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Federal Budget 2012:Goods, services, distribution,

economic growth and the business cycle

Key people in the Budget 2012

Created by O. McIntosh, Newstead Campus, Tasmanian

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Created by O. McIntosh, Newstead Campus, Tasmanian

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Terms you should know

Goods and services Gross Domestic Product (GDP)

Factors of production GDP per capita

Standard of living (including HDI)

Equitable distribution of output/production

Infrastructure (social overhead capital)

Inequitable distribution of output/production

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RESOURCE REWARD

Natural resources (land) ?

Labour ?

Capital ?

Enterprise ?

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Equilibrium

• Equilibium occurs in the circular flow when the sum of all the leakages is equal to the sum of all the injections to the economy.

Savings (S) +

Taxation (T) +

Imports (M)=

Investment (I) +

Government expenditure (G) +

Exports (X)

LEAKAGES = INJECTIONS

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The business cycle

GDP

Time

×× AB

Although this economy is generally growing, it will experience downswings or recessions (point A) and upswings or booms (point B).

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Impacts of the business cycle

Recession Boom

Falling production of goods and services.

Falling levels of consumption and investment.

Rising unemployment.

Falling income levels.

Falling quality of life.

Increasing production of goods and services.

Rising levels of consumption and investment.

Falling unemployment.

Rising income levels.

Rising quality of life.

Created by O. McIntosh, Newstead Campus, Tasmanian

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Created by O. McIntosh, Newstead Campus, Tasmanian

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Government policy aims …

• To minimise fluctuations in the business cycle.

• For a low rate of inflation.

• For a low rate of unemployment.

• For stable, sustainable economic growth.

Government policies are known as MACROECONOMIC or COUNTER-CYCLICAL.

A balanced budget

• This occurs when total government revenue is equal to total government expenditure

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Budget surplus and deficit

• Surplus: a positive balance, where total government revenue is greater than total government expenditure

• Deficit: a negative balance, when total government expenditure exceeds total government revenue

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Created by O. McIntosh, Newstead Campus, Tasmanian

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Measuring economic growth

• To measure the annual rate of change in real GDP:

• Real GDPcy – Real GDPpy x 100 Real GDPpy 1• Where cy stands for current year and• py stands for previous year• Between 1990 and 2003, Australia sustained the

second highest average economic growth rate in the industrial world (OECD members), averaging 3.8 per cent.

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Aggregate demand (AD)

• AD is the total demand for goods and services within the economy over a given period of time.

AD = C + I + G + (X – M)

where C is consumer spending, I investment spending by business, G government expenditure and (X – M) net exports.

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Aggregate supply (Y)

• Y is the total productive capacity of an economy.

Y = C + S + T

Where C is consumer spending, S is savings and T is taxation.

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Equilibrium

Exists when AD = Y

Or

When leakages = injections

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Influences on consumption

• Consumer expectations/confidence

• Level of interest rates

• Distribution of income

• Average propensity to consume (APC)

• Average propensity to save (APS)

• Marginal propensity to consume (MPC)

• Marginal propensity to save (MPS)

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Influences on investment

• The cost of capital equipment (taking into account interest rates, government policies, price or productivity of labour).

• Business expectations (demand, outlook, new resources, technology).

• Inflation.

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Multiplier process

• Measures the number of times an increase in national income exceeds the aggregate demand that caused it.

• Example:

• An initial increase in national income is $10,000.

• MPC = 0.8, which means MPS is 0.2.

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Calculating the multiplier effect

• K is the multiplier

• K = 1 = 1 = 5

MPS 0.2

If the initial increase in national income is $10,000.

∆ Y = k x ∆ AD = 5 x $10,000 = $50,000

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Think about it …

• If the government wanted to increase national income by $25 million, by how much would it have to increase its own spending levels?

• Information: MPC = 0.8

?

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Effects of economic growth

• Living standards (increase in real GDP per capita)

• Employment (high labour participation rate)

• Inflation (government aims for sustainable rate of economic growth)

• External stability (watch that imports do not threaten current account deficit)

• Environmental impacts (externalities)