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Using Economic Analysis, Account for the Rapid Growth of an Economy in Recent Years

  • Date Submitted: 08/16/2011 02:28 AM
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Q12a. Using economic analysis, account for the rapid growth of an economy in recent years.
Economic growth is the sustained increase in a country’s productive capacity or it’s real national income per capita over a period of time. The rise in the real national income could be caused by a rise in aggregate demand (AD) or aggregate supply (AS).
Aggregate demand is the total demand of final goods produced by an economy at various price levels, ceteris paribus. Various components that contribute to AD include consumption, investment, government expenditure and trade balance (net exports – net imports)
Increased accessibility of credit and low interest rates can contribute to a rise in autonomous consumption. If credit is more easily available or installment payouts are low, more consumers are tempted to spend thus increasing the level of autonomous consumption. Lower interest rates also encourage borrowing, since it is much cheaper to borrow when interest rates are low. Thus, this promotes consumer spending. In addition, low interest rates also discourage saving since interest rates are low, thus benefits of saving are less attractive. Therefore, lower interest rates can increase the level of consumption. In recent years, there have been many emerging economies. One example is China, a rapidly growing economy. With high economic growth, there will be a rise in employment, thus leading to a rise in income for more people. Thus people now are more affluent and have more purchasing power, thus able to afford more goods and services, increasing consumption.
The increase in investments is another factor that can cause a rise in AD. Business expectations and interest rates affect the investment expenditure of an economy. Higher than expected returns of investments can cause firms to have higher expectations of business, thus they are more confident and are more likely to invest more to reap grater profits, thus increasing investment. Interest rates represent the cost of...

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