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Mind Map by mikaela.farrugia, updated more than 1 year ago
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Created by mikaela.farrugia
over 10 years ago
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2.5: Aggregate demand as an influence on
Australia's cyclical level of economic activity (PART 1)
- Definition of
Aggregate demand
- macroeconomic variable
- consists of spending by both
households and businesses
(C), private investment
spending and equipment (I),
speeding by gov (G1),
investment by gov (G2) and
exports (X) minus spending on
imports (M).
- AD=C+I+G1+G2+X-M
- macroeconomic variable
- John Maynard Keynes
- instability in Aggregate Demand
causes the ups and downs of
economic activity
- came up with the idea below
- instability in Aggregate Demand
causes the ups and downs of
economic activity
- The effect of cyclical
changes in AD on
economic activity
- improve understanding of what determines
economic activity we focus on the instability
of AD and its components.
- How rising AD causes economic
activity to expand.
- AD grows, due to a fall in leakages, firms see growing
sales,lengthening orders and a fall in unsold goods.
- expand their levels of production providing that resources
are available
- most firms do this = expansion in the economy
- most firms do this = expansion in the economy
- no unused productive capacity -
rising AD will make a shortage of
goods and services.
- This will cause rising prices or
demand inflations. This all
happens in a boom
- This will cause rising prices or
demand inflations. This all
happens in a boom
- AD grows, due to a fall in leakages, firms see growing
sales,lengthening orders and a fall in unsold goods.
- How slowing AD causes
economic activity to contract.
- AD falls, due to a
rise in leakages,
firms notice the
falling sales,
absence of orders
rising stocks of
unsold goods
- Businesses cut production to
prevent overproduction.
- most firms do this = slow
down in the level of
economic activity
- could end in a recession or depression
- could end in a recession or depression
- most firms do this = slow
down in the level of
economic activity
- Slow downs
will cause high
levels of
unemployment
and possibly
lower inflation
because most
firms cut
prices to get
rid of extra
stocks.
- AD falls, due to a
rise in leakages,
firms notice the
falling sales,
absence of orders
rising stocks of
unsold goods
- How AD can create ‘ideal’
conditions of domestic
economic stability.
- Ideal when the level of AD is neither excess ion or
insufficient that it results in a boom or recession
- Economy could benefit from experiencing
domestic economic stability
- Governments try to create policies including taxes,
government spending and interest rates to try and stabilise
the level of AD.
- Ideal when the level of AD is neither excess ion or
insufficient that it results in a boom or recession
- improve understanding of what determines
economic activity we focus on the instability
of AD and its components.
- The components of AD and
their demand side
determinants
- levels of
aggregate demand
(C,I,G1,G2 and X)
respond to
aggregate demand
side factors.
- Strong demand side
conditions can increase AD.
- AD to accelerate due
to rising C,I,G and X
- Sales
rise
- Employ extra workers,
lowering cyclical
unemployment
- Firms raise production
levels - activity rises which
could lead to a boom.
- AD to accelerate due
to rising C,I,G and X
- Weak demand side conditions
can decrease AD
- AD will slow
due to C,I,G and
X
- Sales
fall
- unsold goods
in warehouses
rise - leads to
price drops
- Firms cut their
labour - high
unemployment
- Reduction of production
levels creating a
downswing in the business
cycle.
- AD will slow
due to C,I,G and
X
- Net increase in unsold business stocks
- Minor item in AD
- Macroeconomic demand side
factors including business
expectations, alter level of
stock.
- Confidence can cause unplanned changes
- Minor item in AD
- levels of
aggregate demand
(C,I,G1,G2 and X)
respond to
aggregate demand
side factors.
- The components of AD and their
demand side determinants
- Private Consumption (C)
- household expenditure to help satisfy our unlimited
needs and wants.
- more stable
that Private
Investment, I
- Growth in this sector is rare
contributing to economic instability
- influenced by demand side factors including consumer
confidence, disposable income, saving ratios, interest rates, tax
rates and population growth.
- 60%
of
AD
- household expenditure to help satisfy our unlimited
needs and wants.
- Private Investment (I)
- involves private business capital spending on
physical plant, manufactured materials and
equipment used to make other goods and services
- Helps raise our nations productive capacity, make production
possible and raise efficiency
- 22% of AD
- 22% of AD
- unusable and is a major
cause of economic instability
- Responds to macroeconomic
demand side factors including
changes in business confidence,
interest rates and company tax
rates.
- involves private business capital spending on
physical plant, manufactured materials and
equipment used to make other goods and services
- Government consumption (G1)
- G1 is all about
government
spending on
public goods and
services to
satisfy the needs
and wants of
individuals
- Incorporates staff wages for gov
departments, defence spending, day to
day running costs. (NOT WELFARE)
- changes in response to election
promises, voter reactions, population
growth and the budget outcome
- averaged 17% of AD
- G1 is all about
government
spending on
public goods and
services to
satisfy the needs
and wants of
individuals
- Government investment (G2)
- incorporates government
spending on equipment.
- Used to help satisfy the needs
and wants of the community
- level changes in regards to macroeconomic
demand side factors including voter expectations,
election promises, population growth and
availability of government revenue.
- 3% of AD
- incorporates government
spending on equipment.
- Net exports (X-M)
- represents balance between foreign spending on Australia’s
exports minus our spending on imports.
- together 18-24% of AD
- Behaves erratically and is greatly affected by the exchange rate,
overseas activity, consumer confidence, business confidence and
government policies (tariffs)
- represents balance between foreign spending on Australia’s
exports minus our spending on imports.
- Private Consumption (C)
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