If investment or consumer spending goes up, economy expands, thus if investment or consumer spending goes down, economy contracts.
- explanation of the factors that affect aggregate demand
Aggregate demand is the total expenditure on goods and services by the private, government, and external sector of the economy.
Here explains how each component of aggregate demand influences the overall level of aggregate demand.
- Personal consumption depends on a number of factors like the level of disposable income, change in the level of savings, consumer credit availability and costs, consumer confidence and expectations and marketing.
Firstly the level of household disposable income is income that remains after tax has been paid, or the income available to the income earner to use according to choice. Consumption spending rises as disposable income rises. Therefore, disposable income is in a direct relationship with aggregate demand.
Secondly changes in the level of savings can be used in two ways for consumption or for savings. Generally consumption spending accounts for much more disposable income than savings do. Thus the higher the proportion of disposable income that is saved, the lower the proportion that is available for consumption. An increase in savings therefore tends to decrease consumption expenditure and, ceteris paribus, decrease the level of aggregate demand. This affects aggregate demand.
Thirdly consumer credit availability and cost affects personal consumption. The more credit that is available in the economy and the easier it is to get, the higher consumer spending is likely to be. On the other hand, the less credit that is available in the economy and the harder it is to get, the lower consumer spending is likely to be. This theory also affects aggregate demand.
Moreover, consumer confidence and expectations is also one of the reasons to affect personal consumption. If consumers are confident and feel secure about their economic future, they are likely at least to maintain their level of spending. However when the economy contracts, usually a fall in consumption. So economy recession or economy boom affect aggregate demand.
Finally, marketing has the effect to increase personal consumption. It does not influence customers in their choice of brands, but actually brings new customers of a product range into the market. This story affects aggregate demand.
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Private investment spending is 2nd factor that affect aggregate demand. It consists of rates of taxation and government incentives, the cost and availability of credit and the level of business confidence.
Rates of taxation and government incentives alter the profitability of undertaking productive activity and may thus the level of private investment expenditure.
The cost and availability of credit determine the level of private expenditure. Private expenditure is financed by borrowings from the financial sector, so high interest rates discourage investment in another way. The opportunity cost of investing is also high when the funds could earn high levels of interest on deposits with a financial institution or converted to government securities. This is an example to affect aggregate demand of private investment.
The level of business confidence is also a factor that affects aggregate demand itself. The anticipated rate of return is the profit generated by an investment is likely to proceed on the assumption that high profit will result.
- Government spending is expenditure independent of income. And it is determined by the level of funds available, the state of the economy and political stance.
The level of funds is available to the government sector from taxation receipts and government borrowings.
The state of the economy influences the macroeconomic policies of government and thereby influences the level of government expenditure. In periods of contracting economic activity, for instance, government attempts to stimulate the level of aggregate demand by expansionary macroeconomic policies. The government sector generally increases its level of expenditure, which in these circumstances, is most likely to be funded by government borrowings.
Political stance is government’s political ideology with regard to the size and role of government in a market capitalist system.
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External sector is 4th factor that affect aggregate demand. Change in exports and imports will explain the influences on net export spending. It is determined by the world economy, competitiveness and governments external policies.
The world economy a factor to affect aggregate demand. High inflation and specific trends in particular economies may affect the Australian economy. And also Australia tends to reflect world-wide patterns of economic activity. When world demands falls, demand in Australia falls. If world demand is down, export values fall to reflect falls in both the quantity and the prices of exports.
The competitiveness is affected by efficiency throughout the economy.
high labor productivity and efficient use of capital are the keys to
achieving efficiency. Exchange rate is also the key to determine cost
competitiveness because it influences export and import prices. In brief,
high exchange rate means high export prices, which puts more pressure
on domestic costs to maintain competitiveness. The high exchange rate
also reduces prices of imports, which may mean that they sell better in
Australia. the critical combination for aggregate demand is where
exports increase and imports decrease. So a relatively lower Australian
dollar may have a positive influence on net exporting. This affects
aggregate demand.
Government’s external policies are a factor that affect aggregate demand. Any activity of government that promotes exports and limits imports will affect net export spending. The balance between export incentives (e.g. tax concessions, export grants), on one hand, and protectionist measures (e.g. tariffs and quotas or liberal import policies, on the other, is therefore critical for net export spending and the aggregate demand.
- explanation of the multiplier effect
Changes in the economy’s levels of consumption, investment, government spending or net exports will cause a more than proportional change in the level of aggregate demand, as the extra spending leads to extra income which is then spent, leading to more income and more spending.
- the impact of exports on production and employment in Australia
Figure 2 The flows in the economy
Inflows I, G,X
Full employment
Unemployment
I=investment
G=government spending
Economic activity, income, output, X=exports
Employment S=saving
T=taxation
M=imports
outflows S, T, M
as you see figure 2, it explains the impact of exports on production and employment. Exports as inflows push up the level of outputs which is production and employment. That is, exports bring us more production and employment.
- Select two of the following topics:
- the Australian dollar exchange rate
- inflation
- balance of payments/current account deficit
- effect of low Australian on inflation
- market deregulation
for each topic (select two):
- find related article
- analyze the article
- relate the content of the article to theory covered in class
-the Australian dollar exchange rate
Inflation targeting and exchange rate fluctuations in Australia.
Several recent papers have explored the possibility that inflation-targeting central banks in small open economies pay too much attention to exchange rate fluctuations; changing short-term interest rates in response to fluctuations that have transient effects on inflation could be counterproductive. Accordingly, we investigate whether the Reserve Bank of Australia, while ultimately concerned with aggregate inflation and output, should set short-term interest rates on the basis of expected inflation in the non-tradable sector or go even further and react directly to expected wage pressures in that sector뭩 labor market. Our results indicate that there are no clear gains to be had from responding only to measures of inflation which abstract from temporary exchange rate fluctuations. The variability of inflation and output would be at least as great as under the current framework, while the shocks that have typically hit the Australian economy over the past couple of decades are such that interest rates would be no less variable than under the current inflation-targeting framework. We attribute these findings to the forward-looking nature of the current inflation-targeting framework, whereby exchange rate shocks are ignored in the setting of policy if they are expected to have only a temporary impact on inflation.
Exchange Rate Pass-through: The Different Responses of Importers and Exporters
This paper examines exchange rate pass-through for the prices of both imports and manufactured exports. It is found that, in the long run, exchange rate pass-through over the docks is complete for both classes of good. However, in the short run, responses to currency movements differ significantly. Difference occur with respect to the speed of pass-through and its pattern over time. Pass-through to import prices is found to be more rapid than that to manufactured export prices. However, evidence is presented of a recent and substantial increase in pass-through to manufactured export prices, in keeping with increased international integration. Conversely, existing patterns of exchange rate pass-through to import prices are found to accord with historical experience. The implications of this are discussed with respect to the balance of payments and inflation.
-Market deregulation
Critical Notes on Labour Market Deregulation
First the financial market, then the product market... surely the time has come for deregulation of the labour market? Social theorists argue that labour market deregulation is something of an oxymoron. The market for labour power will always be regulated by someone, if not by the state or the unions then by the untramelled power of capital. This, i think, is true, but it is not central to the purpose of this paper, which is rather to assess the narrowly economic case for deregulation.
The Effects of Financial Deregulation on Integration : An Australian Perspective
This paper uses the model developed by Jorion and Schwartz (1986) to test whether the Australian capital market is segmented from or integrated into the world capital market. Using industry portfolio data for the period 1974 to 1992, we examine whether the Australian market was segmented from the world financial markets in the first half of this period, when the domestic market was subjected to considerable regulatory controls.
- relate the content of the article to theory covered in class
4a. Outline the key factors that determine the level of economic growth. Discuss two factors that likely to contribute to Australia’s economic growth over the next decade.
Achieving economic growth raise the level of any components of aggregate demand made up of consumption, investment, plus government spending and net export spending.
First of all, it is required to push up the level of consumption from households sector which consists of a number of factors.
Disposable income rises as consumption spending rises, however the higher proportion of disposable income that is saved, the lower the proportion that is available for consumption. Consumption spending is related to the level of interest rate and the availability of consumer credit. The more credit that is available in the economy and the easier it is to get, the higher consumer spending is likely to be. For example, loans from financial institutions and credit cards. Moreover consumer spending has a close relationship with consumer confidence and expectations, that is, the economic future. Consumers maintain their level of spending under the situation. Finally marketing as well, stimulate consumer spending. For example heavy advertising influences consumers in their choice of brand, but brings new consumers of a product range into the market.
Secondly it is also required to push up the level of investment from firms sector. Government policies regarding rates of company tax, indirect taxes and incentives affect business perceptions. In other words low rates of company tax and indirect taxes bring firms to push up the level of private investment expenditure. And also the cost and availability of credit are important factors. Private investment expenditure is mainly financed by borrowings from the financial sector. So low interest rates from the financial sector encourage investment.
4b.critically evaluate the statement:
“Resources should always be used efficiently in a developing economy”.
In any economy our needs and wants are not limited, changeable, recurrent and complimentary. Satisfying those wants and needs means producing more goods and services. Where do we produce from? And what is production? Production is the process where factors of production, that is, land, labor, capital and enterprises are combined by producers to provide valuable goods and services. production can be increased by using more resources, or by using existing resources more efficiently. However to achieve its productive potential, a nation must provide not only for the full employment of its resources, but also for full production from those resources. Resources should be allocated in such a way as to make the maximum contribution to output. This is why “Resources should always be used efficiently in a developing economy” for economic growth.
- Explain the major macro-economic objectives of the federal government. In your answer you must discuss the following:
- reasons/objectives of the policies
Their policies are mainly for improving standard of living, they consists of internal balance, external balance, and economic growth. Internal balance is that the federal government tries to keep in a minimal rate of inflation and minimal rate of unemployment. External balance is to get rid of deficits on the current account of the balance of payments and encompasses a reasonably stable exchange rate at a level compatible with domestic economic welfare. Economic growth is obviously to improve standards.
- potential conflicts/problems in achieving such objectives
Employment stability versus price stability the simultaneous achievement of these two objectives is almost impossible. And it brings inflation in the economy.
Economic growth versus employment stability bring lower employment levels in short term because economic growth can result from technological changes. Economic growth can be accompanied by structural unemployment.
Employment stability versus external stability bring our inflation rate exceeds that of our major overseas competitors, then Australia’s export competitiveness and that of our import-competing industries can suffer.
It is the budgetary stance of the central government of a country.
Its objective is to change level of spending in the economy by altering government spending and/or taxation.
influences the cost and availability of credit through the Reserve Bank of Australia. The ultimate objective of this policy is to assist the economy to achieve economic growth and full employment with relatively low inflation. However, it is possible to influence these objectives directly. The main intermediate objectives of monetary policy are interest rates and the availability of credit. Changes in interest rates are likely to affect private investment spending to a far greater extent than consumer spending. This stimulates aggregate demand.
- Analyze the present state of the Australian economy against the present state of an Asian Pacific economy.
Australian economy ranked fourth in size in the Asian-pacific next to Japan, China and Republic of Korea.
Table 1
If you look at table 1, it shows that GDP growth rate is outstanding compared to other Asian countries. The growth of the Australia economy is blessed with the business section which it is remarkable, is the basis of a low inflation and a low interest rate, and was excellent in competitive power, the labor market which is rich in pliability, and the efficient and democratic government section.
- explain the reasons why Australia participates in international trade. Your answer is to discuss the following:
Y=C + I + G + (X – M)
Let’s take a look at (X – M) from GDP expenditure. The balance of payments is directly related to Y, that is, net income affects GDP(I). More exports than imports contribute to push up the level of GDP(I), so Australia participates in international trade to look for better balance of payments.
- the effect of exchange rates on the economy
When exchange rates is high, it is the right time to import. On the other hand, when exchange rates is low, it is the right time to export. For example, rice trades 50 cents and 70 cents/kg with Japan, which is the better rate to have a business with Japan? It is clear to trade at 50 cents/kg with Japan that brings more money in Australian economy. That is, very high exchange rates is not favorable to push up the level of GDP (I).
Foreign debt means the total amount which, at any given time, Australian residents owe to overseas countries. In other words, foreign debt is an excess of imports over exports, which also affects investments as inflows. As a result Australia’s foreign debt pushes down the level of GDP(I).
- Australia’s current account deficit
Australia’s current account deficit is the net income deficit. Excess imports that is foreign debt causes current account deficit. In international trade, it is possible to reduce the amount of current account deficit to increase net income in surplus, which also means affect GDP (I). This is why Australia participates in international business.
Bibliography
Fraser, I and Gionea, J and Fraser, S (2003) Economics for Business, 2nd edn. NSW: McGraw-Hill
Ryan, C. and Thompson (2000) ‘Inflation targeting and exchange rate fluctuations in Australia’, RBA Research Discussion Papers
Dwyer, J. Kent, C. and Pease, A (1993) ‘Exchange Rate Pass – through:’, RBA Research Discussion Papers
King, J.E. (1997) ‘Critical Notes on Labour Market Deregulation’ La Trobe - Department of Economics
Ragunathan, V. (1997) ‘The Effects of Financial Deregulation on Integration : An Australian Perspective’, Melbourne - Centre in Finance
M’zungu, S. (2003) Note Taking, TAFE, Goldcoast Institute of TAFE
T, Suzuki. (2003) Economic & Social Data Ranking / Developed countries (OECD) http://web.hhs.se/personal/Suzuki/default.htm
T, Suzuki. (2003) Economic & Social Data Ranking / ASIAN countries (Japan, China, NIEs & ASEAN10) http://web.hhs.se/personal/Suzuki/index-ae.html
