Economic Growth

• Macroeconomic Objectives

  • Sustainable economic growth – 3%
  • Price stability – 2-3%
  • Full employment 4.5%
• Not all objectives can be achieved at once so there are choices to be made and trade-offs to be considered
• Economic growth is defined as an increase in the real output of goods and services produced in a country

  Usually measured by annual change in real Gross Domestic Product (GDP)
• In Australia, a desirable rate of growth is around 3% per annum.

  If growth is much slower – difficult to achieve full employment.

  If growth is much quicker – difficult to control price increases and ensure sustainability of scarce resources.
• Sustainable economic growth refers to a rate of growth which can be maintained without creating other significant economic problems for future generations
• Price stability refers to low rates of inflation.
• In Australia, inflation target is between 2-3% per annum
• •Price stability is important because inflation adversely affects the real income of households and firms; erodes international competitiveness; distorts the distribution of income and influences the allocation of resources throughout the economy
• Full employment occurs when everyone who is willing to work can find employment
• The unemployment rate associated with full employment, called the natural rate of unemployment, is thought to be around 4.5%
• It is not possible to achieve all three objectives as they are not all compatible
• Growth and full employment tend to be compatible because both rely on expanding economic opportunities. Other objectives may bring about conflicts in policy making, such as the inflationary risks associated with attempts to reduce unemployment. Choices need to be made and national economic objectives need to be prioritised.
• Economic growth is defined as an increase in the real output of goods and services produced in a country
• Most frequently used measure of economic performance is GDP – defined as the total market value of all final goods and services produced in a country during a period of time (usually a year)
• Graph shows a slow, steady upward trend but it is evident there are some periods of faster and slower growth
• GDP % change = (GDP(year2)  - GDP(year 1))/(GDP (year 1)) x100
• The ABS and RBA often release quarterly growth rates (the rate of growth over any three month period).

  These are compiled by substituting quarter for year in the above formula.
• Nominal GDP is the value of output expressed in the prices of the day (current prices)
• Real GDP or the constant price is adjusted to remove the effect of price increases
• Over time, real GDP tells us what the value of output is worth as if there had been no price changes in the economy. Real GDP thus removes the effect of inflation.
• real vs nominal GDP

  
• For individuals to be better off in material terms, economic growth has to be faster than population growth
• We can divide real GDP by the population in order to determine the real GDP per capita (GDP per head of population)
• GDP measures the total dollar value of all of the goods and services made and purchased within one year. It is a measure of the money spent by households, businesses and governments.
• The value of output produced doesn’t necessarily tell us about the broader standard of living or the level of welfare of people in the community. People don’t measure their wellbeing by material standards alone, so we need to be aware of the limitations that may arise when using GDP as a measure of growth.
• Limitations of GDP

  • Only includes value of goods and services that are exchanged for payment – no volunteering etc
  • Understates the change and improvement in quality
  • Doesn’t account for rising productivity
  • Income distribution issues
  • Environmental impacts
• GDP doesn’t necessarily value all of the activities that enhance our wellbeing (benefits), nor those that diminish it (costs)
• Among the alternative measures of economic progress developed to address these issues are:

  • The Measure of Economic Welfare
  • The Index of Sustainable Economic Welfare (ISEW)
  • The Genuine Progress Indicator (GPI)
• The GPI adjusts GDP data to account for activities that increase or decrease social welfare. Includes social, economic and environmental indicators.
• Effort spent on housework, parenting and volunteering increase social welfare. Estimated costs of crime, commuting and defensive environmental spending (such as the cost of water purification) are included in GDP data but deducted from GPI.
• The Aggregate Production Function (APF) is the function that shows a relationship between aggregate inputs and aggregate outputs. Economic growth increases as functions of aggregate production increase due to technological, human capital, knowledge, and social infrastructure changes.
• Economic growth is defined as an increase in the real output of goods and services produced in a country.
• Current growth expands the opportunity set for the future. If the rate of growth for this year was 4%p.a, the future production frontier will be further from the origin.
• ppf

  
• apf

  
• The potential rate of economic growth over time is determined by the stock of natural, human and capital resources available both quantity and quality
• determinants of economic growth:

  • land
  • labour
  • capital
• Land

  • Natural resources are often the foundation of economic growth in early stages of a country’s development
  • In Australia, the contribution of natural resources to economic growth was greatest in the late 1800s, when the gold boom occurred and land was cleared for agriculture
  • More recently, mineral and energy resources have again been important contributors to growth
• Labour (economic growth determined by)

  • Number of people in working age population (population)
  • The proportion of those who work and their working hours (participation)
  • The amount of output produced per hour worked (labour productivity)
• Labour

  • Annual average growth rate about 1.4%
  • 40% of this is due to natural increase – Australia’s birth rate is decreasing
  • 60% of population increase is due to migration
  • Average around 215,000 people per annum