examine the arguments for and against increasing economic growth rates
Apply economic skills
identify and analyse problems facing contemporary and hypothetical economies
calculate an equilibrium position for an economy using leakages and injections
determine the impact of the (simple) multiplier effect on national income
explain the implications of the multiplier for fluctuations in the level of economic activity in an economy
You will learn about:
aggregate demand and its components: Y = C+I+G+X–M
injections and withdrawals (I+G+X; S+T+M)
the simple multiplier: k = 1/(1–MPC)
measurement of growth through changes in real Gross Domestic Product
sources and effects of economic growth in Australia
increases in aggregate supply – improvements in efficiency and technology
trends in business cycle
Why is Economic Growth Significant?
Ref: "Economic growth does not guarantee rising happiness: An old paradox lives on" (The Economist, 21/03/2019) Philosophers from Aristotle to the Beatles have argued that money does not buy happiness. But it seems to help. Since 2005 Gallup, a pollster, has asked a representative sample of adults from countries across the world to rate their life satisfaction on a scale from zero to ten. The headline result is clear: the richer the country, on average, the higher the level of self-reported happiness. The simple correlation suggests that doubling GDP per person lifts life satisfaction by about 0.7 points.
Ref: Dixon & O'Mahoney, 2020: Workbook) Explain TWO costs of higher levels of economic growth for an economy.
Firstly, higher levels of economic growth increase the level of demand and will usually result in upwards pressure on prices and wages, leading to higher inflation. This is particularly the case when the economy is producing near to its capacity whereby aggregate supply cannot meet aggregate demand. For this reason, the Reserve Bank attempts to keep growth at a sustainable level to avoid large increases in interest rates and fluctuations in the level of growth. Secondly, higher levels of economic growth may lead to external instability. Economic growth often increases the disposable incomes of consumers. This will usually result in an increase in the volume of imports as consumers purchase more goods from overseas, leading to a deterioration of the balance on goods and services, and a worsening of the CAD.
Read Dixon & O'Mahoney (2020) Ch. 7.6: The Effects of Economic Growth. Now, in your workbook: explain TWO benefits of higher levels of economic growth for an economy. Then, on the padlet below: give a real-world example of when a country enjoyed one of the benefits you described.
Try this interactive:
Snapshot Comparison This interactive tool allows you to compare snapshots of the economy at different points in time. Click on the the Reserve Bank of Australia image below. To create your customised snapshot comparison choose two different periods of time or two important events. Before heading to the link, predict economic growth rates for: (a) GFC 2.6% (b) COVID-19 Pandemic -6.3% (c) Early 1990s recession -1.2%
Mindmap the arguments for and against increasing economic growth rates. You can use this RBA Explainer.