Econ Class 10

Given data (RBA), what should government do??

Fiscal Policy

The value of the quantity of goods and services produced by an economy Total GDP is also total income.

• When a product is sold, people that contribute to its production get its profits (including investors!)

GDP(aggregate expenditure) = C + I + G + (X - M)

• Households spend and in return get goods and services from firms
• Households provide resources (labour) and receive income from firms
• Firms produce output which is consumed by households
• All output produced by economy is equal to income, which equals expenditure!!!
  • Circular flow model
• Consumption expenditure is expenditure by the households.
  • Parents buy stuff, firms get their money, and produce things via the resources households provide, and households receive incomes.
  • Firms can buy off each other, e.g. farmer buy tractor off firm, (Known as investment expenditure), farmer sells products and gain income.
  • Both households and firms produce, giving expenditure, income, and output.
• Saving exists.
  • Firms take savings and inject it back into economy as investment.
• Government exists.
  • Firms and households pay taxes
  • When governments spend money, they inject money into the economy. They buy goods and services from firms. Firms require capital to do things, buy capital from other firms, etc.
  • Government employment is spending, generating income which goes to the households.
  • Governments can change how much they spend.
• Export/Imports exists.
  • Exports: something you sell overseas.
    • When sold to foreigners, we get expenditure, which becomes our income
  • Imports: something we buy overseas
    • We send expenditure overseas, which becomes income for foreigners.
  • In Australia, our exports/imports are roughly balanced.
    • But currently we have a trade surplus, i.e. we export more than we import.

All expenditure in economy becomes income (of someone else)

• You buy some, i.e. you expend, and someone gets your money as income, i.e. from household to firm to household. This is equal to the value of the output of an economy

BTC represents ==fluctuations in the level of economic activity over time in an economy==.

Sometimes, an economy produces less/more output. Either way, output relates to our income.

Purpose of government (meeting economic objectives) is to have household income always increasing.

• Thus we must increase output, as they are both equal
• GDP thus must also increase. So when governments try to increase GDP, they aim to increase household income.

GDP, Aggregate expenditure, and Aggregate Demand are essentially the same

• For Aggregate expenditure

Investment: expenditure on capital equipment by firms(?)

• New factories, new machinery, etc.
• Expanding ability of economy, expanding capacity, is not a bad thing!!!

Firms have inventory. Shops hold inventory, and each day a certain amount of stock will be sold, and then it will be topped up.

Planned investment: factory plans to produce a specific number of goods which they predict will be consumed.

Everyday there is a planned level of production.

What if there is an increase in the income of consumers?

Maybe then, the amount of goods sold increases.

This is outweighed by their planned investment, and thus they will not keep up with demand. They will eventually run out.

This results in unplanned investment, as then the shop asks the factory to increase production.

This increases output, and thus GDP increases.

In some cases, such as this, expenditure is greater than income, as more people buy than there is to be replenished.

Shops take things out of their stock to sell, i.e. use their savings.

Recall: Aggregate Demand.

The government can rapidly create jobs via government spending. This results in increased output.

In booms, government spends less money.

This is fiscal policy.

Aggregate Demand: Total demand in an economy, of all consumers, business, government and net export. Governments can change this demand.

Aggregate Supply: Total amount of output in an economy, coming from firms and from imports.

What does it look like if inventories were decreasing?

• Aggregate demand must exceed aggregate supply.

What if inventories were increasing?

• Aggregate supply must exceed aggregate demand.

In our economy right now, aggregate demand exceeds aggregate supply, due to supply chain issues.

What should the government do to stabilise the government?

• Tax more!!! :)

Government is spender, not supplier.

• It cannot produce more things to directly increase aggregate supply.

• Instead, it increases its own demand/expenditure, to influence the economy's own aggregate demand.

Backlinks

Recent pages

None found yet.