Essay on Australian Economic Issues

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Economic Growth

Measurement

Economic growth refers to an increase in an economy’s productive capacity, as measured by changes in its real GDP (adjusted for inflation), over a period of time. Growth may be measured quarterly, annually, or year on year (changes from one quarter to the corresponding quarter the following year). Annual growth is used to identify trends in the business cycle, while quarterly growth provides an indication of the economy’s short-term direction, and year on year growth to show annual progress.

These measures are necessary so that policy decisions can be implemented accordingly. Fiscal policy may only be implemented once per year in the annual budget while monetary policy may be conducted 12 times per year
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In the Government’s Budget Speech in May 2009, Treasurer Wayne Swan stated that annual growth was expected to bottom out at a level of -0.5% in 2009-10, followed by economic recovery in the years to come with 2010-11 predicted to record 2.25% annual growth and 4.5% for 2011-12.

Justification of Government Policy

The reason for the government’ decision of expansionary fiscal policy to stimulate economic growth is evident with an understanding of Keynesian economic theory and the Keynesian Transmission Effect. This is a theory of macroeconomics, developed by John Maynard Keynes , based on the principle of aggregate demand being the major determinant of economic growth.

1) Equilibrium level of National Income:

Keynes’ theory suggests that individuals will not necessarily demand what is produced, therefore firms must produce what consumers demand rather than simply expanding production (increasing supply, which previously was assumed to increase aggregate demand). Thus, the level of economic activity, or total output (O) was determined by the total expenditure (E) within an economy. The amount spent by firms, individuals, the government and foreigners is determined by their level of income (Y), which is determined by their level of production (O). Therefore, Keynes proposed that the equilibrium level of income, where there is no tendency to change occurs when:

Y = E =
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