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Changes in Components of Aggregate Demand (Net Exports :confetti_ball:…
Changes in Components of Aggregate Demand
Net Exports
:confetti_ball:
Change in currency exchange rates
- affects how much or where people buy g&s from
Increase in production of goods domestically
- means less needs to be imported and less needs to be paid to other countries
Change in economic growth rates of trade partners
- if economy of a major trade partner slows down they require less imports and will buy less from you
Interest rates
- affect the exchange rates, as higher inflation rates usually lead to higher interest rates (but in the case of China this might mean a stronger currency...)
Recession or expansion either domestically or internationally
- affects the individuals willingness to spend and subsequently the amount of money entering an economy
Demand for certain goods from overseas
- or demands from within the country for certain goods
Price of goods
- If goods such as oil experience large fluctuations in price willingness to purchase it (import and/or export) will fluctuate accordingly
Consumption :checkered_flag:
Changes in interest rates
- If intrest rates rise there is likely to be less brrowing due to it being more expensive to borrow, thus consumption will fall in AD :fire:
Changes in wealth
Changes in Share wealth
- If the value of those shares increases, then people feel more wealthy. This might encourage them to spend more. Alternatively, they might sell those shares and then use the earnings to increase consumption. :check:
Changes in value of House Price
- When house prices increase, consumers feel more wealthy and are likely to feel confident enough to increase their consumption by spending or borrowing more. :recycle:
Changes in expectations / consumer confidence
- If people are optomistic about the economy then they are likely to spend more e.g. if they think they will get promoted they will they will feel more confident about spending there money - this is usally measured using a consumer confidence index :star: - If inflation is high it can mean that consumer confidence is also high
Household indebtness
- Household indebtedness is a households willingness to borrow money. This effects consumption because if it is easy to borrow (intrest rates are low) it is leikly that people will take out loans and household spending will increasehowever if house prices rise then spedning will decrease and households will spend less on goods and services :pen:
Changes in income
: As incomes rise, people have more money to spend on goods and services, resulting in an increase in consumption. When national income rises, consumption increases, leading to an increase in aggregate demand. :explode:
IN SUMMARY, If consumers have or believe they have more money consumption will increase and AD will increase.
Investment
:warning:
Investment
refers to the addition of capital stock to the economy by firms. The capital stock of an economy refers to all goods that are made by people and are used to produce other goods or services such as factories, machines, offices, or computers.⚖️
Interest rates:
Firms can use their “retained profits” or they can borrow the money. Both of these are affected by the interest rate. If the money is to be borrowed, then an increase in the cost of borrowing may lead to a fall in investment. If interest rates are high, then firms may prefer to put their retained profits in the bank to earn higher returns as savings, rather than use them to invest.🆒
Changes in the level of national income:
As national income increases, there will too be an increase in consumption. This places pressure on the capacity of existing firms to keep up with the demand. This will encourage new firms to invest in new plant and equipment for the market to meet the increase in demand. This is a form of investment is referred to as 'induced investment'.💰
Technological change
: In any dynamic economy there is likely to be a quick pace of technological change. In order to keep up with advances in technology and to remain competitive firms will need to invest🕶
Expectations/business confidence
: Businesses make decisions about the amount of investment they should make based to a large extent on their expectations for the future and their confidence in the economic climate. If businesses are very confident about the future of the economy and expect increases in consumer demand they will want to be ready to meet the demand by investing to increase potential output and productivity.🏄♂️
What causes changes in investment?
Interest rates, changes in the level of national income, technological change and expectations/business confidence.💸
Government Spending
:tada:
If the government makes a commitment to financially support a given industry in the annual Budget, they will increase spending in that area (potentially in the form of subsidies)
The government may decide to improve/increase spending on public services such as national defence, transportation infrastructure, healthcare or education.
For example, the 144 year-old Arthur Phillip High School in Parramatta is undergoing a $225 million upgrade to make it the first public high-rise school in Sydney. Due to the expansion, the school will be able to hold 330 students in each year group.
In 2019, the Australian government planned to increase spending on the defence industry by $40 million (as stated in the Budget), subsequently creating new jobs.
If the government has to correct a market failure, government spending will rise.
The Australian dairy industry was damaged by power imbalances between different stakeholders in the industry last year. The Government department, the Australian Competition and Consumer Commission, investigated the case for 18-months and concluded that $1 bottles of milk was an unbalanced value and unfair for farmers. The supermarkets involved in the market failure were fined and warned to never be involved in collusion again.
One of the five goals in macroeconomics is equal distribution of wealth. The government may choose to reduce inequality in the population by spending money on numerous benefit funds for people who need extra support.
Unemployment benefits
Income support
Child benefits
Housing benefits
Pensions
Support for people with disabilities
Summary
Government spending is decreased when consumer activity is high (high level of economic activity/the economy is growing at a rate that is too high (more than 3%)).
Government spending increases when consumer activity is low (low level of economic activity/nearing a recession).
As government spending increases, aggregate demand increases, further increasing inflation rates
As government spending decreases, aggregate demand decreases, further decreasing inflation rates