Macroeconomic theories were developed by John Maynard Keynes. According to Keynes the level of economic activity was determined by total expenditure by consumers, firms, governments and net exports. Keynes developed the notion of equilibrium income, which was the level of income in the economy from which there was no tendency for change. From the circular flow of income model, income, expenditure and Output are different ways of measuring the value of GDP, with total expenditure equaling the total value of output, which in turn equals the total incomes received by the owners of productive resources in the economy.

Aggregate demand refers to the sum of expe

Effects of economic growth Include, higher real incomes per capita and living standards which can be realised due to increases in productivity and resource use. Higher real incomes allow individuals to have greater purchasing power in raising their standard of living through purchases of more goods and services to improve their material welfare. Higher levels of economic growth in Australia also encourage higher levels of saving both in the private and public sectors.

Australia’s recent economic performance in economic growth has had many negative and positive fluctuations. In terms of percentage annual changes in the volume of real GDP, Australia emerged from the 1990-91 recession with a higher rate of growth at 3.6% than the OECD 7 average of 1.5% in 1992-93. The economic stimulus applied by the Australian government to promote recovery included expansionary monetary policy, with fifteen cuts in interest rates between January 1990 and July 1993. The cash rate fell from 18% to 4.75% in this period. Fiscal policies were also applied with One Nation Statement released in February 1992, providing 2.3billion dollars of extra spending and tax cuts to promote recovery and confidence in the economy.

The multiplier allows us to calculate the increase in national income (GDP) when a rise in investment, exports or government expenditure (injections) is present. A change in an expenditure component is transmitted, or multiplied through the rest of the economy. The number of times that the increase in income (change in GDP) exceeds the increase in injections is known as the multiplier (k). The multiplier effect occurs because when extra spending is injected into the economy it stimulates further spending, which in turn stimulates yet more spending, etc. The higher the level of spending the greater the multiplier effect, therefore the value of the multiplier is dependent on the marginal propensity to consume (MPC).

Economic growth necessarily involves increases in real output, some of which may be exported to other countries. Export income can then be used to finance imports of capital and consumer items produced more cheaply overseas. The gains from trade include lower prices, higher output, economies of specialization and higher living standards.

During 1993-1995 Australia’s rate of economic growth exceed 4% per annum, outperforming the OECD Major Seven which recorded average rates of growth at 2.5%. This strong level of domestic growth led to some inflationary and current account pressures in 1994-1995 and the RBA (Reserve Bank of Australia) tightened monetary policy in 1994 to achieve a more sustainable rate of economic growth. Over 1995-97 growth eased from 4.5% in 1995-96 to 3.8% in 1996-97, still above the OECD average of 3.2%. During the Asian crisis in 1997 causing OECD’s rate of growth to 2.8%, the Australian economy went out to record the years of economic growth above 4% between 1997-2000. Much of this was due to high levels of consumption and investment spending due to consumer confidence and low interest rates.

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