Unit 3 Economics AOS2 AD Factors impacting Economic Growth

Hello. Hello everyone, and welcome to the fourth video in our series about strong and sustainable economic growth. Today we're going to be talking about AD factors, accurate demand factors and recent ones and how they've changed and what impact that's likely to have on the goal of strong sustainable economic growth. So hopefully, if you've been watching these in order, you've already understand what economic growth is and how it's calculated. And we're just going to be going a step further into how different things from an aggregate demand side affect it. So we're going to be looking at different factors. We'll talk a little bit about how it affects the components of aggregate demand and then the effect it has on aggregate demand and economic growth as we go. So it might be a little bit longer because we've got a lot of different little things to go through. But this is up to date, as I could possibly get it, with statistics which would hopefully be beneficial to you so you don't have to go hunting for them yourself. That being said, before your end of your exam, they will have all changed, so you'll need more up to date things, but the general things affecting them will be the same. So first up, if we look at our goal of strong and sustainable economic growth, as we've talked about in past videos, most recently we've been tracking at about 2.2%. So if we were to draw a mark there, most recent 2.2%. If we look at that as in our recent trends, we're always looking at the last two years. So we'll look from January 2018 and ignore the rest of this stuff. So we start off 2.5. We're tracking pretty well for a while, trending upwards. And then we've had this kind of like big drop over the last year. Then we started improving again until we got to our 2.2%. But it's gonna be really, really interesting to see when our second quarter figures come out for this year. First quarter figures come out for this year because the March panic buying has had a pretty big impact on inflation apparently and moved inflation up to 2.2%. And therefore economic growth might be similar or a little bit higher in the first quarter of 2020, but it's highly likely that by the second quarter it's going to significantly drop based on the massive decrease in production. And we could actually have either a reduced negative growth rate or a negative economic growth rate based on that. And as you hopefully know, if we have negative growth for two consecutive quarters, we are deemed to be in a recession, which is what they're predicting. So although if you look at the graph at the moment, economic growth has been rising, it's predicted to fall in the near future. So recent trends with economic growth, this is what we just talked about. So over the past two years it's average below 3%, partly due to the mining boom ending and overall uncertainty about the future, as well as natural disasters. Uncertainty and natural disasters are big ones at the moment. So if we look at China being our major buying, the major buyer of our exports, the they are decreasing the amount they're getting from us because of this coronavirus. If you also look in Australia, one of our major exports is tourism. And due to the bushfires and natural disasters, we are struggling to produce as much tourism as we were before because people aren't coming to Australia and they definitely aren't at the moment with international travel being banned. And that is going to decrease our overall level of economic growth into the future. So overall living standards in Australia have increased pretty strongly over the last 10 years, but the gains haven't all been shared equally. So the downside of this all is that in Australia, the wealthy have benefited the most from any increases in economic growth we have, while the poor only benefit a little bit. So it's not proportional. Then if we look at different factors that impact our strongest stable economic growth. So we're going to look at, first up, changing levels of consumer confidence. If we were to get out my little highlighter and highlight in green, the changing levels of consumer confidence. So consumer confidence is all about how confident consumers feel about future employment and incomes and being able to pay their way. Usually with consumer confidence, if it's above 100, that is good. That means consumers are feeling very confident. Being an index below 100 means this consumer pessimism around we're not feeling that great about the future. And if you can look closely at the graph, you can see really over the last 12 months it has been trending downwards, so going down in this direction and it's likely to keep trending downwards in the near future, especially with employment and unemployment decreasing so much. So it's currently a little bit higher in the first part of this year, potentially due to the kind of bouncing back up to the bushfires. But then the effects of COVID 19, the coronavirus is probably going to really, really depress consumer confidence with people losing their jobs and being worried about the future. After this, we've got changing levels of business confidence with business confidence. This is all about business confidence is an aggregate demand Side factor. It's really important to point out that that's aggregate demand side and not aggregate supply side. A lot of people make the mistake of being like, oh, business, aggregate supply side. This is all about businesses feeling good about the future, so they'll invest and expand. As you know, private investment spending is an injection into aggregate demand. So if businesses are feeling confident, they're going to do more private investment spending, which is an injection which will increase aggregate demand, which will then lead to greater levels of economic growth. Because increased aggregate demand will lead to businesses seeing that signal investing in expanding and then producing more overall. But as you look at business confidence into recent times, you'll probably very quickly notice that in the most recent little segment of time, it's negative. And we can only predict. Like if I was to predict what the next graph for business conference is going to look like, it's probably going to be something like this for overall. Because although, like a lot of my students point out, there are certain businesses that are just smashing it with sales right now. Like, if you look at supermarkets, if you look at chemists, if you look at places that sell gym equipment, their sales are through the roof. But we've got to look at this as a national thing and nationally, although some businesses have been increasing in their overall production, many have lost their whole business. Like if we were to talk about my local cafe, their sales are down over 70%, even though they're still operating, Even just branch out a little bit further than that. There are many businesses that just can't operate at all right now. We are seeing widespread closures of certain businesses. So I know Big W has been completely closing stores, Kmart's been closing stores, and it's a big deal. Like, some of these businesses are expecting that after this crisis will never return. So business confidence is going to be at very, very low levels, which means there's going to be less private investment spending, which means that there's going to be less aggregate demand and less production and therefore less economic growth. Then we have changes in disposable income. This fund kind of. It's not that great of a graph because it's not real disposable income. So it's income without the effects of inflation taken out. If you were to look at this in general, you just say, well, disposable, disposable income is increasing. If disposable income increases, that will mean that there is increased consumption spending or private consumption spending, which means that there is going to be increased aggregate demand. That's all you really need from that in terms of people's overall disposable income. Changing interest rates. Oh, this is a little bit out of date. Now this is the slides that I used in March last late Feb, maybe March, probably March. So this should be a little bit lower. We'll call that 0.25 down here from the emergency meeting they had not long after I made these slides. So we'll call that 0.25 for the cash rate changing. Interest rates have a great impact on the overall level of economic growth. Well, they're meant to the overall. The general idea is that the RBA manipulates interest rates firstly to target the goal of low inflation. And then if the goal of inflation is within the target range, they'll use it to target economic growth and full employment. And so one thing I always like to point out, so in terms of aggregate demand side, the things that interest rates impact are savings and consumption spending and import spending. So whenever you talk about how interest rates impact aggregate demand, you should talk about at least two of the components of aggregate demand. So most likely, if you talk about interest rates being decreased, that's going to mean that savings are going to go down and private consumption spending is going to go up. This means that there's less leakages from aggregate demand and aggregate demand will increase overall. If aggregate demand increases overall, this should mean there is an overall message sent to businesses to increase production, which increases the overall level of economic growth. But if you get a question about this, I hope, or if I wrote the question, then it's definitely going to expect something along these lines. Interest rates often come up in things like evaluate and discuss questions because there is a really, really big thing at the moment that interest rates haven't been effective at stimulating aggregate demand. And so the best possible answers that a student will write will mention the effects that the interest rates are meant to have. But then we'll go on to another point. We're saying, although this is the effect they're meant to have due to depressed consumer confidence and worries about the future, lower interest rates aren't actually leading to consumers borrowing and spending more money, and therefore they aren't being effective at increasing our overall level of economic growth. And that's the difference between student who gets maybe three out of four and four out of four. It's a very important thing to know. So other things we've got so changing government macroeconomic policy. So recently we've had expansionary budgetary policy, so a deficit, which means the government is outlaying more than they're receiving. And it's been used since the GFC to try and boost economic growth. If you look at the last 10 years of government budgets, they've been returning to surplus for about 10 years. And every year something happens that means they have to going to deficit. But it's a very good political tool to say you're returning to surplus. So recently the deficit has been reduced to move towards a surplus, but it's been deemed impossible to return to a surplus without slowing economic growth. So say, for example, if the government went with the surplus they were trying to achieve this year, it would have crippled the economy even more than the economy is currently being crippled. So very, very important that we remain in deficit for the foreseeable future. And the RBA has also switched to more expansionary policy to soften the effects of the reducing budget deficit, but also to try and stimulate spending and growth. Other things. So since the gfc, there's been a severe slowdown in overseas economic activity. So especially in the us, Japan and Europe, which has depressed our exports a little bit. And our exports to China grew significantly until about 2014 and since then have dropped by almost 30%. So that was the peak of the mining boom. We were exporting a ridiculous amount of iron ore to China and it was doing very well for us. It meant the value of the Australian dollar was very high because of how in demand the Australian dollar was. But they've dropped a whole lot recently and they're probably dropping even more right now. So that's going to decrease the amount of economic growth we have because we're going to be exporting less. So there's less reason to produce as much overall. Next up, we have changes in the terms of trade. So hopefully, if you've watched along with the inflation or full employment videos, we talked about the terms of trade a little bit. But the terms of trade is all about a ratio. The world pays for our exports relative to what we pay for the world's imports. And so if it's over 100, that means that we are getting more value for our exports compared to what we're paying for imports. So for every one export we get, we might get more imports, which is positive because it means we're getting more for our exports overall. As you can see, recently the terms of trade had been trending upwards. We've been doing pretty well, but more recently it has been falling and it's likely to continue falling in the near future. I may pause for a second and check if there's any updated statistics to See if we have fallen any more yet. Know that 95.2 is the most recent statistic. But I'm expecting there'll be a new figure put out soon and I'm expecting it's going to be even lower than that again, as our exports have become far less valued as global trade has kind of slowed down a lot and we have been importing a whole lot more during this crisis. Lastly, we have the exchange rate. So the exchange rate being the value of the Australian dollar, which in recent times has been decreasing, makes me laugh a little bit every year that students freak out when the exchange rate is dropping because they get really worried. Mainly because from a consumption point of view, you guys buy a lot from overseas and if the dollar is weaker, you can't buy as much. From an economic growth point of view, there's two effects. Once again, similar to interest rates, exchange rates often come up. As a discussed question. From an aggregate demand point of view, when the exchange rate is low, that is very positive because when the Australian dollar is low in value, that means we are going to have more exports overall and they are an injection that increases aggregate demand and we're going to have less imports. So why are we going to have less imports? Well, most of you have probably had that experience recently where you've gone to the checkout when you're putting stuff in your cart at an online shopping store and then you do the conversion and you see that it's almost double the price when you include shipping to import something. And then you go, well, I can't afford this. Close the window. Don't import things. Imports drop less. Leaks used from aggregate demand, exports go up. Our exports are suddenly cheaper to countries, so they're buying a lot more of them, which means that we're going to be able to export more. And this is favorable for aggregate demand. And then that tells producers that they need to produce more because we can export more because it's more enticing. And therefore that increases production and can increase our economic growth. So lower exchange rate, very positive for aggregate demand. A higher exchange rate hurts our aggregate demand. Because if the exchange rate is high, say for example, way back here, or if you go back 10 years ago when the dollar was above parity with us, you better believe I was importing a lot of things. Like if you looked at my vinyl collection behind me, I bought a lot of that when the dollar was above parity, it was like you were saving money from buying things from the US So that's the end of this video. Hopefully this was useful. I'll be back. Probably. Well, it won't really matter when you're watching this because I'll all be up on the YouTube page or on my class page. But next up we'll be talking about aggregate supply side factors that impact aggregate demand. Thank you for watching this. If you have any questions at all, feel free to leave a message somewhere, send me an email, start a chat. More than happy to help you with anything to do with any of the economics. If there's anything you'd like, let me know and I'll do my best to try and do that. On that, I hope you have a great day. I hope you smash any assessments you have coming up and I will talk to you next time. Have a great day. Bye.