The ABS uses a variety of approaches for measuring GDP in Australia. These measures are known as the GDP(Income), GDP(Production) & GDP(Expenditure) methods. The official measure of economic growth takes an average of these 3 indicators of growth and is known as GDP(A)

7.1 The Components of Aggregate Demand

John Maynard Keynes, developed a theory which stated that the most important influence on economic growth was the total level of spending in the economy - that is, the level of aggregate demand. If households and business firms were generally pessimistic about the future economic outlook, housholds would tend to spend less on consumer goods and save more and business firms would be reluctant to invest in capital goods. This would result in an overall decline in aggregate demand, with falling production and rising unemployment.

The economy is in equilibrium where:

A market economy such as Australia’s is subject to the ups and downs of the business cycle(the general level of economic activity) caused by changes in the level of aggregate supply and demand.

Þ A rise in inflation due to the rise in import prices as a result of the depreciation.

When aggregate demand(or spending) exceeds the productive capacity of the economy, prices rise as output cannot expand any further. Consumers force prices up by bidding against each other for the limited goods and services available.

Higher inflation distorts economic decision making since producers and consumers change their spending and investment decisions in order to minimise the effect of inflation on them, such as through buying assets rather that investing in income producing activities.

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