CHAPTER SEVEN

SUMMARY –
ECONOMIC GROWTH
Tahni Valentine
HSC SYLLABUS EXTRACT
ECONOMIC GROWTH
 Growth in the amount of goods & services
produced by an economy over time
 Increased national income
 Indicated by changes in GDP
 Rising growth = rising national prosperity =
better living standards
 Aim = moderate growth
 Growth too high = inflation and CAD
problems
AGGREGATE DEMAND (AD)
 Total demand for goods and services in the
economy
 Aggregate demand increases  aggregate
supply rises  increased production 
economic growth
 Equilibrium:
 Aggregate demand = aggregate supply
 More concerned with short term economic
growth
AGGREGATE DEMAND (AD)
 AD = C + I + G + (X – M)
 C = consumer spending
 I = business investment expenditure
 G = government spending
 X – M = net exports
 Manipulated through macroeconomic
policies:
 Monetary policy
 Fiscal policy
LEAKAGES & INJECTIONS
 Leakages:
 S+T+M
 Savings + Taxation + Imports
 Reduce the amount of money in the system

 Injections:
 I+G+X
 Investment + Government spending + Exports
 Increases the amount of money in the system
LEAKAGES & INJECTIONS
 Equilibrium:
 Leakages = Injections
 S+T+M=I+G+X
 No increase or decrease in growth
 Increase in growth:
 Injections > Leakages
 I+G+X>S+T+M
 Decrease in growth:
 Leakages > Injections
 S+T+M>I+G+X
SIMPLE MULTIPLIER
 The number of times the final increase in
national income exceeds the initial increase
in expenditure

K= 1 OR K= 1
MPS 1 – MPC
 Individuals save more  spend less 
generate less income
NOMINAL GDP
 The ‘raw’ measurement of domestic product
 AKA = money GDP or current GDP
 The aggregate value of all goods and services
in the economy in the current year, at
current prices
 Makes no allowance for changes in the value
of money
 Nominal GDP comparisons over the years are
inaccurate since it is not clear whether the
economic growth represented is due to
increased production or inflation
REAL GDP
 Constant GDP
 Adjusts nominal GDP for inflation
 Allows accurate comparisons of GDP over the
years
ECONOMIC GROWTH
CAUSES OF ECONOMIC GROWTH
 Improved quality & quantity of resources:
 Increased size in the labour force  higher
amount of goods & services produced 
economic growth
 Improving worker skills  increased
efficiency & productivity  more goods &
services produced  economic growth
 Increased capital  more efficient 
production of higher value goods 
economic growth (especially manufacturing
industries)
CAUSES OF ECONOMIC GROWTH
 Improved quality & quantity of resources:
 Entrepreneurship  encourages innovation &
competition  boosts potential for economic
growth
 Natural resources huge boost for growth 
Australia’s growth fuelled by its commodities
 must be managed well, regulation &
taxation required  many African countries
are resource rich but lack capital &
technology to exploit opportunities  source
of conflict & instability
CAUSES OF ECONOMIC GROWTH
 Government policies:
 Main drivers of economic growth
 Ensure efficient utilisation of resources
 Fiscal policy:
 Expansionary fiscal stance  government
increases spending or reduces taxation 
higher budget deficit or smaller surplus 
stimulates the economy  economic growth
CAUSES OF ECONOMIC GROWTH
 Government policies:
 Monetary policy:
 The way the RBA manipulates interest rates
 Low interest rates  loosening monetary
policy stance  expansionary  economic
growth
 High interest rates  tightening monetary
policy stance  Contractionary  reduces
growth
CAUSES OF ECONOMIC GROWTH
 Government policies:
 Microeconomic reform:
 Deregulation or privatisation  rise in aggregate
supply  targeted at various product and factor
markets  increased efficiency & international
competitiveness  economic growth
 Trade policy:
 Free trade agreements have helped Australia
achieve strong growth
EFFECTS ECONOMIC GROWTH
 Firms:
 Economic growth  individual income rises
 demand for products rises  higher
profits  growth opportunities for firms
 Some industries benefit more than others
 Mining sector has expanded dramatically 
shift of labour and capital from other sectors
EFFECTS ECONOMIC GROWTH
 Individuals:
 Employment = derived demand of production
 Firms expand  more jobs available 
unemployment falls  labour becomes
scarce  firms more profitable  wages
likely to rise
 Household expenditure  rise in living
standards
 People become richer  save more 
greater prosperity & long-term security
EFFECTS OF ECONOMIC
GROWTH
 Government:
 More people working  increased taxation 
increased government revenue
 Fall in unemployment  decrease in welfare
payments
 Additional funds  used to reduce public debt 
investment in infrastructure  directed at
improving services
 Governments aim for sustainable growth  never
maximum growth since problems can arise such as:
 Environmental damage
 Increased inflationary pressures
AGGREGATE SUPPLY
 Total level of income in the economy in a
given amount of time
 Y=C+S+T
 Y = Aggregate supply or national income
 C = Consumer spending by households
 S = Saving by households
 T = Taxation by the government
AGGREGATE SUPPLY
 More concerned with long term economic
growth
 Increase in aggregate supply  increase in
total output  economic growth 
reduction in general prices
 Aggregate supply increase when a higher
level of output can be produced for the same
cost
AGGREGATE SUPPLY
 Increased through:
 Workers acquiring new skills
 Adoption of new technology
 Measure to improve efficiency
 Capacity constraints:
 Major focus of aggregate supply
 Bottlenecks in Australian ports
 Skill shortages
 Federal government invests in
apprenticeships and traineeships
TRENDS IN ECONOMIC GROWTH
 Never stable – subject to ups & downs of the
business cycle caused by aggregate demand &
supply
 Australia usually experiences growth in real GDP
 Subject to strong economic growth after a
recession
 Recession in the early 1990’s – longest period of
sustained growth since
 No recession in Australia – global recession –
Australia unaffected due to Asia Pacific being
less effected & stimulus package