Topic 3 CH 7 Economics growth
2 capacity constraints in Australia
skills shortages and infrastructure bottle necks
The marginal propensity to consume (MPC) definition
the proportion of each extra dollar of income that is spent on consumer products
The marginal propensity to save (MPS) definition
the proportion of extra dollar of income that is saved
Example for investment (expectations) (aggregate demand)
the spur in Chinese demand for Australian resources induced record high-capital expenditure and promising future prospects, leading to mining investment increasing by fivefold from $20b since 2004, peaking at 9% of the GDP in 2012
aggregate supply diagram explanation
As seen in figure 2 (production possibility frontier), an optimal trade-off between goods must be obtained to achieve maximum output and economic growth. The outward shift in the curve in Figure 2 (PPF1 to PPF2) reveals an increase in productive capacity, which will drive long-term economic growth
how does net exports and imports affect aggregate demand
Australia's net exports and influenced by the level of overseas and domestic income. When overseas income levels rise Australia's exports rise increasing aggregate demand and when domestic income rises imports rise reducing net exports and aggregate demand. Net exports are also influenced by exchange rate movements, levels of international competitiveness and protectionist policies of other countries
2 Examples for consumption (aggregate demand)
Australia's strong economic growth rate peaking at 4% in 2007 was attributed to the growth in real capital household income which rose by 13% and consumption averaging around 5%. Uncertainty during bushfires and COVID caused confidence and expectations to plummet leading to consumption growth to decrease by 0.2% and GDP growth rate of -4.16% in 2020 compared to 2019
Aggregate demand diagram explanation
an outward shift in aggregate demand (AD1 to AD2 will promote economic growth with increased price levels and real GDP. This growth is induced by the multiplier effect, in which an initial change in components in aggregate demand can have a multiplied impact on the level of equilibrium national income.
Stats for microeconomic policies (infrastructure and jobs)
1. $75 billion in transport infrastructure projects and over $50 billion for additional infrastructure e.g. - National Water Infrastructure Development Fund and regional grants programs 2. Government is investing $6.4 billion in 2021‑22 to build the skills an additional $500 million to Job Trainer and $2.7 billion to extend the Boosting Apprenticeship Commencements program.
Two examples for net exports and imports (aggregate demand)
1. China's rapid development in 2019 with a GNI of 27 trillion PPP led to an increase in Australia's exports. The recent trend of increasing protectionist barriers with 2. China's 80% tariff on barley and other agricultural exports has decreased Australia's net exports decreasing aggregate demand and economic growth.
Positive effects of economic growth 3 examples
1. Faster growth in Aus led to 2.3% annual growth in per capita real income in 2000s compared with 2% in 1990s and this sustained growth increased living standards by 54% since 1990 2. Australia's 30 consecutive years economic growth caused it to move from the 7th to 19th for annual OECD rating of joblessness, demonstrating creation of jobs 3. For example in 2007 an increase in economic growth of 3% meant that Australia spent $185 million health, increasing by 1.5%.
Outline two sources of economic growth in Australia
1. Global economic conditions that have been favourable for Australia in the recent decades. China has increasingly become a key engine of global economic growth duirng the 2000s and Australia was a major beneficary because of rapid growth in global demand for resources such as iron ore and coal . Strong demand for resource exports underpinned a boom in mining and construction investment. 2. The Australia economy went through a period of major structural improvements in its terms of trade. This meant that Australia enjoyed the benefits of rising export prices and volumes for several decades and currently with the price of iron ore, one of Australia's key exports, reaching a high of $US237 ($A312) a tonne in May 2021 and set to contribute to $149 billion from exports to GDP
2 stats for domestic factors affecting Australia's exports and imports
1. In 2020, the onset of the COVID-19 pandemic has resulted in a substantial dip in demand to export industries such as iron ore and coal 2. since early 2017 Australia has experienced environment related crises, with ongoing drought and bushfires contributing to an 18% decline in rural exports.
6 negative effects of economic growth
1. Increased demand for imports 2. Structural unemployment 3. Inflation 4. Environmental degradation 5. Income distribution 6. Social dislocate and other social problems
6 benefits of economic growth
1. Increased level of real income and living standards 2. Better community infrastructure, health, education 3. Improved working conditions 4. Generally compatible with macroeconomic objective of full employment so long as rate of growth exceeds the rate of population and workforce 5. Improvements in productivity and structural change 6. Higher employment will tend to breed more growth because more is produced and aggregate levels of expenditure rise
Effects of economic growth on environment two examples
1. high reliance on committees for growth led to it having the 8th largest carbon footprint in the world 2. For example $486.3 million has been allocated in environmental funding for oceans, biodiversity, recycling and waste, and climate resilience as part of the 2021-22 Budget which will help long term environmental improvement.
Negative effects of economic growth (inflation, external stability and income distribution
1.For example, underlying inflation rose to 5.1 in 2008 as a result of higher global prices, strong AD growth and the Australian economy being close to full capacity, limiting aggregate supply growth 2. For example the mining boom is estimated to have boosted real per capita household disposable income by 13 per cent over the decade to 2013, contribution to Australia's poor bogs in the late 2000s following the end of the boom and less export's growth. 3. For example, during the global resources boom (2000-2008) Australia experienced strong economic growth but income growth was very uneven as the average income of the lowest 20% grew by 5.6% per year but the highest 5% rose by 10.3%.
describe two ways aggregate supply can be increased
Aggregate supply can be increased by increasing the level of output that can be produced at a given cost. This can be achieved through increasing the quantity, or improving the quality, of factors of production. For example, population growth can contribute to increased aggregate supply. More people of working age in the economy can contribute to increased production. Technology can also play a role in increasing aggregate supply, by improving the efficiency of production. Productivity gains leading to increased aggregate supply could also be achieved through improvements in infrastructure such as faster broadband or improved transport links.
Factors of aggregate demand and percentage
Consumption 55-60%, Investment 10-15%, Government policies 20-25%, Net exports and imports 1/4-1/5%
economic growth formula
Economic growth = real GDP (current year) - real GDP (previous year) / Real GDP (previous year) x 100 %
How was fiscal policy used during covid to increase EG (tax and investment stats)
For example Key expenditure measures included JobKeeper program (%85.7) billion, JobSeeker supplement ($16.8 billion), household support payments ($9.4 billion) and business cashflow support payments ($31.9 billion to neutralising some of the impact of the economic downturn caused by the COVID-19 as facilitating a faster recovery. Also government announced $25.1 billion in announced tax cuts in 2021 budget
example of capacity constraints- infrastructure bottlenecks
For example, during the commodities boom coastal ports experienced long queues of shipping waiting to receive loans of exports for China and Japan due to insufficient infrastructure development. However despite these constraints 80% of Australia's economic growth is estimated to be as a result of increases in labour market productivity.
Example for investment (gov policy) (aggregate demand)
In march 2020 to stimulate business investment the Australian government increased the threshold for the instant write-offs for asset purchases from 30,000 to 150,000 giving small businesses stronger incentive to buy capital goods and invest
how is monetary policy used to influence economic growth and example
Involves influencing the level of interest rates which in turn influences the level of aggregate demand and the rate of economic growth. If the RBA wants to stimulate growth, interest rates can be reduced which would encourage consumer and business spending. Although effectiveness of further easing monetary policy has declined in recent years as interest rates hit record lows. For example after two emergency reduction took the cash rate to 0.25 in march 2020 the RBA indicated little more could be done through the cash rate to support EG
How is fiscal policy used to influence economic growth and example
Involves use of the Commonwealth government's budget in order to achieve economic objectives. Variations in spending/revenue can influence economic activity e.g. increase in income tax/ decrease in government spending -> leakage in circular glow -> constrain growth. For example COVID expenditure
Simple multiplier formula
K = 1/ MPS or K= 1/ 1-MPC
domestic factors affecting Australia's exports and imports
Level of domestic income, undiversified export base meaning vulnerability to world commodity prices, environmental related crisis e.g. droughts reducing agricultural exports
how can aggregate supply be increased
Population growth, Discovery of new resources, Workers acquiring new skills, Increased capital, The adoption of new technology, Measures to improve efficiency, Government policies
general statistic on Australia's economic growth
Since 1991 Australia has experienced its longest period of economic growth with an average of 2.6%
how does an increase in the simple multiplier affects the level of aggregate demand
The multiplier determines the size of the overall increase in national income resulting from an initial increase in aggregate demand. An increase in the simple multiplier will mean that a change in the level of aggregate demand will now have a larger effect on the level of national income. If aggregate demand increases, for example through an increase in investment, the level of national income will increase by a larger amount. If aggregate demand decreases, the level of national income will decrease by a larger amount.
How are microeconomic policies used to promote economic growth
aim to increase the economy's sustainable growth by increasing aggregate supply and reducing the extent to which higher growth causes inflationary and current account problems, factors that may restrict growth. This includes labour market reforms, deregulation, efforts to improve international competitiveness, increased investment in work force skills and physical infrastructure.
influences of consumption (aggregate demand)
consumer expectations, level of interest rates, distribution of income
Example for investment (interest rates) (aggregate demand)
contractionary monetary policy put in place in 2012, decreasing the cash rate from 4.25% to 2.0% in 2015 led to growth in private business investment to 17.5% of the GDP in 2015
influences of investment
cost of capital equipment and business expectations
Two examples for aggregate supply
in the 1990s, 2.1% of the 3.2% growth was a result of labour market efficiencies prompted by microeconomic reform. Australia's long-term capacity, with migration comprising 62.5% of population growth and contributing to half of the labour force's increase in the past decade
Definition Economic Growth:
occurs when there is an increase in a countries productive capacity over time. This is commonly measured by increase in real GDP. Increases in economic growth will see an outward shift in PPF
Macroeconomic policies definition
policies that aim to smooth out fluctuations in the business cycle in the short term to medium term, Fiscal and monetary policy. limited impact in the long run growth,
aggregate demand definition
refers to the demand for goods and services in the economy. Aggregate demand includes household spending, investment by business and household (I), spending government (G) and net spending from overseas (X-M)
aggregate supply definition
refers to the total production capacity o the economy that is potential output when all the factors of production are utilised
influence of investment (aggregate demand)
the cost of capital equipment (interest rates, changing government policies and changes in price of productivity of labour) and business expectations
the simple multiplier definition
the greater than proportional increase in national income resulting from an increase in aggregate demand
influences of consumption
the level of household disposable income, consumer expectations, interest rates and the distribution of income
