economics

• National economic goals


  The aims that Australia sees as being important and therefore we try to achieve them
• National economic goals reflect our society's general values, wishes or beliefs
• Australians would like to enjoy even better material and non-material living standards
• Subsidiary goals to achieve better living standards


  • Low inflation
  • Strong and sustainable economic growth
  • Full Employment
• Economic growth


  An increase in the level of national production of goods and services between one year and the next
• Goal of strong and sustainable economic growth


  The fastest rate of growth in national production, averaging perhaps 3 per cent per year, that is consistent with achieving other economic and environmental goals
• Strong rate of economic growth


  • The fastest rate of increase in GDP that is consistent with achieving other government economic goals
  • Target is 3% GDP each year
• Sustainability of economic growth


  • Growth rate at which Australia's economy can grow its production of goods and services without jeopardizing the living standards of future generations or causing excessive pollution
• Definition of Strong and Sustainable Economic Growth


  The fastest rate of increase in GDP that is consistent with achieving other government economic goals
• Measure of economic growth


  Percentage change in GDP (gross domestic product)
• Sustainability of economic growth


  Growth which meets the needs of present consumption without compromising the ability of future generations to meet their needs
• Target rate of Economic Growth

  Between 3 and 4 per cent per annum, measured by real GDP (Gross Domestic Product)
• When the Australian economy grows too quickly


  It can cause inflation and/or an increasing current account deficit
• When the Australian economy grows too slowly

  It leads to unacceptably high rates of unemployment and a possible recession
• Why economic growth is important


  • It creates more jobs and higher incomes
  • It provides opportunity for investment, invention and innovation
  • It allows an economy to produce for export markets
  • It increases the material standard of living
  • It can benefit non-material aspects of living standards
• GDP (E)


  GDP should be equal to the total annual market value of expenditure (AD) on final goods and services in Australia
• GDP (I)

  GDP should be equal to the total market value of incomes paid to those selling the resources needed for production
• GDP (P)

  GDP should be equal to the total market value of final goods and services produced each year
• Chain volume GDP

  Measures the value of production, taking account of the annual market value of expenditure on GDP and using chain price indexes to remove the impact of price changes
• Inflation exaggerates the rise in the marketed value of goods and services produced, while deflation causes the market value of output to be underestimated
• Chain price indexes

  Measure the average change in the prices of goods and services relevant to expenditure on GDP for the most recent year, against the prices that existed in the previous year
• Chain volume GDP (Real GDP) makes adjustments using chain price indexes to remove the impact of price changes, so that variations in GDP reflect volume or quantity changes in output, not price changes
• Limitations of GDP as a measure of growth

  • Non-marketed production is excluded
  • Imputed production involves error
  • Quality changes may be ignored
  • Uneven distribution of national production and incomes
  • Negative externalities
  • International comparisons difficult
  • Quality of life not taken into account
• Determinants of economic growth

  • Aggregate demand-side conditions
  • Aggregate supply-side conditions
• Aggregate demand-side factors affecting economic growth

  • Changes in consumer/business confidence
  • Change in disposable income
  • Rate of population growth
  • Changes in interest rates and monetary policy
  • Change in budgetary policy
  • Global or overseas rate of economic growth
  • Changes in the terms of trade
• Stronger demand-side conditions

  Cause spending to grow faster, business stocks fall, firms lift output and accelerate economic growth
• Weaker demand-side factors

  Slow expenditure, unsold stocks rise, firms cut production and defer investment, slowing economic growth
• Aggregate demand-side conditions

  Determine the short-term cyclical rate of economic growth and the extent to which the economy's productive capacity is actually used
• Aggregate supply-side conditions

  Ultimately determine the economy's productive capacity available and thus the potential sustainable rate of economic growth
• Factors affecting Australia's rate of economic growth (demand-side)

  • Changes in consumer/business confidence
  • A change in disposable income
  • The rate of population growth
  • Changes in interest rates and monetary policy set by the RBA
  • A change in budgetary policy
  • The global or overseas rate of economic growth (esp trading partners like China)
  • Changes in the terms of trade
• Stronger demand-side conditions

  • Cause spending to grow faster, business stocks fall, firms lift output and accelerate the rate of economic growth
• Weaker demand-side factors

  • Slow expenditure, level of unsold stocks rise, new orders disappear, firms cut production and defer new investment, slowing Australia's rate of economic growth
• Factors affecting Australia's rate of economic growth (demand-side)

  • Variations in consumer confidence
  • Changes in business confidence
  • A change in disposable income
  • The rate of population growth
  • Changes in interest rates and monetary policy set by the RBA
  • A change in the budget outcome (i.e. the size of the budget deficit or surplus)
  • Instability overseas in the rate of economic growth, especially among our trading partners such as China
  • Changes in the terms of trade (i.e. the ratio of export to import prices) and exchange rate
• Optimum rate of economic growth

  Occurs when AD is sufficient to cross the AS line at the elbow (AD1), corresponding with GDP1 which is the economy's maximum
• If demand-side conditions are too weak

  Falling expenditure results in ADo, causing firms to cut output to GDPo, slowing the rate of economic growth (perhaps resulting in recession)
• If expenditure grows too quickly

  Excessively strong aggregate demand-side conditions cause the economy to be stretched beyond its ability to supply, leading to demand inflation
• Aggregate supply-side conditions

  Can affect Australia's rate of economic growth by altering the availability of resources, production costs, profits, the level of business closures, and the ability and willingness of firms to produce goods and services
• Aggregate supply-side conditions affecting the AS line

  • The level of staff wages and salaries, including changes in the minimum wage
  • Labour on-costs like the superannuation guarantee charge and various type of leave entitlements
  • Labour productivity (GDP per hour worked)
  • R&D and the adoption of new technology in production
  • The rate of business bankruptcy and closures, versus that for new start-ups
  • Disruptions to supply chains due to pandemics, war, climate change and weather events
  • The age distribution of the population (affected by the birth and death rates, and the rate of net migration)
  • The labour force participation rate and the number of hours worked per week
  • The cost of electricity, gas, water and other utilities
  • Changes in the adequacy of infrastructure and the costs of transport, electricity and communications
  • Changes in the exchange rate may affect the costs of imported resources and equipment used by local firms to produce goods and services
  • Variations in the cost of borrowing credit from banks by local businesses
• More favourable supply-side conditions

  The aggregate supply line (AS) for the economy grows and moves outward and to the right from AS1 to AS2, increasing the equilibrium level of economic activity (GDP2 not GDP1)
• Less favourable aggregate supply-side conditions

  Limit the economy's productive capacity (a shift from AS2 to AS1) in the long term, retard the sustainable rate of economic growth (GDP2 to GDP1) and accelerate cost inflation (P1 to P2)