Unit 1
Unit 3
Economic Growth
Demand Factors and Sustainable Economic Growth
Any factor that will cause an increase in aggregate demand may lead to an increase in real GDP in Australia. As such, we can assess the impact of a change in a demand factor by using the supply and demand graphs.
As the equilibrium point has moved to the right, it is possible that the economy has seen some growth during this period. This growth can be achieved through many demand side factors. It is important that you are comfortable when linking any change in a demand side factor to changes in Australia’s rate of growth. Let’s consider an example:
From this a link between changes in consumer confidence and our rate of growth becomes apparent. In theory, when consumers become more confident about the future, they are more likely to spend their disposable income, rather than save it. This will be reflected in an increase in the consumption spending (C) component of aggregate demand, and as a result the demand curve will move to the right. Similarly, as confidence falls we will see the demand weaken, and so the growth rate may slow.
During 2008 consumer confidence fell dramatically. While the Reserve Bank and the federal government both responded with aggressive expansionary policies, falling confidence resulted in lower consumer spending in the second half of 2008 and early 2009. It is not surprising, therefore, that the rate of growth fell to only 0.8% for the year ending June 30th 2009. However, we can also see that the strong expansionary stance taken by the government had a positive impact on consumer confidence during this period, as the Westpac index showed an increase during that year.
On the other hand, it is worth noting that the graph above does disguise a lot f the variability in confidence during this period. The data for consumer confidence has been taken from June of each year. In June 2011 it appears that confidence levels were steady (based on a comparison with data from the previous year). In reality confidence was falling as the European debt crisis became apparent. This caused a contraction in consumption spending, and as a result lower rates of economic growth were recorded at this time.
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