Hsc Economic Textbook: Topic 3 Summary

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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 Gross Domestic Product (GDP) i.e the percentage increase in the value of goods and services produced in an economy over a period f one year, adjusted for the rate of inflation

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 (level of aggregate demand). One of the best ways of understanding this perspective on economic growth is to review the factors that influence economic growth or aggregate demand, which is calculated by adding its components. Aggregate demand is represented by the symbol Y, and is showed in the equation:

Y (output) = AD = C + I + G + (X- M)

Aggregate supply = Aggregate demand

(National income) (National expenditure)

Y (national income) can also be looked upon as aggregate supply for the economy as it represents the income paid to households for producing the current level of output

C + I + G + X - M (aggregate demand) can also be looked upon as total output, as it represents the amount of planned consumption, investment, government spending and net export spending, that is undertaken at a given level of national income.

Any change in one of the components that make up the aggregate demand can change the equilibrium level of national income (Y). A change in demand can change the overall level of economic activity.

S + T + M = I + G + X

Leakages = Injection

Saving, taxation and spending on imports are leakages because they take money out of the circular flow...