goverment Sector - Goverment Spending
Imports - Overseas Sector - Exports
Injections increase future consumption and spending
Leakages reduce future consumption and spending
The Business Cycle and Economic Indicatiors
Expansionary or recovery
- The level of real GDP is rising fast (3% per year)
- Strong spending, Falling unemployment
- Accelerating Inflation
Peak
- GDP max level growth eases
- Inflation accelerates quickly
A strong rate of economic growth
Consumer and business confidence are high
A great willing to spend
A reduction in saving
A willingness to take on new debt
Expand production
Increased demand of labour
Contraction
- Rate of GDP is slowing
- Weaker spending, lower production,
- Unemployment rises
- Inflation eases
Higher interest rates slow AD
Assets likely to be overvalued
Consumer and business confidence likely to fall
Inflation will fall, unemployment will rise, GDP slows
Leakages start to increase relative to injections
Trough
- National production reaches its lowest level
- Negative rates of economic growth
- Drop in production
- Unemployment increases - depression
Low rates of growth, low confidence, high saving rates, high unemployment, spare capacity and failing inflation
Leakages higher than injections (higher saving, lower imports)
Extreme Phases of the business cycle
Boom - a period of strong economic expansion where many business are operating at full capacity or above capacity, and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.
Recession -when output has fallen for a period of time and the unemployment rate increases. If GDP actually falls over two consecutive quarters (i.e. a period of six months or more), this is called a recession. Here, unemployment rises (perhaps well above 5 or 6 per cent) while inflation slows (perhaps to less than 2 per cent, or it may even become negative where there is deflation).
Depression - a very severe recession. There is a large contraction in the economy, and the unemployment rate is likely to be at a very high level.
Aggregate demand for goods and services (AD)-Consumer
AD = C+I+G+X-M
Factors that influence AD:
Disposable income
Interest rates
Consumer confidence
Business confidence
The exchange rate of rates of economic growth overseas.
Slopes down from let to right. This is because as prices fall, AD increases
Wealth Effect
Interest rate effect
Foreign exchange effect
C: Consumption Expenditure
Total value of all expenditures on individual and collective consumption by resident households and non-profit institutions serving households.
Include consumer durables, semi-durables, single-use goods and services
The Largest Component of AD (60%)
The following affects levels of consumption spending
Disposable income
Consumer confidence
Savings rates
Interest rates
Rate of population growth
Budgetary policies
I: Private Investment Expenditure
The purchase of new equipment and plant, buildings and vehicles
To increase the firm’s ability to produce goods and services
Include stock purchased by firms and new housing by households
G: Government expenditure
All demand for goods and services by Federal, State, and Local governments
X-M: net exports
Exports: are Australian-made goods and services that have been purchased by overseas residents
Imports: Foreign-made goods and services that are purchased by Australian residents
Trading partner up and aud exchange rate down
exports up
more consumption more exchange rate more imports
Factors
Changes in disposable income
Increases =Increased AD -’C’
Interest rates
Decreased interest rate=Increase AD-’C’ and ‘I’
Consumer and Business confidence
Increased confidence =Increase AD ‘C’ and ‘I’
Exchange rate
Decreased exchange rate = increased X and reduced M=Increased AD
Rate of economic growth overseas
Increased growth overseas =Increased AD - ‘X’
Intrest Rate:
Interest rate = cost of borrowing
When interest rates fall, householders and business are likely to save less and borrow more. Lower saving and increased borrowing economic growth
Rise in discretionary income (income is available to be spent after paying for essentials) boost Consumption and Investment
Overseas:
An increase in economic growth overseas - an increase in demand for Australian exports of consumer items, capital items or raw materials.
Disposable Income
Increase in income or decrease in tax leading to increase disposable income leading to an increased ability to purchase goods and services an increase in Consumption Expenditure
Only when growth in disposable income exceeds the rate of inflation.
Exchange rate:
Increase in AUD value leads to a fall in the international competitiveness
leads to
Improve supply condition for Australian business replying on imported products in their production process
Term of Trade:
TOT: compiling an index of export prices and dividing this by an index of import price.
A rise in TOT leads to beneficial to Australian economy
The value of Net exports increases AD and economic growth increase
Boost of Australian income, life consumption and investment
Aggregate Supply (AS)-Business
Total volume of goods and services that producers are able and prepared to supply to the market.
It represents the ability of an economy to make available the goods and services to meet AD
Closely related to Productive capacity: Increases in AD will only lead to growth in the production of goods and services if the economy has sufficient productive capacity (AS) to meet that demand
Cost of production and product efficiency
AS Factors
Is determined by the level of inputs available to produce goods and services, and how efficient these inputs are used.
Development of natural resources
Climate change and severe weather events
Level of industry technology and development
Developing capital resources through business investment
The quantity of labour resources available
Government provision of infrastructure
Labour productivity or efficiency
Workers/managers adopting world’s best practices
Government microeconomic efficiency reforms
Strong and Sustainable Economic Growth
Growth means 3-3.5%
(this is enough to create jobs and improving living standards, but not strong where inflation or enviromental degredation)
To acheive the highest growth rate possible, consistent with strong employment growth, but without running into unacceptable inflationary, external environmental pressures.
Still sustainable when productivity growth is strong, GDP is 4% (allowing stronger demand and production to take place without inflationary or external concers)
Consider the international growth rate
WHY CANNOT BE TOO HIGH
- Causes inflation to climb
- Results in significant external pressure (an excessive current account deficit and/or net foreign debt)
Over use of natureal recources: common access goods
Measuring economic growth
GDP - (Gross domestic product measures the value of production)
- Measure the amount of production taking place in the economy
Nominal GDP
- Does not account for the increase in prices
Real GDP
- Want real gdp between 3-3.5%
- Remove the price effect (inflation)
CALCULATE GDP% Growth
(NEW - OLD)/OLD x100
Annualised - Qaurterly Growth
Quarterly = (GDP end - GDP start)/GDP start x 4
Influences on GDP
AD conditions:
Variations in consumer confidence
Changes in consumer confidence
A change in disposable income
The rate of population growth
Changes in interest rates and monetary policy set by the RBA
A change in the budget outcome (the size of the budget deficit or surplus)-more info in Unit 4
Instability overseas in the rate of economic growth
Changes in terms of trade
Exchange rate
AS conditions:
The level of staff wages and salaries
Labour on-costs
Labour productivity
R&D
New technology
Disruption to supply chains
The age distribution of the population
The labour force participation rate
The cost of electricity, gas, water and other utilities
Changes in the adequacy of infraucture and
Strong Rates of economic growth
Growth in real income: material and non-material living standards
Lowering the unemployment rate
Increased ability of government to provide essential services:
taxes allow governments to spend more on essential services, helps to increase living standards in material terms (human and physical capital)
Less well off/disadvantaged members of society
If growth is too high or slow
Too High - External Pressure:
Every $ 1 spent in the Australian economy leads to roughly 20 cents of import spending
Australia relies heavily on imports of, technology, medicine and cars
This can lead to a current account deficit.
Too High - High inflation:
When production occurs, the economy moves closer to its productive capacity (PPF)
As we move closer to capacity, shortages strate to emerge increasing prices which suppliers will pass on to customers.
Negative impact on material and non-material living standards.
To Slow - Unemployment:
One person’ spending is another persons job (the circular flow model).
If there is a slow down in growth, business require less labour.
This can lead to job losses and higher unemployment
Negative impact on Material and Non-material living standards
