Economic Growth refers to an increase in a country’s productive capacity as measured by a change in real GDP overtime hence allowing the country to achieve a higher standard of living and level of income. Australia has undergone 22 consecutive years of economic growth between 1991-2013, averaging between 3-4% in real terms, due to a combination of positive world economic growth ( resources boom) and microeconomic and macroeconomic reforms.
J.M Keynes theory states that the level of economic growth or total output is determined by the aggregate demand to total expenditure of consumers, firms, the government and net exports. He uses the circular flow of income model to measure the income in an economy of ‘equilibrium income’ which is a level of income from which there is no tendency to change.
Aggregate demand refers to the sum of expenditure on domestic output by households( consumption expenditure) , firms( investment) and the government( government expenditure) and the foreign sector( Net Exports or X-M) in an open economy.
AD = C + I + G + (X-M)
• C = consumption expenditure by the household sector
• I= Investment expenditure by the firms sector on new capital goods to increase productive capacity.
• G= Net government expenditure
• X= export expenditure by foreigners on domestically produced goods and services.
• M= import expenditure by residents
Injections are forms of expenditure ( such as business investment (I), government expenditure (G) and exports (X)) which are not a direct function of income, but are ‘injected’ into the circular flow of income. These injections increase the level of aggregate demand and expenditure in the economy. ‘Leakages’ or withdrawals( Savings (S), Taxes (T) and Imports (M)) deduce income from the circular flow of income.
In an equilibrium: AD= C + I + G + (X-M) or Consumption + Investment+ Government Expenditure + (Exports – Imports)
S + T + M > I + G + X,?output falls as aggregate demand is less…