Chapter 14 - The nature and operation of aggregate supply policies Flashcards
What is the definition of aggregate supply (AS) policies?
AS Policies: refer to any government initiative that is designed to reduce the costs of production and/or improve supply conditions for business so that Australia’s productive capacity and living standards are enhanced over time.
What are the effects of AS policies on Growth, Inflation and Employment?
Overall AS policies can increase real GDP and employment in the longer term, without adding to inflationary, external and/or environmental pressures. In this respect, AS policies help to achieve:
- Strong and sustainable economic growth
- Low Inflation
- Full Employment
What are the effect of AS policies on equity in the distribution of income?
Whilst the effect on unemployment may be negative in the short term with some AS policies (e.g. microeconomic reforms), the improvement to economic growth in the long term is expected to create enough employment to provide a net reduction in the unemployment rate. In this respect, AS policies can assist to reduce absolute poverty therefore contributing to the goal of greater equity in the distribution of income.
What are the effects of AS policies on external stability?
With respect to external stability, AS policies provide clear benefits over time. Any improvement in productivity or efficiency will help to reduce production costs, minimise inflationary pressure and increase international competitiveness. This should boost the BOGS and reduce both the CAD and NFD to more sustainable levels.
What are the effects of AS policies on living standards?
Overall, the successful implementation of AS policies should help to boost both material and non-material living standards.
Material living standards can improve because there will be a greater volume (and/or quality) of goods and services available at lower prices.
Non-material living standards can improve via greater efficiency in production helping to reduce strain on resources and the environment.
Impact of AS policies on price levels and real GDP
AS policies effectively push the AS curve out to the right, lift the nation’s productive capacity and enable higher output and employment levels to take place alongside lower levels of inflation.
Lower production costs enable firms to reduce prices for any given output, level or increase output at any given price level.
Fighting Stagflation
AS policies are particularly important when an economy experiences stagflation; high inflation and low economic growth
Alleviating Capacity Constraints
AS policies are important when an economy experiences supply constraints where the nation’s productive capacity is stretched to the limit and output cannot keep pace with growth in AD.
The growing importance of aggregate supply policies
With an ageing population and an end to the terms of trade boom, which have provided significant boosts to Australia’s income since the early 2000s, the role of AS policies becomes all the more important. Well targeted AS policies that ultimately boost Australia’s productivity over time are needed to fill the void. Without productivity enhancements, Australia’s future rates of economic growth will be limited and average living standards will be compromised.
Addressing short-term supply shocks
AS policies are also useful to counteract the effects of a short-term supply side shock to the economy.
Boosting productivity and International Competitiveness
An improvement in Australia’s international competitiveness means that Australian firms or industries are producing goods & services at lower prices or higher quality compared to overseas competitors.
Generally, improvements in productivity should increase international competitiveness as average costs of production fall, allowing businesses to reduce prices or improve quality. This will only occur in a competitive industry; thus competition is the largest incentive to increase productivity.
How do AS policies help to achieve the government’s goals?
Low Inflation and Sustainable Growth: by increasing AS, or expanding productive capacity, the economy is able to achieve a higher rate of economic growth alongside low inflation; this is sometimes referred to as low inflationary growth
Employment: with higher levels of AS and real GDP, we should expect to see an increase in the derived demand for labour, boosting employment and reducing the rate of unemployment over time.
Equity in the distribution of income: the relatively lower prices (or lower inflation rate) that results from AS policies should provide relatively greater benefits to lower income earners as they tend to spend a much higher proportion of their income on goods and services.
External Stability: the successful implementation of AS policies should result in downward pressure on both the CAD and NFD over time.
Living Standards: overall, AS policies should benefit living standards for Australians (despite possible short-term effects) as Average incomes across the economy should increase and real GDP per capita should expand, providing Australians with a greater ability to purchase goods and services.
What is the definition of productivity?
Productivity refers to the volume of output that is produced from a given number of inputs.
What is the definition of capital, labour and multi-factor productivity?
Capital productivity is best defined as output over the number of capital hours used.
Labour productivity is best defined as output over the number of labour hours worked.
Multi-factor productivity is defined as output over a combination of inputs, such as capital and labour.
What is the effect of a change in the participation rate?
Higher rates of labour force participation will help to reduce real unit labour costs over time. This is because an increase in the labour force size reduces labour shortages and exerts a downward pressure on wages.
