AD/AS Model and Growth

Any increase in Real GDP shows economic growth AD/AS Model Price level = average price level of all prices in the economy (Inflation) Real GDP= Total output of an economy produced in a year Any increase in Real GDP shows economic growth

Aggregate Demand – Recap AD = C + I + G + ( X –M ) C = Consumption spending Which is affected by interest rates, disposable incomes, inflationary expectations and consumer confidence I = Investment spending By firms. Affected by interest rates and business confidence G = Government spending X = Export receipts M = Import payments Affected by exchange rates

Aggregate Supply AS is affected by changes in Nominal wage rates Productivity and Technology Imported raw materials

Example The effect of rising oil prices on Real GDP

Rising oil prices are an imported raw material Rising oil prices are an imported raw material. They will cause costs of production to rise for firms, so AS will decrease. (AS shifts left)

AS shifts left causes A fall in real GDP ( from Y to Y1). This shows that the output produced by firms has fallen. Meaning there is less growth. If producers are producing less, this will mean they will have less demand for labour, causing unemployment to rise. As fewer workers are now required.

Show the effect on AD/AS what is the effect on growth? Income taxes decrease Business confidence increases Oil prices rice Reduction in savings by Nzlanders Nominal wages increase NZ dollar appreciates NZ dollar depreciates Incomes increase – Consumption increases – AD increases – eco growth increases Investment increases – AD increases – eco growth increases Import cost increase – AS decreases – eco growth falls Savings fall- Consumption increases – AD increases – eco growth increases Wage costs increase – costs of production increase – AS decrease – eco growth falls AD – X fall M increase – AD FALLS AS increases as import costs falls AD – X increases M decrease – AD increase AS decreases as import costs increase

Workbooks 136 -137