structural Change Flashcards
Structural Change
- term used to describe changes in the distribution of output, income and employment across industries, sectors, regions and states.
- Agricultural activities dominate economic activity and employ most people during a country’s pre-industrial phase.
- > a change to industrial is based on ability to produce surplus food
- > industrialize leads to urbanize
- > urbanization, labour-intensive manufacturing activities grow generating new income and demand.
- > accumulation of physical and financial capital leads to a more sophisticated manufacturing structure and economic activity
- > in the long term, service sector dominates and manufacturing industry declines.
Employment Levels?
- Mining employment is small due to capital-intensive nature of the sector.
- Services are a major employer - their share of total employment began a trend in 1940’s & now accounts for 80% of all workers.
Explain the concepts of MER policy
• MER (one of the three ‘weapons’ that the government can use to intervene on economic activity) refers to all of the government policies and programmes
- under a policy-induced process, aim to improve the productivity and efficiency in the Australian economy (i.e. has increased the capacity of the economy).
• MER’s have been used in Australia since 1980 in response to:
o Globalisation.
o Weaknesses and constraints in using fiscal and monetary policies.
o The fluctuations of the Australian economy with the CAD and inflation constraining economic growth.
• Difference between MER and Fiscal/Monetary is:
o Fiscal/Monetary; demand management policies (aim to reduce AD to stimulate recessions/slow down booms).
o MER; supply management policy
- (aim to increase SRAS and LRAS to act as a backdoor to increasing EG and achieving price stability, a potent combination, that would normally conflict as increased EG without affecting AD will not induce a need to increase inflation to cater for the increased demand).
Explain the concept of productivity
- efficiency in which firms / producers / economy converts inputs into outputs
- Increase in productivity is major contributor to an increase in EG.
- Productivity is measured by comparing the volume of output per unit of input at two different times (i.e. increased output on the same level of capital and labour); result from training etc.
- Increase in productivity over time leads to increase in LRAS (with apparent increase in SRAS as well).
Outline the common measures of productivity
• Three different ways to measure productivity:
o Labour productivity: comparison of value of GDP (or volume of goods) per labour hour worked at two different times.
o Capital productivity: comparison of value of GDP (or volume of goods) per unit of capital equipment employed in production at two different times.
o Multifactor productivity: key measure and combines the two; comparison of value of GDP (or volume of goods) per unit of labour and capital at two different times.
• Productivity shown in APF model (aggregate production function).
o Reflects the Law of Diminishing Returns (i.e. there is a limit of the level of GDP that can be achieved with a constant level of inputs, even with increased productivity).
o Increased productivity shifts APF upwards (i.e. more output, same input).
Explain the concept of economic efficiency
• Economic efficiency means that an economy is operating at its maximum potential and no resources are being underemployed. To do this, the government aims to increase three types of efficiency:
o Technical efficiency: producing output with the least cost combination of factors
-> (i.e. most cost effect way to produce).
o Allocative efficiency: producing goods that have lower opportunity cost
-> (i.e. no wastage of resources and specialisation occurs and resources allocated to most valued uses).
o Dynamic efficiency: refers to the adaptability of the economy
- > (i.e. the speed with which it adjusts its resource use over time).
- > An example of how MER can increase dynamic efficiency is to increase the level of competition
- > will force producers to be more responsive to demand and supply changes.
• Efficiency equates to productivity which contributes to increased production and an eventual increase in economic growth.
Discuss examples of MER policy in Australia
- NEW TAXATION SYSTEM (TAX REFORM)
- WORKPLACE RELATIONS ACT (LABOUR REFORM)
- DEREGULATION OF FINANCIAL MARKETS
- TRADE REFORMS
- PUBLIC SECTOR REFORMS
NEW TAXATION SYSTEM (TAX REFORM)
• Initiative of the Howard government and was introduced on July 1st 2000 (beginning of the new millennium financial year).
• Aimed at reducing extent to which the tax system distorts the allocation of resources and imposes costs on Australian businesses.
• Made in response to growing concerns of complexity of tax system, extent to which it discriminated against specific sectors of the economy and negative impact on international competitiveness.
• Tax reform included:
o Introduce GST
o Cancellation of Wholesale Sales Tax
o Reduction Company tax (36% to 30%)
o Reduction in capital gains tax
o Increase tax free threshold.
• Effects: reduction in business/consumer costs (increase productivity) which allows for EG.
• Increased EG from 2.1% (2001) to 3.9% (2002)
• Follow on: Henry Report in Rudd Government 2008
- WORKPLACE RELATIONS ACT (LABOUR REFORM)
- In response to Australia’s labour market being highly regulated and having centralised wage fixing, the labour market moved towards enterprise bargaining in the early 1990’s.
- 1996 was enshrined in Workplace Relations Act, aiming to make wage negotiations decentralised and to lower the influence of the unions.
- Amendment Act introduced in 2005 which introduced a minimum wage/working conditions.
- Working hours for firms deregulated (increased opening hours).
- Working towards agreement (fewer strikes).
DEREGULATION OF FINANCIAL MARKETS
• Deregulation of the financial market in 1983 by introducing:
o Cancellation of all RBA controls over interest rates
o Freely floating exchange rate
o 16 new foreign banks which completed with domestic banks, increased competition (e.g. HSBC and Macquarie).
o Banks/Non Banks given same restrictions.
• Increase competition/lower interest rate/resulted in lower fall of economy in GFC due to constant reforms and stable financial system.
- TRADE REFORMS
• Major focus by government in 1988
• Eliminate tariffs 2010 APEC agreement; therefore focus on tariffs.
• Exceptions passenger motor vehicle/TCF tariffs remove by 2015.
• Improve 3 efficiencies:
o Technical: increasing competition from foreign producers.
o Allocative: reduce price distorting effect of tariff meaning reduce opportunity cost.
o Dynamic: proportional relationship; increasing competition encourages innovation.
- PUBLIC SECTOR REFORMS
- Privatisation: transferring ownership of government run organisation into the private sector (e.g. Telstra, QANTAS; 1997). Goal is to improve efficiency of the firms by forcing them to be answerable to shareholders.
- Corporatisation: process of forcing GBEs to face same market as other businesses. They must aim to make a profit as if they were owned by shareholders (e.g. Australia Post).
Explain the relationship between MER and structural change
• Structural change refers to the process by which the pattern of production in an economy alters over time. Certain products, methods of production and even industries disappear while others emerge. It is a continual process, brought about by changes in the pattern of demand and supply.
• Indicators of structural change:
o Changing patterns of employment, proportion of GDP and resource usage.
• Cases of structural change:
o Changes in pattern of consumer demand (from changes in preferences and taste) lead to emerging products while others become obsolete.
o Technological change; influence consumer taste.
• MER does not facilitate structural change, but can reduce the impediments to change which helps to increase consumer sentiment.
Demonstrate and explain the impact of MER on AS
- Increase in productivity/efficiency shifts SRAS and LRAS curves to the right.
- Increase in efficiency reduces costs (lowers price level).
