Chapter 5

Question 1

Does the Gov’t have a target rate of Eco growth, what is it

Answer 1

Gov’t does not have a specific ‘target’ rate of eco growth to achieve – but the government outlines board objectives to promote an economic climate conducive (beneficial) of high levels of sustainable and employment growth

Question 2

Sustainability is underpinned by 3 important considerations that place an upper limit on any growth rate
The growth rate can not be so high that it:

Answer 2

Causes inflation to climb to unacceptable levels (above the RBA’s target range 2-3% over an economic cycle)

Results in significant external pressures on the economy (mainly an excessive CAD or net foreign debt)

Leads to an over use of the nations natural resources (unfairly burdens future generations

Question 3

Where is a sustainable rate considered to be at

Answer 3

3-3.5% growth per year

Question 4

What is the gov’t goal for strong sustainable growth

Answer 4

The gov’ts goal for strong and sustainable economic growth is to achieve the highest growth rate possible, consistent with strong employment growth, but without running into unacceptable inflationary, external or environmental pressures’

Question 5

Factors in accessing a growth rate

Answer 5

It is important to remember what is considered to a sustainable rate of growth can vary over time. During periods when productivity growth is strong – it is possible for growth to remain above 4% and be sustainable – this is because the nations productive capacity is being expanded by productivity growth

However if productive growth is slow or if the nation’s capacity is being stretched growth rates below 3% may be unsustainable

The government will also take in to account international growth rates, when determining the acceptability of given growth rates in Aus’t

Question 6

What is used to measure Eco growth

Answer 6

GDP

Question 7

Define GDP

Answer 7

The final market value of all goods and services produced in the Australian economy over a given period of time – it is the same as the total ‘value added’ during each stage of the production process and is calculated every quarter by the ABS

Question 8

Define chain volume GDP (real GDP)

Answer 8

An estimate of the real GDP in the economy – it involves using prices from previous periods and applying them to current period volumes
The

Question 9

Explain chain volume GDP (real GDP)

Answer 9

The ABS will provide figure for chain volume Gdp in dollar terms for each quarter – the seasonally adjusted and trend figures are based on original figures, but statistically manipulated to ensure they provide a more accurate reflection of the state of the economy (the level of eco activity) during each quarter.

Whenever Gdp figures are reported without reference to whether it is the original, trend or seasonally adjusted figure it is best to assume that the figure being reported is the seasonally adjusted one
Figures of economic growth are rarely reported in absolute dollar terms as they are shown, instead referring to these dollar values to media will typically report movements in % terms

Question 10

When using real GDP what is the most common form

Answer 10

The annual rate of economic growth is most commonly derived using the real GDP dollar values for the latest quarter and comparing them to the values for the quarter one year earlier, this is also called the – year-on year growth rate

Question 11

Define annualised rate of Eco growth

Answer 11

The product of multiplying the quarterly rate of economic growth by four

Question 12

Define annualised

Answer 12

The process of converting a monthly or quarterly figure into one the can be compare to annual figures – e.g. quarterly rate if growth of 1% is multiplied by 4 to provide an Annualised rate of growth of 4% for that quarter

Question 13

Why does Australia peruse Eco growth

Answer 13

The primary means by which governments can maintain/improve living standards over time.

Growth in production means there has been growth in incomes that accrue to the factors of production such as wages, interest and dividends –
these higher incomes will enable some members of society to have greater ability to purchase g+s that satisfy their needs and wants = having a positive impact on material living standards

Question 14

Why does Australia peruse Eco growth

- also because of positive relationship between employment growth and its ability to reduce the unemployment explain:

Answer 14

Governments recognize the real costs of unemployment in terms of the potential waste of labour resources
The debilitating affects can be psychological and form unhealthy relationships between unemployment and crime and social unrest
Economic growth will tend to result in a bigger ‘derived demand for labour’ (because the demand stems from a bigger demand for goods and services) and will tend to increase employment levels
In addition high levels of employment will involve a greater sharing (distribution) of income gains from eco growth further contributing to enhanced material living or welfare.
Economic growth can also provide individuals and groups with the opportunity to enjoy an increase in non-material living standards, focusing on more intangible factors that shape our ‘quality of life’ these factors could include – general happiness, freedom of expression, freedom of movement, self esteem, a felling of making a difference to others etc.
This is because higher incomes can provide individuals with a greater opportunity to become more charitable, helping to improve the quality of life enjoyed by others, as well as their own
Stronger rates of eco growth leads to an increase in tax revenue – enabling the federal government to improve the living standards of those less well off, via welfare spending or to improve the issue of the developing world via foreign aid.

Question 15

Why is the growth rate 3-4%?

Answer 15

The government pursues a relatively strong growth rate to ensure a number of things happen:
The government is keen to ensure the growth rate exceeds the rate of growth in productivity (output per unit of input) over time.

Gov’t and business continue to invest huge amounts on research and development in order to achieve technological progress that helps to boost productivity

However these advances can have negative affects on employment growth – e.g continuing rates of productivity growth in order of 1% means that 1% increase in economic growth is likely to be insufficient to cause an increase in employment (this is sometimes referred to as ‘jobless growth’ – where higher output is achieved via greater productivity of existing inputs negating the need for additional labour inputs

Question 16

Why is the growth rate 3-4%

- ageing population

Answer 16

The gov’t is keen to ensure the rate of eco growth is sufficient enough to cater for a continually growing population. If real gdp falls below population growth, it will signify that the average Australian is materially worse of than in a previous period

Higher population growth will also increase the size of the labour force over time and make it more difficult for employment growth to have a favorable impact on the employment rate – this is because more new jobs will be taken by new entrants to the labour force, such as skilled migrants forcing rates of economic growth to be higher yet again.

The government wants to see economic growth at a high enough rate to actually boost the overall living standards or welfare of Australians – this means the rate must be higher than the rate of population growth, but not too high to cause a diminution of non material living standards for current or future generations of Australian’s. Therefore greater focus on economic sustainability

Question 17

Consequences of failing to meet / achieve strong levels and sustained growth
*assuming growth remains positive

Answer 17

Any rate of growth that is positive but below our rate of population growth signals that our nation has experienced a decline in per capita incomes – while the size of the real gdp has expanded and the economy is growing in absolute terms the average income per person has declined and our average material living standards will fall.
We would then expect living standards to deteriorate, but this will depend on the reasons for the relatively slow growth in real gdp – e.g may be possible for living standards to improve in the low growth if the low growth rates are engineered by gov’t policies that are seeking to protect the environment

Any rate of eco growth below the rate of productivity growth is unlikely to create additional employment growth and with a growing labour force, will tend to add to the unemployment rate

Any rate of growth that is fuelled by excessive consumption at the expense of investment is likely to reduce future productive capacity and future growth rates (pcc shift to the left)

Growth may be high enough to push growth outwards, but is unsustainable such that inflation becomes to high, external pressures become burdensome, or it comes at the expense of the environment then it simply transfers the problems to the future

Question 18

Define sustainable development

Answer 18

development that meets the needs of present without compromising the ability of future generations to meet their own needs.

Question 19

Explain what is economic sustainable development?

Answer 19

Today much more emphasis is placed on ‘non material’ or ‘quality of life’ factors when perusing growth with a particular concern for future generations of Australians

Increasingly governments will implement policies that force both public and private sector decision making to take into account any depletion of natural resources or any damage to the environment e.g co2 tax, laws on deforestation etc

Question 20

Explain the impact too much growth would have on ‘Eco sustainable development’

Answer 20

If growth is too strong it can be considered a failure to meet the objective - it should not:

• jeopardise the governments other Eco goals
  [inflation] - demand (increases in AD when operating at productive capacity)
  - cost (businesses have to bid up wages to attract scarce workers)

[external stability] - cad increases as imports increase

• jeopardise the living standards of future generations (ecological sustainability)

Question 21

Further consequences of not meeting goal of stong and sustainable Eco growth

Answer 21

Growth is too high - may come at the expense of a Nations natural resources - falls under the banner of ‘ecological sustainability’

Question 22

Environmental influences of Australia’s future rates of growth

Answer 22

Are typically adverse weather that cause ‘supply shocks’ to the economy resulting in lower rates of real gdp (and higher unemployment) in the short term.
These disasters have a significant impact on the output in industries as diverse as agriculture, mining, construction and tourism.
Droughts have had a significant affect throughout history affecting particually the agricultural industry
Drought = lack of water reduced the willingness and ability of farmers to maintain production levels. Further grain and cotton production were severely condensed and the high rate of feed added to the cost of production for livestock. Sheep and cattle farmers were forced to reduce stock as the size of the drought affected the land continued to increase, these factors combined to have a negative supply side impact on farmers willingness and ability to produce reducing production, income and employment in rural Aus’t

Question 23

Environmental influences on Aus future rates of Eco growth

- climate change

Answer 23

The incidence of natural disasters is increasingly linked to climate change
Excessive carbon pollution is resulting in substantial social and economic costs
Large amounts of resources need to be given to the reconstruction efforts often of natural disasters caused by climate change
Given that climate change is expected to reduce rates of economic growth in the long term due to the increased lengths of froughts ans other severs weather events, the dilemma facing governments is related to the need to become ‘inter-temporally efficient’ with the use of the nations resources – to continue to use resources in production without affecting the efforts to minimize or reduce carbon emissions will promote current rates of growth at the expense of future rates of growth
However efforts to combat climate change will impose costs on industries (production costs) have negative affects on eco growth in the immediate medium term

Question 24

Define peak oil

Answer 24

The point of time when half the worlds oil supplies have been extracted – after this point it generally becomes more difficult and more expensive to extract oil.

Question 25

Limitations of GDP as a measure of Eco growth + living standards

Answer 25

Gdp is inaccurate in the sense that it excludes some ‘non-marketed’ goods and services where it is too difficult to get accurate values such as home based production, black market goodss or many chartiable activites

Gdp fails to distinguish between monetary transactions that actually improve out welfare (e.g money spent on food) and those which actually detract from our welfare (money spend on tabacco)

Gdp does not measures changes on quality from one quarter to the next

Some non-marketed goods and services have a value imputed for them, such as farm produce consumed on the farm, the rental value of owner occupied housing and most importantly government services provided without charge – the imputed values might not reflect the true ‘market values’

There may be inacracies when converting to real gdp using the chain volume measure – that is the index used to remove the affects of inflation (which comprises a wide number of producer and consumer goods and services) is unlikely to be 100% accurate when accounting for inflation

Gdp figures are largely based on estimates which by there nature will rarely be 100% accurate

Gdp figures do not take into account the value associated with the depletion of the nations stock of natural capital (natural resources) or the costs associated with other negative externalities

Figure do not take in to account the values of ‘leisure time’ that may be sacrificed (or gained) when there are increases (or decreases) in gdp. E.g. increase in real gdp may indicate that living standards have improved – however as a consequence people may be pressured to work longer hours (on average) then living standards may deteriorate.

Gdp fails to take into account the direct affects steaming from movements in the Terms of trade (TOT) e.g. an increase in world mineral prices will boost TOT and will result in higher export prices. This is not reflected in a higher value for real gdp because the price affect is removed and export volumes remain unchanged. Accordingly an increase in the TOT will be reflected in higher national incomes as measured by ‘gross national income’ (GNI) but not in the real gdp. Real GNI more accurately captures changes in living standards as it reflects changes in ‘purchasing power’

Question 26

Alternate measures of nations welfare and living standards other than GDP

Answer 26

General progress indicator (gpi)

Measure of Australia’s progress (map)

Question 27

Define the GDI

Answer 27

An indicator of national wellbeing that seeks to overcome difficulties associated with the use of GDP as a measure of overall living standards for a nation. It takes into account a host of other factors not taken into account by GDP estimates, such as the social costs associated with unemployment, crime, problem gambling, excessive work, natural resource depletion and pollution

Question 28

Explain the GDI

Answer 28

The general progress indicator (GPI):
Like gdp, the gpi starts with a focus on expenditure on goods and services to provide an idea about how our material living standards are likely to have changed over time, it further take into account a range of other factors that the gdp does not factor into it’s estimations including:
Social costs associated with unemployment
Crime
Problem gambling
Excessive work
Natural resources depletion and pollution

In the medium / long term

Question 29

Limitations of GPI

Answer 29

Li tied as measure adjustments are estimations (inaccurate) highly subjective

Question 30

Quote must be used relating to map

Answer 30

“Has life in Aus been getting better”

Question 31

Define MAP

Answer 31

An indicator of national wellbeing that seeks to overcome the difficulties associated with the use of GDP (or real GDP) as a measure of overall living standards for a nation. It takes into account a host of other factors not taken into account by the GDP estimates, such as the social costs associated with unemployment or crime

Question 32

Explain the Map

Answer 32

A Measures of Australia’s progress (MAP)
Purpose of finding an answer to the question: ‘has life in Aus’t been getting better’
The ABS makes it clear that it is too difficult to arrive at a definite answer – but the publication of a number of indicators helps to provide some picture of our progress overtime
The ABS has formulated 4 key domains that are used to summarise the overall changes in our nations ‘wealth’ over time. These are:
Society
Economy
Environment
Governance

Question 33

Define demand factors

Answer 33

Factor that causes a change in Eco activity vis its impact on Ad

Question 34

Define supply factors

Answer 34

A factor that causes changes in economic activity via its impact on as

Question 35

Explain supply factors

Answer 35

As curve in the economy indicates the total real value of production (output) that can be produced in relation to various aggregate price levels
Total aggregate supply is really the total volume of production that suppliers (in aggregate) are prepared to supply to the market.
There are several factors that influence AS in the economy and these factors are similar to those influencing individual supply curves – in essence any factor causes a change in the ‘cost of production’ or ‘supply potential’ (ability / willingness

Question 36

Explain interest rates demand side

Answer 36

when interest rates increase household and business sectors are likely to reduce demand for goods and services as the cost of borrowing money is higher.
Households would be less likely to use credit cards or to take out loans for the purchase of consumer durables (tv / computers)
Similarly businesses are less likely to purchase new capital or expand operations
Further the higher cost of financing existing loans for household and businesses causes them to experience a reduction in funds available for spending reducing both consumption & investment
This ultimately results in a slower rate of eco growth

Question 37

Explain interest rates supply side

Answer 37

Supply side = higher interest rates – higher cost of financing existing business loans will tend to increase the cost of production for businesses, decrease the ability to expand supply and exert upward pressure on prices and inflation.
This than acts as a further resistant on eco growth as higher prices deter Consumption and reduce net exports (X-M)

Question 38

Define disposable income

Answer 38

The total income that households have received in exchange for their participation in the production process plus government transfers less direct (income taxes). Also gross income less the direct taxes levied by governments

Question 39

Explain disposables income

Answer 39

When real disposable income increases it means that after tax income has increased, in real terms providing the household sector with increased purchasing power
This is likely to increase consumption – boosting AD and leading to an increase in real GDP or economic growth
Disposable income is an indicator that is derived from national accounts – it’s trend movement should generally follow the movement in eco growth – however any increases in this measure should also add to growth in AD and real GDP
Similarly any decrease in real disposable income will not only follow a decline in economic growth but actually contribute to further falls in AD and eco growth

Question 40

Define taxation rates

Answer 40

Company taxed in Aust is proportional taxes levied against company profits at a flare rate of 30%

Question 41

Explain demand side tax rates

Answer 41

Lower company tax will provide a medium to a long-term stimulus of AD as businesses will increase investment demand. This occurs because the after tax rate on investment projects will be higher as future profits will be taxed at a lower rate. Businesses will be able to justify investment in more projects boosting AD and proving a long-term boost to eco growth once the investment projects become fully operational adding to the nations productive capacity (higher investment demand today has supply side benefits into the future

Question 42

Explain supply side taxation rates

Answer 42

Lower company tax will provide a medium to a long-term stimulus of AD as businesses will increase investment demand. This occurs because the after tax rate on investment projects will be higher as future profits will be taxed at a lower rate. Businesses will be able to justify investment in more projects boosting AD and proving a long-term boost to eco growth once the investment projects become fully operational adding to the nations productive capacity (higher investment demand today has supply side benefits into the future

Question 43

Explain personal taxes levied on individuals

Answer 43

Personal income taxes levied on individual income earners – they also have demand and supply affects on eco growth
Demand side – a decrease in income tax rates will decrease disposable income as less of a persons private or gross income is taken by the federal government
Supply side – a drop in tax rates can provide increase incentive for workers to lift performance which will boost labour productivity, resulting in lower average cost of production for the business (RULC) and reduced pressure on prices
In addition lower tax rates will tend to increase the participation rate (supply of labour) exerting downward pressure on wage rates reducing RULC and prices further stimulating eco growth

Question 44

Explain government assistance

Answer 44

Generally the gov’t is hesitant to provide businesses with assistance in fear of them becoming dependent on government support which can have negative affects on economy efficiency and international competitiveness
Subsidies and tax concessions are applied at the microeconomic level and are not typically used to assist with macroeconomic stabilization of the economy – microeconomics may beneficially impact macro
In order to simplify the analysis of ‘government assistance’ as an aggerate demand or supply factor we will focus on 2 separate types of government assistance:
Subsidies and/or rebates
Tax concessions and/or tariffs

Question 45

2 main types of gov assistance

Answer 45

Subsides/ rebates

Tax concessions / tariffs

Question 46

Explain a subsidy or rebate

Answer 46

A subsidy rebate or cash grant to households will operate as a demand side factor affecting economic growth – these are sometimes referred as ‘consumption subsidies’ and are primarily designed to influence consumer behavior and reallocate resources to areas of national best interest (rather than to stimulate the economy) e.g gov’t rebates provide the instillation of solar hot water systems, solar energy and other saving initiatives – the gov’t can choose to accelerate the provision of subsidies or grants in an effort to stimulate eco growth

Subsides to business are often referred to as ‘production subsidies’ and are mostly designed to reallocate resources at the micro level to the production of g+s’s that promote the national best interest – common examples include subsides for the production of public transport and education or more recently technologies such as solar panels.
However the subsidy will primarily work as a supply side factor helping to reduce businesses effective production costs, leading to a fall in the price of their products helping to slow the rate of inflation and increase AD and eco growth
The subsidy will also operate as a demand side factor encouraging more business investment (i) because future profitability is expected to be higher – the subsidy makes the investment worthwhile = accelerates the rate of growth in both AD and real GDP

Question 47

Define a subsidy

Answer 47

A Form of ‘protection’ involving the government protecting local producers with financial or other forms of assistance

Question 48

Explain concessions and tariffs

Answer 48

Concessions involve the government providing taxpaying entities with the ability to reduce their assessable income at an accelerated rate via the provision of more generous tax deductions – e.g. research and development concession enables businesses to spend more money on research projects and claim the total expenditure as a tax deduction

Concession are similar to production subsides in terms of the impact on eco growth. On the ‘demand side’ they encourage investment and AD and on the ‘supply side’ they lower production costs and encourage greater supply (AS)

Tariffs are a tax imposed on imports and have traditionally been introduced to ‘protect’ Australian producers and save Australian jobs by diverting demand away from the purchase of imports (international) and towards local.
This policy can have short term ‘demand side’ benefits for the Australian economy in terms of reducing imports – boosting AD and eco growth. However tariffs can lead to longer term negative ‘supply side’ effects that are characterized by lower levels of productivity or efficiency (technical) a higher cost structure for the economy, higher prices and lower AD and eco growth

While lower tariffs do encourage resources to move to sectors or areas where Australia has a comparative advantage (tourism, mining + education) the short to medium term transitional cost it creates can be particularly burdensome for some groups

Question 49

Define economic growth

Answer 49

an increase in the amount or level of national production that has occurred over time – most commonly measured by changes in the level of GDP

Question 50

Explain demand side exchange rate if aud depreciates

Answer 50

If the AUD decreases = the demand side effects on economic growth are positive – there are 3 main reasons:
Exports in Aus’t that are ‘price takers’ (rely on the USD price of their goods when selling on world markets) will receive more income for any given volume of exports – each USD they receive for their product is now worth more than before. The rise in export income causes AD and economic activity to increase – despite the volume of exports being unchanged

Non price takers (tourism industries etc) will find that price competitiveness of there of their G+S in international markets will increase when the value of the AUD falls (e.g. if AUD fell but NZ dollar rose people would prefer to travel to AUS)

Important competing business in Aus’t will now be relatively more price competitive against imports as the lower AUD forces importers to pay more for imports thereby raising the price of imports – this causes consumers to shift away from imported goods to local goods – causing net exports and AD to rise = stronger rate of eco growth.

Question 51

Explain supply side exchange rate

Answer 51

Supply side* = A higher Australian dollar tends to restrain economic growth + depreciating AUD tends to stimulate economic growth
The lower value of the Australian currency will result in relatively more expensive intermediate imports and capital imports – thus increasing the cost of production therefore negatively impacting AD + eco growth
A higher Aud – imports as inputs of production become relatively cheaper = cost of production decreases – willingness increases – AS ^

Question 52

Define consumer confidence

Answer 52

Consumers general expectations about future Eco prosperity

Question 53

How does consumer confidence affect Eco growth

Answer 53

When the economy is growing strongly it will add to consumer + business confidence and consumers are more likely to increase their marginal prosperity to consume (more likely to spend a higher proportion of their income)
Businesses will be more likely to invest in new capital and equipment or expand capacity

Both consumers + business will be more willing to take on debt as they believe their capacity to service the debt into the future is enhanced – this will lead to further upward pressure on consumption and investment lifting AD and increasing the rate of eco growth.

However once confidence is affected it will tend to be pro-cyclical in it’s affect on economic growth e.g when the economy is going strongly it will add to consumer and business confidence and consumers are more likely to increase their ‘marginal prosperity’ to consume = consumers and businesses will be more willing to take on additional debt during a period of high confidence as they believe they capacity to service the debt in the future is enhanced – this will contribute to further up ward pressure on consumption (C) and investment (I) lifting AD and increasing the rate of eco growth

Question 54

Consumer confidence will tend to be __________ in it effect on Eco growth

Answer 54

tend to be pro-cyclical in it’s affect on economic growth
e.g when the economy is going strongly it will add to consumer and business confidence and consumers are more likely to increase their ‘marginal prosperity’ to consume = consumers and businesses will be more willing to take on additional debt during a period of high confidence as they believe they capacity to service the debt in the future is enhanced – this will contribute to further up ward pressure on consumption (C) and investment (I) lifting AD and increasing the rate of eco growth

Question 55

How do overseas Eco conditions affect Eco growth

Answer 55

Increases in the rate of overseas economic conditions is likely to have a favorable impact on Aus’t rate of growth for 3 main reasons:
Likely to be increase demand for Aus’t exports of consumer items, capital items and raw materials needed to fuel the growth in overseas economies (china a developing country is still heavily dependent on Aus’t for raw materials)

Higher rates growth rates overseas may trigger inflationary pressures in those economies – resulting Australian’s demanding a smaller volume of imports and instead purchasing relatively cheaper domestic products (X-M) down

Strong growth will tend to improve consumer and business confidence and also provide a greater supply of foreign funds – that can be used to fuel Aus’t investment

Overall the higher overseas growth should boost C, I and (X-M) lifting AD and increasing the rate of eco growth
The volatility and low growth in USA economy has negatively impacted on the Australian economy over the past four years reducing consumer and business confidence, limiting foreign investment and detracting from growth in net export demand.

Question 56

Define tot

Answer 56

The ratio of Aus export prices to import prices

Question 57

Why is a higher tot typically good for AUS

Answer 57

When the TOT increases it means we have been able to purchase more imports for any given volume of exports. It means we have experienced an increase in our purchasing power, reflected by a higher level for ‘real GDP income’

e.g when the prices for iron ore increase this will lead to an increase in the TOT and boost the incomes for mining companies for any given level of output (not affected by volumes changing)

The higher level of income enables companies to increase investment and boost factor incomes (wages / dividends) these factors are likely to boost consumption, investment and exports providing a stimulus to AD

Question 58

When tot increases for Aus it is praised as a good result for 2 important reasons

Answer 58

More than 50% of Australia’s exports are commodity’s whose prices are largely determined by world markets – accordingly when the price of commodities increases this reflects either a growing world demand for the commodity (such as china’s large demand for iron ore) so when the pirce of iron ore increases it will have a relatively large impact on the export price index and therefore the TOT – Australian commodity exporters will benefit because any given volume of output can be sold for a higher price, boosting export incomes and the ability of exporters to increase investment demand or distribute the extra income to employees or shareholders providing an additional boost to AD via more consumption demand.

More than 50% of Australia’s imports are manufactured capital (or immediate goods) that have relatively few import competing products in Australia - accordingly the price elasticity of demand for these imports is low meaning that Australian industries do not significantly reduce the demand for capital imports when prices rise. Accordingly if the price paid for capital imports fell this would benefit Australian industries because they can acquire there own capital at a lower overall cost reducing production costs and providing a greater incentive to expand their productive capacity overtime – in this respect the TOT can be regarded as a supply side factor.

Question 59

Define productivity

Answer 59

The volume of output that is produced from a given number of inputs (labour + capital resources) Refers to how well factors of production combine to produce G+S

Question 60

Explain productivity and its affect on Eco growth

Answer 60

Common form of productivity is ‘labour productivity’ – measured as total output (GDP) divided by total hours worked
An increase in productivity should increase eco growth over time because any volume of output can be produced with fewer resources thereby enabling a business to experience lower production costs.
Per unit costs of production will likely fall (labour)
Thus there is greater CAPABILITY

Question 61

Define labour costs

Answer 61

The costs of businesses of employing labour, including the wages and salaries paid to employees and any additional costs with their employment

Question 62

Exalting how labour costs affect Eco growth

Answer 62

Like any business cost, businesess are keen to minimize cost without sacrificing quality of their inputs.
When labour costs increase without a corresponding increase in labour productivity, this results in the real cost of employing labour increasing
This can also occur if labour costs remain unchanged when labour productivity falls
Business can make an increase in their labour costs if they are confident that it will result in greater proportional increase in labour productivity
At a simple level the offer of bonuses and other incentives is an example of how this may play out in reality. Overall this means businesses will always be keen to minimize the ‘unit labour costs’ defined as – the average cost of labour per unit produced in the economy

                                 The average cost of labour Unit labour costs =   ---------------------------------
                                 Average labour productivity

Question 63

Unit labour costs will fall (become more productive/competitive) if:

Answer 63

Labour costs fall without a change in productivity
Productivity increases without a change in productivity
Labour productivity increases by a bigger margin than an increase in labour costs
Labour productivity falls by a smaller margin than a decrease in labour costs

Question 64

Define real unit labour costs

Answer 64

The average cost of labour (adjusted for inflation) divided by average labour productivity

Question 65

Explain gov regulations (supply side factor) affect of Eco growth

Answer 65

In addition to taxes levied by all levels of gov’t there are a range of gov regulations affecting businesses that are essentially designed to protect against ‘market failures’ inherent in market capitalist economies

Laws and regulations relating to licensing, permits, occupational health and safety and work cover all work to protect some members of society from the costs that businesses typically ‘externalize’
When gov’t introduces new regulations they invariably result in compliance and other costs for businesses that raise the costs of production. There are also costs of gov’t admin itself and the associated impact on taxes – this clearly has a negative impact on supply side constions raising cost and price pressures and slowing the rate of eco growth.

However many regulations are designed to improve the efficiency of the markets (such as those prohibiting anti-competitive behavior) and if appropriately applied and enforced should have a net positive impact on eco growth – they should facilitate greater eco growth overtime despite the added cost burden in the short term

Not all regulations are designed with efficiency in mind – many regulations seek to achieve greater equity and fairness at the expense of ‘efficiency’ their objective is to achieve an improvement in non material standard of living in the knowledge that material living standards will be sacrificed e.g. scaffolding for builders cost more and may take longer but safer

Question 66

Define participation rate

Answer 66

The percentage of the total ‘working age’ population (over 15) that is a member of the labour force

Question 67

How does participation rate effect Eco g

Answer 67

When the participation rate increases this will reflect a bigger labour supply and greater competition for jobs will exist, this exerts a downward pressure on labour cost (unit labour costs are likely to fall)
Extra number of people looking for work will minimize the chance of wage increases within the market
In addition higher labour supply increases pressure on those already employed to lift performance this having a favorable effect on labour productivity
The lower unit labour costs should result in lower average cost of production for the business, leading to a fall in inflation and a boost in Ad and eco growth.

Question 68

Explain industrial distribution and effect of Eco g

Answer 68

Occurs when employees and employers are in disagreement over the setting of wages or conditions at workplaces
The disputes usually involve employees seeking to ‘hurt’ employers by going on strike, arranging stop work meetings – lowering productivity and increasing average production costs
Accordingly this will slow growth in AD and investment becomes less attractive

Question 69

Explain climate and gel graphical events (supply factor) and effect on Eco growth

Answer 69

climate + geographical events refer to things like natural disasters (floods) or wars that impact on supply and costs of inputs use by industries
when these events occur it can result in an increase in cost of production for those businesses relying on inputs that are produced in these regions
In addition national or even global resources can be mobilized to assist relief which further adds to costs of other goods and services as suppliers are affected and key resources become relatively scarce
This results in an increase in aggerate price pressure and lower rates of growth in AD and real gdp

Eco growth will fall if natural resources exhausted
Population damages productive resources
Measures to prevent global warming slow pace of production
E.g. Peak oil - depletion of natural resources

Question 70

Other potential influences of FUTURE rates of Eco growth

Answer 70

Climate change
Ageing population (labour shortages)
global conflict and instability
Capacity utilisation

Question 71

Explain how the ageing population affects rates of Eco growth

Answer 71

With low feterlity rates and increasing life expectancy this trend is expected to continue into the future with negative implications for the economy.
Over the next 40 years the number of Australians of retirement age (65-84) is expected to double – this means as a percentage of the total population those over 65 will increase by 13% to 23% in 2050
As a consequence those of working age will fall from 67% to 60% the size of the about force is expected to fall significantly particularly form 2020 when the bulk of the ‘baby boomers’ retire
With fewer people of working age offering their labour services – cost pressures in the economy will build and the rate of growth in the nations productive capacity is likely to slow
This will occur in tandem with greater gov’t expenditure to provide for health, aged pensioners and aged care all working to erode any budget surplus – this will have negative implications for either tax rates or government debt
Further as the labour force is smaller the gov’t will be generating less tax revenue from the working population

Question 72

Define capacity utilisation

Answer 72

The rate at which industries produce in relation to maximum capacity

Question 73

Explain how capacity utilisation will affect future Eco rates of growth

Answer 73

It is the amount of output that is currently produced compared to potential output. Capcity utilization rates are used as an indicator of capacity constraints or excess capacity.
When capacity utilization rates are below 80-81% it suggest that excess capcity exists and inflationary pressures are likely to be at a minimum
If rates are above 82-83% it indicates that the economy is struggling to produce enough output to keep up with the demand and capacity constraints are present which is ikely to translate to inflationary pressure
These capacity constraints can be caused by Ad that is too excessive and structural problems in the economy that are causing relatively low levels of efficiency and relatively low aggregate supply
It is important to note changes in capacity utilization are not a supply factor in the sense of causing the AS curve to move as it does for all other supply factors. Despite this changes in utilization rates do indeed have implications for future rates of eco growth
On one hand an increasing rate for capacity utilization from low levels can stimulate growth as it means that industry is using up more of it’s existing capacity and is therefore achieving efficiency gains and lowering average production costs
On the other hand increasing rate of capacity utilization to high levels can inhibit growth with higher inflation and higher interest rates working to slow the rate of eco growth and the real gdp
Australia’s capacity utilization start of 2015 = 80% indicates spare capacity avaliabe

Question 74

Explain how global conflict and instability will effect future Eco rates of growth

Answer 74

Conflicts exist around the globe that typically stem from competing interests in relation to key economic resources
While some do not have direct impact on the Aus’t economy – it typically the case that conflicts in other parts the world will affect out economy and living standards in some way

‘The world is becoming smaller’ China sneezes the whole world catches a cold

“Contagion” - the effect on other economies whom are negatively invested
Global terrorism- confidence levels