Cycles and changes: total output and consumer spending

Cycles in total output

Economic growth is measured in many ways. The most general measure of a country's economic health is what is called total output. This is usually measured as a country or region's gross domestic product, or GDP.

Gross Domestic Product

GDP is one of several measures of the size of an economy. The GDP of a country is calculated as the market value of all the finished goods and services produced within a country in a period of time. It also takes into consideration the value that is added to goods and services throughout the various stages of production and delivery.

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Government expenditures and revenues tend to vary with the economic cycle. When output growth is high, expenditure falls and revenue rises. Expenditure falls because when growth is higher the government spends less on unemployment benefits and other welfare programs. At the same time the government's tax revenue rises through higher company profits, wages and consumer spending. When output growth is declining, the opposite happens - governments have less revenue and have to spend more. Economists are able to use input-output models to predict the effect on total output of the actions, sentiment and behaviour of industry, government, foreign suppliers and domestic consumers.

Consumer spending

One of the main drivers of the economy is consumer spending. Producers rely on it in order to make money from the goods and services they produce. The level of consumer spending fluctuates, in general due to the level of consumer confidence. Think about what influences your own decisions on when to spend money and how much. When people are confident in the economy and have some extra money in their pockets for whatever reason, they spend more on consumer goods and services. In fact, even when people do not actually have the money but feel good about the economy, they borrow money through credit cards and spend it on consumer products. This can in fact be a problem if too many people in the economy take on too much debt.

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Consumer spending generally grows in line with household income growth. It has been seen, for example, that lower income taxes marginally increases consumer spending. In general, income tax cuts are seen to increase consumer spending by around one percent. This can, however, have a flow-on effect of raising consumer prices and, in turn, put upward pressure on interest rates. Factors like higher interest rates, excessive personal debt, high energy and petrol prices and the state of the labour market can all cause consumer spending to stay level or decline. A weaker Australian dollar also means that people do not spend their money overseas or on imports, and can lead to consumers 'cocooning' - holidaying and spending 'at home', that is, within the Australian domestic economy.

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The Consumer Sentiment Index (CSI) is an average of five indices produced in Australia which reflect people's evaluations of their family finances over the past and coming year. The index also measures their expectations about economic conditions and their employment prospects for the future. It also measures people's views about current buying conditions for major household items.