No trade necessary. I hope this will help. Post a reply if you want me to clarify anything.
aggregate demand and its components: Y = C+I+G+XVM
Aggregate demand can be veiwed as the sum of consumtion, investment, government expenditure and the sum of exports, less the cost paid for imports. Aggregate demand is therefore the sum of production of all goods and services (i.e. all injections) in a given period. It can therefore be looked at as national income, denoted by (Y)
injections and withdrawals (I+G+X; S+T+M)
The economy will find itself in a state of equilibrium when all leakages equal injectison. I guess I should explain what equilibrium is.. well thats when the economy is in a state where there is no tendency for change. This occurs when all the leakages (savings, taxation and imports) equal injections (this is investment, government expenditure and exports).
Leakages are defined as savings, taxation and imports, because it can be viewed as money leaving the economy (savings go to the bank, it is not invested in the economy.. taxation goes to the government and imports will see money paid out to overseas investors so in all these examples, money is not being invested back into the economy).
Injections are defined as otherwise, that is as investment, government expenditure and exports as it will see money being 'pumped' into the economy so to speak.
Try to think of the economy as a balloon. Our injections is air put into the balloon, and leakages is when we let air out. Well when you think about it that way, when our leakages equal injections, the balloon stays the same size doesn't it? i.e. it is in equilibrium, in a state where there is no tendency for change.
Ok when injections are greater than leakages, the economy expands, i.e. growth will rise. If leakages are greater than injections, the economy will contract, i.e. demand will be dampened and growth will fall.
the simple multiplier: k = 1/(1VMPC)
The multiplier is the number of times a change in national income will increase as a result of the aggregate demand that caused it.
Ok I know that sounds confusing but think of it this way. Say MPC is 0.8 and MPS = 0.2 well if the government spends like 100 dollars, well out of that 100 dollars pumped into the economy, 20 will be saved and 80 will be spent again. Well out of that 80 dollars, (0.8 * 80) will be spent and (0.2 * 80) will be saved.
That is, a multiplied effect will occur until the money is insignificant. So an increase in AD (thats our government spending 100 in this example) will cause a multiplied increase in national income.
This is proportional to 1/(MPS) but to make it simpler, we let this equal k as keynes the very cool fella figured this all out. (what i dont understand is why the syllabus tries to make it more confusing by using 1/(1-mpc) when they could just write 1/mps but oh well)
measurement of growth through changes in real Gross Domestic Product
Ok so we already know economic growth is the increase in the volume of goods and services over a period of time. GDP reporesents the productive output or capacity of a nation. GDP is the market value of all goods and services in a given time. Therefore, and changes in GDP will give an accurate measure of economic growth. However, the final price is slightly altered to factor in inflation so we get Real GDP (aka GDP at constant prices and therefore a more accurate measure of growth.
sources and effects of economic growth in Australia
Economic growth may be brought on by increases in consumption and investment as this encourages producers to produce more the take advantage of the increase in demand. This may be influenced in a number of ways:
Consumption:
Consumer expectations: future of inflation, interest rates, real incomes
Level of interest rates: increase in interest rates discourage spending
Distribution of income: a more even distribution of income will overall, encourage higher spending levels
Investment:
Cost of capital equipment: changes in government policy, prices, production and interest rates
Business expectations: changes in demand, economic outlook, resources/technology, inflation
business cycle X trends
business cycle trends
1990: -0.34% (global downturn)
1994: +4.5% (upturn)
1996: +3.8% (Asian financial crisis)
1999: +4.4%
2000: +2.3%
