Chapter 5 - The goal of strong and sustainable economic growth Flashcards
What is strong and sustainable economic growth?
Economic growth for a country refers to any increase in the amount or level of national production that has occurred over time.
A growth rate cannot be so high that it:
- causes inflation to climb to unacceptable levels
- results in significant external pressures on the economy
- leads to an overuse of the nation’s natural resources.
A sustainable rate of economic growth is generally considered to be within the range of 3 - 3.5% per annum.
What is the measure used to measure economic growth?
In Australia, Gross Domestic Product (GDP) is used to measure the amount of production taking place in the economy and it is defined as;
the final market value of all goods and services produced in Australia over a given time period.
GDP is made up of the total ‘value added’ during each stage of the production process.
What is an annual GDP figure?
Annual rate of economic growth (year-on-year growth):
Is derived by using the real GDP dollar values for the last quarter and comparing them for the quarter one year earlier.
What is an Annualised growth rate?
Annualised Growth Rate:
Is derived by multiplying the quarterly rate of economic growth by four (quarters) to arrive at an annualised growth rate.
Comparison of Annual and Annualised Figures
Annualised Quarterly Figures are more instructive in terms of their ability to isolate turning points and capture the volatility occurring within any one year period, whereas, annual figures show more of a trend overall.
Both are derived from the same raw figures, but show a slightly different story.
Why does Australia pursue economic growth?
All governments pursue economic growth as it is the primary means by which nations can maintain and/or improve living standards over time.
Growth in production means that there has been growth in incomes that accrue to the factors of production, such as wages, interest, and dividends. These higher income levels will enable some members of society to have a greater ability to purchase goods and services that satisfy their wants, thereby having a positive impact on material living standards.
Economic growth is also pursued because of its positive relationship between employment growth and its ability to reduce rates of unemployment.
What is derived demand for labour?
Demand for labour is derived from, or stems from, a bigger demand for goods and services (AD).
Increased AD → Increased Production → Firms Expand → Employ more workers …
Economic growth and Quality of Life
Economic growth can also provide individuals and groups with the opportunity to enjoy an increase in non-material living standards, encompassing more intangible factors that shape our quality of life. Factors include; happiness, freedom of expression/movement, self esteem etc…
What is Jobless Growth?
Jobless growth occurs when a higher output is achieved via a greater productivity of existing inputs, negating the need to hire additional labour inputs.
What are the consequences of failing to achieve strong and sustainable growth?
Firstly, any rate of economic growth that is positive, but below the rate of population growth signals that our nation has experienced a decline in per capita incomes. While the size of real GDP has increased, and the economy is growing in absolute terms, the average income per person declines and our average material living standards will fall.
Secondly, any rate of economic 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.
Thirdly, any rate of economic growth that is fuelled by excessive consumption at the expense of investment is likely to reduce future productive capacity and growth rates.
Finally, growth may be high enough to push the PPC outwards, but if it is unsustainable such that inflation becomes too high, external pressures become burdensome, or it comes at the expense of the environment, then it simply transfers the problems to the future.
What are 3 Environmental Influences on Australia’s Economic Growth?
Production of goods and services require large quantities of natural resources, many of which are non-renewable, forcing governments to accept the natural limits placed on economic growth by our physical environment.
3 Environmental Limits:
- Natural Disasters (Droughts, floods)
- Climate Change (extreme weather, rising sea levels, land degradation)
- Peak Oil (occurs when half the world’s oil supplies have been extracted and further extraction requires more and more energy)
What are the limitations of real GDP as a measure of economic growth and living standards?
While real GDP is generally considered to be a reasonably reliable indicator of the level of production that take place in our economy, it suffers from a number of shortcomings that ensure it will never provide a totally accurate representation of national production levels or living standards:
- GDP is inaccurate as it excludes some non-marketed goods and services such as home-based production & black market goods.
- GDP fails to distinguish monetary transactions that actually improve our welfare from those that detract our welfare (gambling, tobacco)
- GDP doesn’t measure changes in quality of goods and services
- Some non-market goods and services have value imputed for them (produce grown & consumed on a farm), the value imputed might not accurately reflect market values
- Inaccuracies when converting real GDP from chain volume measure
- GDP figures are based on estimates, thus not 100% accurate
- GDP figures do not take into account the value associated with the depletion of the environment or cost associated with other negative externalities
- GDP figures do not take into account the value of leisure time that may be sacrificed when there are increases in GDP
- GDP fails to take into account the direct effects stemming from movements in the terms of trade
What is the Genuine Progress Indicator?
The GPI is an indicator of national wellbeing that seeks to overcome the diffculties associated with the use fo GDP. GPI focuses on expenditure but also takes into account social costs (unemployment, crime, gambling etc…).
For example, the $500 Million that gambling amounts to each year in country X, would detract from the GPI figure of country X
What is the Measure of Australia’s Progress indicator?
MAP has the specific purpose of finding the answer to; ‘has life in Australia been getting better?’
4 Key Domains:
- Society
- Economy
- Environment
- Governance
Each domain has a number of ‘dimensions’ that serve to provide an indication of the changes that might be taking place in the nations domains.
What are aggregate demand factors affecting economic growth?
Any event that causes AD to change will have an impact on economic growth and can, therefore, be considered an AD factor affecting economic growth.
AD = C + I + G + (X - M)
- Interest Rates: higher interest rates lead to a decrease in demand as the cost of borrowing increases
- Real Disposable Income: households purchasing power increases equal an increase in spending (‘C’)
- Taxation Rates: lower individual & company taxation rates equal more disposable income and thus higher demand
- Government Assistance: can increase demand through subsidies & rebates
- Consumer & Business Confidence: higher levels means consumers & businesses are more willing to spend and take on debt
- Overseas rates of economic growth: increased rates of economic growth overseas increases demand in Australia for Australian made goods (exports)
- Terms of Trade: increase in TOT equals an increase in purchasing power
What are aggregate supply factors affecting economic growth?
The aggregate supply curve in the economy represents the total value of production that can be produced in relation to various aggregate price levels.
Any factor affecting costs of production or supply potential is and AS factor affecting economic growth.
- Interest Rates: higher interest rates equals higher financing, increasing costs of production thus decreasing AS
- Taxation Rates: lower taxation rates, lowers the cost of production, increasing supply
- Government Assistance: higher tarrifs increase the cost of production for importers, decreasing supply
- Exchange Rate: lower AUD will result in more expensive imports
- Terms of Trade
- Productivity: increased productivity, lowers cost per unit (more output for same input)
- Labour Costs: labour cost is a major cost of production
- Government Regulation: regulations can be a large barrier of entry in regards to financial cost and time
- Participation Rates: higher participation rates decrease labour costs
- Industrial Disputation: lost working hours and lower productivity
- Climatic or Geopolitical Events: increase cost of production and lower trade volumes.
