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Economic Growth HSC Notes

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Introduction

Economic growth is the most important single measure of the performance of an economy. It generally involves an increase in the volume of goods and services that an economy produces over a period of time. It is measured by the annual rate of change in the Gross Domestic product (GDP). Aggregate Demand (AD): refers to the total demand for goods and services within the economy. Components include - Consumption (C), Investment (I), Government Spending (G), and Net Exports (X-M) Aggregate Supply (AS): refers to the total productive capacity of an economy i.e. potential output when all factors of production are fully utilised. Effects/Impacts of Economic Growth * Living Standards: o Faster economic growth ? Increase in real GDP/capita. o Real wages rise ? ? increase in household's disposable income. o Increase In household's disposable income means that there is more spent consumption, which means that there is a higher level of material living standards. o Faster economic growth in Australia ? 2.2% p.a growth/capital of real income between 1998 and 2008. * Employment: o A key benefit of economic growth is the strong growth in employment o As there are higher levels of economic growth in a country, there is a general increase in the level of aggregate demand. o To match this higher level of aggregate demand, there is increased output, which usually requires more workers. o In Australia between 1996 and 2007 there was fairly strong levels of economic growth which resulted in the creation of more than 1.5 million jobs o Between 1997 and 2008: * The unemployment rate fell below 4.3% (close to NAIRU) ...read more.

Middle

This provided the perfect conditions for a very low inflationary environment. The 1960s and the 1990s were the best performing decades of the century. The 1960s were helped by a boom in mineral trade and an improvement in the productivity of manufacturing and strong population growth. The strong economic growth in the 1990s was a reflection of the sound macropolicy framework and the ongoing structural reforms. The second half of the 1990s was historically high productivity, strong GDP growth/capita, falling unemployment and low inflation. In the first half of the 2000s decade, stronger domestic and world economies, low interest rate and ongoing productivity growth all boosted Australia's GDP growth. However, the growth of the economy has been hindered by supply constraints such as skill shortages, lack of infrastructure capacity to keep up with demand and lower productivity growth. Since the early 1990s, Australia had avoided a major recession until the Global Financial Crisis in Late 2008. In 2009 Australia had an uncertain economic future. The 2009-10 budget forecast that there would be a 0.5% contraction in 2009-10, whereas the RBA forecasted a 0.5% growth. The Australian economy showed to be resilient and experienced a much more gradual slowdown that other OECD's like USA and UK. In 2008-09, the economy recorded a positive 1% growth rate. The RBA later in the year changed their forecast from a contraction of 0.5% to an expansion of 0.5%. Causes/Influences of Economic Growth * Global Economic Conditions: have been favourable since the early 1990s ?lower inflation, lower interest rates, lower unemployment rated and greater macroeconomic stability worldwide. ...read more.

Conclusion

The RBA tried to avoid any causes of economic imbalance. Between 2005 and early 2008, a positive climate for investors and consumers was maintained by controlling the domestic interest rates to ensure that the inflation rate was within the RBA range i.e. 2-3% * Fiscal policy is aimed at debt reduction and consolidation. Since the late 1990s until 2008, the Federal Government had run budget surpluses, which helped to wipe the public debt. In July 2000, taxation reforms were announced which aimed to reduce costs to businesses which would in turn increase economic efficiency in the tax system. Greater investment and a healthy environment for economic growth was achieved by lower personal tax, company tax and capital gains tax. * The workplace legislation of 2006 was designed to improve the efficient of labour markets and the 'welfare to work' reforms provides more incentives for the older people and the unemployed to stay or enter into the workforce (attempt to increase labour force participation) * One way of achieving economic growth is increasing labour productivity. The 2006 National Reform Agenda and the 2008 COAG Word Agenda emphasis vocational training and up skilling the labour force, this improvement of the quality of labour force will ensure greater productivity and efficiency, which would in turn mean greater output. New policies to improve the efficiency of capital stock such as ports and other infrastructure, water and electricity are also in effect. COAG aims to reform seven key areas: * o Productivity o Health and Ageing o Climate Change and Water o Housing o Indigenous o Business Regulation o Vocational training and education ?? ?? ?? ?? ECONOMIC GROWTH Basil Razi 1 ...read more.

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