| Demand Factor |
Theoretical Link to Growth |
Evidence |
| Interest rates |
When interest rates are decreased the discretionary income of consumers and businesses will increase. As a result, we may see increased spending on consumption items (C) and business investment (I). (It is important to remember that there is an 18 month impact lag with changes in the cash rate.)
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Interest rates were cut to 4.25% by December 2001, and between 2002 and 2004 economic growth averaged over 3.5%. By 2005, the cash rate was being increased again, and in 2006 economic growth fell to 2.1%. |
| Business Confidence |
As business managers become more confident they will also be more willing to invest in the future. This may mean an increase in investment spending (I) and hence an increase in aggregate demand. |
When business confidence fell in 2000/01 (2.7 on the NAB index) growth also fell to 1.8%. By 2002/03, business confidence increased to 18 on the index, and growth increased to 3.6%. Falling confidence in 2005/6 resulted in rate of growth below 3%.
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| Wage levels |
If wages increase this will allow for higher disposable incomes amongst the public. Again, this should lead to an increase in consumption spending (C) and therefore an increase in aggregate demand. There may be a slight lag in the impact on the economy associated with changes in income levels. (Australians have experienced a decade of very strong growth in wages.)
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Disposable income increased by 9.9% in 2000/01, however low confidence at that time meant that some of this was saved rather than spent. Subsequently, as confidence returned this increase in disposable income was spent, and therefore we returned to strong growth very quickly in 2001/02 (up to 3.9% from 1.8% the previous year). |
| The value of the Australian dollar |
Changes in the value of the AUD will affect the willingness of people and businesses overseas to purchase our exports (X). If the AUD depreciates, this will lead to our products appearing relatively cheaper on the international market, and therefore our exports should increase. This equates to an increase in aggregate demand.
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The Trade Weighted Index increased rapidly after 2004, and as a result our economic growth fell to 2.1% in 2006. (It is important to note that changes in the value of the AUD also have a strong supply side impact, which will be discussed separately.) |
| Income Tax Rates |
If income tax rates fall, consumers will have a higher disposable income. Even though their actual pay has not changed, they will have more money to take home. This will lead to higher levels of consumption spending (C) and therefore higher levels of aggregate demand.
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The increase in disposable income detailed above occurred due to a restructuring of the tax system in July 2000. At that time income tax rates were significantly decreased, and the impact on growth was significant - from 1.8% in 2000/01 to 3.9% the following year. |
| Government Spending |
The government sector is a vital part of the aggregate demand formula. By choosing to increase their spending (G), the government is directly adding to the level of aggregate demand in the Australian economy. (The budget is now used in a different way – see the discussion under Unit 4 to see how a surplus can help stimulate growth.) |
Between 1992 and 1995 the Keating government ran large budget deficits in order to help stimulate the economy after the recession. (eg $16.9 billion in 1992/3, and $17 billion the following year). These deficits stimulated the economy quickly, leading to the strong growth figures seen in those years. (Note: These statistics are "old" because the Federal Budget is no longer used in this way.)
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| Overseas Economic Conditions |
If our major trading partners are experiencing strong economic conditions, then it is likely that they will demand more of our exports. The increase in demand for these goods and service will lead to an increase in aggregate demand. |
In 2003/4 the US economy has returned to strong growth after a recession which had started after the September 11 terrorist attacks in 2001. As a result our exports to that area increased, which put pressure on aggregate demand in Australia. This resulted in our higher growth figures at that time - growth averaged in excess of 3.5% during this period. By early 2008 the threat of lower economic growth in the USA was already affecting the Australian economy. |
Unit 1
Unit 3
