PP3 - Economic Growth + AD Flashcards
sources of eg
- Quality of labour / Entrepreneurs ( Human Capital )
- Increases in investment ( via AD )
- Improved factors of production efficiency / Technology
- Favourable institutional features ( Govt, Banking )
major sources
I - int competitiveness
G - government policies
A - aggregate demand
Percentage of AUS aggregate demand
C = 55%
I = 18%
G = 25%
( X - M ) = 2%
Percentage of China AD:
C = 35+%
I = 12%
G = 50%
( X - M ) = 3%
X = 3.5
M = 2.5
increases to consumption
- National income ↑
- Domestic savings decrease
- Increase overseas borrowing
- Unsustainable if consumption growth fuelled by access to easy consumer credit
increases to government spending
- countercyclical
- Spending via discretionary fiscal policy ( budget ) and non-discretionary automatic stabilisers
increases in investment
- Encouraged by AD > Output and higher consumption
- Take advantage of increased efficiencies and technological change
Long-term investment ie: $400B housing investment in progress
net export increases
- Encouraged by stronger world economy ( China + EU )
- Increased INT competitiveness + stronger exchange rate
- Stronger AUS economy → increases in imports ( higher SOL )
international competitiveness
Degree of ability for Australian exports and import competing firms to compete against foreign producers.
Factors of international competitiveness
P - Productivity
Q - Quality
R - retail Price ( Fx rates, inflation, costs )
S - Service
int comp sources from - higher productivity
Capital deepening + Higher productivity → lower average costs + higher incomes → increased efficiencies + int comp
depreciating currency + int comp
encourages dom prod –> cheaper exports –> increase exports
- Can devalue currency in downturn to stimulate growth
macroeconomic reform
- Fiscal Policy
- Monetary Policy
EG + AS
- increase in AS will lead to an increase in output at lower prices
- This will lessen inflationary pressures from increases in aggregate demand
Increase AS results in EG without inflationary pressures
positive effects of EG - nation
Environment ( greater level of protection )
Exports ( greater export income )
Poverty → lower poverty rates
positive effect of EG - government
Taxation ( increased taxation )
Spending ( less UE spending ) → larger surplus, long term infrastructure + investment projects
positive effect of EG –> households
Income ( higher real per capita income )
consumption ( increasing SOL )
savings ( higher levels of dom. savings )
Leisure ( increased quality of life )
Employment ( creation of employment )
postive effects of eg –> firms
Productivity growth ( LABOUR )
Technological progress ( Capital )
Investment ( To meet growing demand )
negative effect of EG –> external stability
Increases Imports → worsens CAD + Foreign Liability
Liability growth OK if for investment and purchase of capital goods
Higher borrowing increase borrowing costs
International Competitiveness hurt if increases in AD increases inflation ( Offset by decrease AUD )
negative effect of EG –> enviro
Pollutes natural ecosystem
Depletes non-renewable resources
Externalities - pollution, overcrowding
negative effect of EG –> equitable distribution of Income
Widens gaps between rich and poor
Social costs of inequality
Regional inequality
negative effect of EG –> employment
Structural UE
Declining industries
Capital investment
Self Esteem
negative effect of EG –> price stability
- ↑ AD, ↑ demand pull inflation
- ↑ employment ↑ Cost Push Inflation
-↑ EG ↑ Inflationary Expectations - ↑ Imports ↓ AUD ↑ Import Inflation
EG 1990-2000
- Post-recession that needed to happen, growth averaged 3-3.7%
driven by productivity growth
2000-2008 EG
- 3.0-4.0%
driven by China’s demand for coal and iron ore - resources boom
2008-2009
growth slowed to 1% due to gfc
avoided technical recession due to kevin rudd 52B discretionary fiscal stimulus
2010-2012
- Renewed resources investment boom 3.0%+. Peak in mining and investment $25B
2013-2015 Global Uncertainty
slow global growth recovery driven US ( QE ended ), Euro still ( brexit, greece )
2018-2019 EG
- Boosted Export Earnings due to pumped-up commodity prices
- 2018 - iron ore rose from US$60/ton to US$150/ton ) + bumper wheat crop
- End of construction phase of Australia’s mining boom simultaneously cuts need for imports
- Balance of payments CA moved to surplus ( INELASTIC strong commodity pisces + demand )
- Record low interest rates → CAS move to 3.4% by 2020
2019 - secular stagnation
Economic Growth in Australia is characterised by weak growth in consumer spending, in business investment and on productivity improvement
Low price inflation + wage growth
Low real interest rates
stagflation
Rapid decrease in Aggregate Supply, leads to high unemployment combined with high inflation
EG: start of 2020
Resources booms are over. – - Australia expects growth 3-4%.
- Sourced from:
China: Slowing growth, ‘ rebalancing ‘ focus on domestic consumption from rising middle class and export growth.
Japan: Push for growth, strong QE policy, sharp rise in fiscal spending structural reform ( inflexibility + population problems ). Regional tensions ( N. Korea )
USA: Signs of recovery ( eco. Growth + falling UE ), ended QE ( $85B a month ), tightening MP ( USA’s FED FUNDS RATE low 0.25-2.5% )
2020-2021 covid EG
- 1st 2 Quarters of Negative EG: -0.3% and -7.0%
- 2020 annualised at -1.1%
- Fiscal Policy discretionary stimulus of $200B:
- Jobkeeper: ( 1500 fortnight ), $90B in each year
- Jobseeker: ( 750 fortnighter ), prior New Start ( $550 )
- Mandated lockdown prevented consumption in shops + restaurants
‘ Pent Up ‘ Demand rebounded upon re-opening
2021-2022: Covid Government Response
- EG rate @ 2.7% in 2022
- Growth boosted by end of lockdown, rebound in consumer spending ( 6.3% formerly 4.8% in Q3 2021 )
- Govt spending growth eased ( 3.8% –> 0.1% after $200B jobseeker/keeper stimulus )
- trade balance contributed negatively
–> exports fell 1.5%
–> imports dropped 0.9%
2023
EG : 1.5%
Infl: 4.1%
UE: 4.1%
future EG - Goods + resources:
GOODS - RESOURCES:
Lessening Coal and Iron Ore
Rise in LNG
%20B + investment so far and expect to export $100B by 2025 ( korea, japan, taiwan )
future EG: services
- increase in services tourism from asian market
- Expect Chinese visitors double from 700,000 in 2013 and export dollars to rise from 4B to 10B by 2025
future EG: Investment
End in mining investment spending → growth in LNG investment
Capital accumulation in place → higher levels of commodity exports
Fall in imports of capital G+S for mining will improve trade balance
Growth in public/private infrastructure
future of bogs
- Growth in Exports ( LNG, Rural ).
- Fall in imports of capital goods for mining sector
- Imports of consumer goods remain constrained due to cost of living crisis
BOGS STAYS IN SURPLUS
future of PY
- Fall in investment inflows due to end of mining boom + near completion of LNG projects
- Govt debt eventually rises
Rising interest rates in EU + US due to inflation
CONSEQUENCE: Rising NPYD Debits
Economic Growth and 3 P’s:
driven by 3Ps
Population
Participation
Productivity
okuns law
The rate of economic growth must exceed the contribution of productivity growth and growth in the workforce for the UE rate to fall.
OKUNS LAW
Target: 3-4%
Prior to covid: < 3.33%
Covid Recession: -03% –> -7.0%
2022 annual: 2.7% ( $90B annual jobkeeper, 300B in spending during covid )
2023 Quarterly and Annual: 0.6, 0.5, 0.3, 0.2, + 1.5%
GFC: +1% ( 52B Kevin Rudd )
