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7 ECONOMIC GROWTH Economic Growth involves an increase in the volume of goods and services that an economy can produce over a period of time It is measured by the annual rate of change in real GDP ie The increase in the value of goods and services over a period of one year adjusted for the rate of inflation The ABS uses a variety of approaches for measuring GDP in Australia These measures are known as the GDPIncome GDPProduction GDPExpenditure methods The official measure of economic growth takes an average of these 3 indicators of growth and is known as GDPA 71 The Components of Aggregate Demand John Maynard Keynes developed a theory which stated that the most important influence on economic growth was the total level of spending in the economy - that is the level of aggregate demand If households and business firms were generally pessimistic about the future economic outlook housholds would tend to spend less on consumer goods and save more and business firms would be reluctant to invest in capital goods This would result in an overall decline in aggregate demand with falling production and rising unemployment The economy is in equilibrium where AD C I G X-M Aggregate Supply Aggregate Demand The Circular Flow Model reveals that based on the aggregate demand equation above certain economic factors can be identified that are either leakages or injections to the overall level of economic activity The economy is in equilibrium when leakagesSTM injectionsIGX An increase in leakages causes a downturn in the level of economic growth and an increse in injections causing an upturn Influences on consumption Consumer expectations If consumers expect a higher rate of inflation higher real incomes or future shortages of goods then they would tend to spend more and save less in the short term and vice versa
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