Unit 4, Area of Study 2 - Aggregate Supply Policy

Question 1

Capacity constraints

Answer 1

Factors that prevent (or constrain) an economy from producing more goods and services such as, skill shortages and infrastructure bottlenecks.

Question 2

Production

Answer 2

the process of converting resources and inputs into goods and services or the total volume (or value) of goods and services produced over time.

Question 3

Productivity

Answer 3

the volume of output (e.g. real GDP) that is produced from a given number of inputs (e.g. labour and capital resources).

Question 4

Productive capacity

Answer 4

the point at which production (or GDP) is occurring at the maximum level possible in an economy.

Question 5

Aggregate Supply

Answer 5

represents the total volume of goods and services that all suppliers have produced and supplied over a period of time.

It is important to note that, “the willingness and ability of suppliers to supply” influences aggregate supply, however, it is not a definition of aggregate supply.

Question 6

Aims of Aggregate Supply policies

Answer 6

• Push AS curve to the right
• Boost Australia’s productive capacity
• Enable higher output (GDP) at lower prices and higher employment levels
• Lower inflation
• Increasing real GDP, without adding to inflationary pressure in an effort to boost living standards (sustainable growth).
• Lower production costs enable firms to reduce prices for any given level of output – without sacrificing profits!
• Alternatively, a bigger productive capacity facilitates greater national output before capacity constraints (and inflation become a problem).

Question 7

Examples of Tax Reform

Answer 7

Households / Consumers

Personal Income Tax plan - altering tax brackets and reducing the tax rates within the progressive tax system to leave consumers with higher level of disposable income.

Businesses / Producers

• Reducing the corporate tax rate from the current 30% is a possible change. At the moment only businesses with turnover of $50 million or less access a rate of 25%
• Accelerated depreciation - example Instant Asset Write-off.

Question 8

Impact of Personal Income Tax reform on Aggregate Supply

Answer 8

• Lower personal income tax provides an incentive to work (quantity of factors of production) and in industries with bonuses attached to performance, lower taxes will see increased effort (productivity growth) and more people willing to improve their skills via training and education courses in order to advance their careers (quality of factors of production) = increase in aggregate supply.
• Lower personal income tax rates = higher labour force participation rate (quantity of factors of production) and increase in productivity and downward pressure on wage growth due to increased competition in the labour market = increase in aggregate supply.
• Lower personal income tax rates = downward pressure on labour costs due to increase labour force participation rate = easing of labour shortages = lower costs of production = increase in aggregate supply.

Question 9

Impact of Corporate Tax reform on Aggregate Supply

Answer 9

• Lower company tax rates (i.e., 25%) = greater retained profits to reinvest into the business in the form of new plant, equipment and technology (quality of factors of production, productivity growth = increase in aggregate supply.
• Accelerated depreciation / Instant Asset Write off –> incentivises investment in new productive assets = increases producers productivity and gives them access to a great quantity and quality of factors of production in form of new technology.

Question 10

Immigration policy

(Skilled Migration Programme)

Answer 10

A strategic supply-side approach to managing the number (level) of migrants coming to Australia from overseas attracting young, English speaking and suitably skilled people.

Question 11

Why do we need Skilled Migration?

Answer 11

Intergenerational report = 3 P framework that will contribute to economic growth (population, participation and productivity)

The effects of an ageing population (and declining fertility rates) has created a skills shortge in the Australian economy, creating a significant capacity constraint holding back economic growth by negatively impacting the productive capacity of the economy and aggregate supply

Question 12

How does the Skilled Migration Programme impact on the Labour Market?

Answer 12

• Alleviates the capacity constraint of skill shortages by increasing quantity and quality of factors of production (i.e., Labour Resources)
• Boosts the Labour Force Participation Rate, placing downward pressure on wages (the price of labour in the labour market and a key cost of production) and improves productivity growth.
• Both these impacts have a positive impact on the supply and price of labour in the labour market.

Question 13

How does a Skilled Migration Programme impact on Aggregate Supply?

Answer 13

Immigration can help to boost the nation’s aggregate supply levels in a number of ways:

• Increase the supply of labour (quantity of factor of production), placing downward pressure on wages rates (production costs), boosting employment and output.
• Alleviate capacity constraints (or skills shortages) and help to maintain labour productivity level (quantity and quality of factors of production and productivity growth).
• Further enhance productivity via the intake of young skilled professionals to replace the ageing population and retirees (quantity and quality of factors of production).

Each of these impacts, positively impact on producers abiltiy to increase the volume of production of goods and services in the Australian economy over a given period of time (Aggregate Supply).

Question 14

How does the Skilled Migration Programme influence the achievement of the goal of strong and sustainable economic growth?

Answer 14

• Boosting the productive capacity (and AS) by improving productivity (productivity growth), increasing supply of labour and removing capacity constraint of skills shortages (both quality and quantity of factors of production) = economic growth as suppliers are more willing and able to supply in the economy at lower prices à expansion in demand (i.e. higher levels of output at lower prices = higher levels of economic activity due to expansion in demand = growth).

Question 15

How does the Skilled Migration Programme influence the achievement of the goal of full employment?

Answer 15

• Removal of capacity constraints (skill shortages) and increase in supply of labour eases upward pressure on wages and costs via increase in LFPR = helps producers maintain output at relatively low prices = expansion in demand = employment opportunities as producers require more labour to facilitate increase in output.

Question 16

How does the Skilled Migration Programme influence the achievement of the goal of low inflation?

Answer 16

• Whilst immigration can cause demand inflationary pressures, as the nature of Australia’s immigration policy focuses on skilled migration, the boost to productivity growth and downward pressure on wages (cost of production) = increase in labour supply and easing of skills shortage / capacity constraint = boost to productivity capacity (and AS), placing downward pressure cost inflationary pressures on inflation (i.e. lowering the cost per unit of production).

Question 17

Trade Protectionism / Trade Barriers

Answer 17

Protectionism in trade refers to government policies aimed at restricting imports and shielding domestic industries from foreign competition.
* Import quotas – restriction on volume of imports / a limit
* Tariffs – a tax on imports (form of indirect tax)
* Subsidies – Financial support to domestic industries to make them more competitive against foreign imports.
* Local Content Requirements - Rules requiring a certain percentage of a product to be made domestically.

The aim of protection is to protect the local producer against competition in order to protect local production, jobs and income.

Negative impact: less pressure on local producers to minimise cost and maximise efficiency / productivity

Question 18

Trade Liberalisation (Nature)

Answer 18

Trade liberalisation includes any government policy initiative that is designed to promote free trade or reduce restrictions to free trade (typically referred to as barriers to trade or protection).

Question 19

Trade Liberalisation (Operation)

Answer 19

The reduction/removal of trade barriers because of trade liberalisation increases the level of competition in particular industries, as they face more competition from overseas producers.

It forces local businesses to restructure to meet these higher levels of competition and to take advantage of the new opportunities in the global market or go out of business.

The focus of the restructure will be to reduce costs of production and/or improve levels of productivity, inefficient businesses and industries close down, with resources being reallocated to the remaining efficient businesses and industries.

Remaining industries will be areas in which Australia has a comparative advantage over other nations )

Question 20

Comparative Advantage

Answer 20

Comparative advantage: refers to a country’s ability to produce a particular good or service at a lower opportunity cost than other countries.

Question 21

Impact of trade lib on international competitiveness (short term)

Answer 21

Mixed
* some firms/industries cannot compete with imports
* export-oriented sectors or those already globally competitive, lower input costs from cheaper imports and access to larger markets can provide an immediate boost to competitiveness

Question 22

Impact of trade lib on international competitiveness (short term)

Answer 22

Trade liberalisation = ↑ competition = ↑ productivity and ↓ costs of production = ↑ productive capacity and aggregate supply = higher volume of production at lower prices = ↑ international competitiveness

Question 23

Impact of Trade Liberalisation on resource allocation

Answer 23

Trade Liberalisation = ↑ competition = inefficient businesses/industries close = resource reallocated to industries / comparative advantage.

Question 24

Example of market based environmental policy Nature?

Answer 24

Setting a cap on total emissions, issuing allowances/permits to polluters and allowing firms to buy and sell permits to meet their obligations as a result setting a price on these emissions which increases over time as the government reduces the number of allowances/permits.

Question 25

Market Based Environmental Policy (ETS) - how it operates?

Answer 25

Places a cost on emissions forcing producers to internalise cost imposed on others (think negative externalities) --> Incentivising producers who use production processes responsible for carbon emissions to seek alternate methods of production including use of energy from renewable sources --> encourages innovation in renewable energy generation technology amongst other areas that then can spillover into other areas of production.

Question 26

Impact of Emissions Trading Scheme on Aggregate Supply in Short Term

Answer 26

* ↑ **cost of production** via the permit/allowance costs as producers * Can contribute to some producers closing down * Both contribute to a contraction / reduced productive capacity of the economy * Limited / Reducing the level of output of goods and services.

Question 27

Impact of Emissions Trading Scheme on Aggregate Supply in Long Term

Answer 27

* ↑ investment in innovative technology = ↑ access to quality and quantity of factors production including new technologies that result from the spillover from developments in cleaner methods of generation of electricity and production methods in general * ↓ costs of production as producers of renewable energy achieve greater economies of scale and can reduce their prices = lower energy prices / Reduced instances of extreme weather events reducing negative impacts on infrastructure (road, rail and ports) * By reducing pollution and improving air quality, an ETS can lead to better public health outcomes. Healthier workers are more productive.

Question 28

Impact of Emissions Trading Scheme on Inter-temporal efficiency

Answer 28

Placing a price on carbon emissions which should incentivise producers (and consumers) to change their behaviour leading through the internalisation of the costs associated with carbon emissions. Changes might involve seeking alternative production methods using newer more efficient technologies or utilising renewable energy sources for power. Or development of new, less carbon intensive technologies to be used in the production process. Link: All leading to an allocation of resources in such a way that the living standards of current generations are not jeopardising future generations living standards, as the natural environment is being protected.

Question 29

Impact of Emissions Trading Scheme on material living Standards - Short term

Answer 29

-->Higher prices for households because of: * Increased Production Costs --> Higher Prices for Goods and Services * Impact on employment (structural) --> Job Losses in Certain Industries * Impact on Household Budgets --> Increased Utility Bills (Electricity) * All reducing the consumers access to goods and services (MLS)

Question 30

Impact of Emissions Trading Scheme on matieral living Standards - Long term

Answer 30

Impact on Employment * Job Creation in Green Sectors --> boosting household income = improving material living standards. * Incentive for investment in new technologies --> Reduced production costs as more research and development go into renewable energy should reduce the price of final goods and services = increased purchasing power and greater access to goods and services (material living standards). * Reduced costs due to damage to economy --> Reduced instances of damage to infrastructure due to extreme weather events will ensure the productive capacity of the economy remains high, placing downward pressure on prices = increased purchasing power and greater access to goods and services (material living standards).

Question 31

Impact of Emissions Trading Scheme on **non-material** living Standards - Short term

Answer 31

↑ Prices  can contribute to financial stress / reduces purchasing power of household income reducing access to goods and services reducing general levels of satisfaction.

Question 32

Impact of Emissions Trading Scheme on **non-material** living Standards - long term

Answer 32

Improved quality of the environment can lead to better health outcomes and general sense of well-being improving NMLS