3.3 Part 5: Recent and future influences on Australia’s economic growth.

Recent and future influences on Australia’s economic growth.
1. Over recent years our economic growth has been cyclical and has been slow within the last four years averaging around 2.7% in comparison to the 3.5% it rose in 2007.
2. GFC slowed our growth dramatically
3. There was quite uneven recovery where rates rose from 1.9 - 3.4% which has been a great growth since the GFC.
4. Most recently in 2012-13 growth was down from peak and forecasts in the future remain modest.
  1. this pattern of growth reflects the changing demand side conditions and hence GDP to accelerate or slow.
5. The short term pattern is affected by changing supply side conditions that alter the economies productive capacity, AS and a long term sustainable speed limit for output.
The influence of recent demand side conditions on economic growth
1. moves cyclically in response to changes made to demand side conditions which affect AD (C+I+G+X-M).
2. 2009-10 when spending grew faster, the stocks tended to fall. To keep up firms lifted output thereby increasing economic growth. In reverse weak spending caused unsold stocks to rise and new orders to shrink, cutting production was necessary and investment was deferred.
3. Demand side conditions are:
  1. Changing Levels of consumer confidence
  2. Changing levels of business confidence
  3. Changes in disposable income
  4. Changes in interest rates or cost of borrowing credit.
  5. Changes in government macroeconomic policy
  6. Changes in the level of economic activity overseas.
  7. Changes in the exchange rate for the Australian dollar.
  8. Using the AD-AD diagram to show the recent effects of changing demand side conditions
  9. Changes in terms of trade
1. Changing Levels of consumer confidence
1. affects the growth of private consumption (C), AD, unsold stocks and the rate of growth in production.
2. collapse will see a fall in AD
  1. firms respond by cutting production
3. Greater optimism helps lift AD and the rate of GDP.
2. Changing levels of business confidence
1. Affects AD, sales, stocks and economic growth by altering levels of private investment (I) or purchasing of new plant and equipment.
  1. optimistic it increases private investment and AD. Firms respond by lifting production and accelerating growth.
2. Investment is critical because it influences total expenditure levels and helps grow productive capacity.
3. Extreme business pessimism (seeing the worst) saw our growth slowed.
3. Changes in disposable income
1. alters household consumption spending (C)
2. Slow rise depresses retail sales and AD causing a rise in stocks.
  1. firms were reluctant to lift production because consumers were not purchasing the product. As a result economy growth was slower.
3. Faster disposable incomes and consumption spending pushes up AD and accelerates growth.
4. Changes in interest rates or cost of borrowing credit.
1. affects the level of saving, rate of household borrowing used to purchase larger consumer items and businesses to purchase new capital items
2. High interest rates - tend to slow AD.
  1. Lower rates - lift expenditure, business production and hence the rate of economic growth.
5. Changes in government macroeconomic policy
1. a mixture of budgetary policy and RBA monetary policy to deliberately speed up or slow down the level of AD and economic activity.
  1. These policy measure in recent times have been countercyclical. This means when very weak spending was slowing Australia’s rate of economic growth during the GFC, an expansionary policy approach was adopted. This involved budget deficits and the RBA slashing interest rates to an all time low to stimulate AD
  2. When economic activity increased during 2010-11-12 the treasurer shifted towards a surplus which involved slowing down economic activity. The RBA’s demand side monetary policy has switched to booming more expansionary to help reduce the budget deficit and slow the economic down.
6. Changes in the level of economic activity overseas.
1. greatly affects exports,AD, sales, stocks, national production and economic growth.
2. During the GFC there was a slowdown in economic activity which depressed our exports and economic growth.
  1. Fortunately for us, our exports continued to grow so we weren't caught in a rut.
7. Changes in terms of trade
1. Terms of trade - ratio prices the world pays Australia for our exports relative to the prices we pay the world for our imports
2. exports change relative to imports, the value of our exports are altered
  1. influences AD, stocks, production and the rate of economic growth.
3. When Aus terms of trade index rose to high levels during 2011-12, we had far better prices for our exports then we payed for our imports. This lifted our export rates and AD which caused firms to increase production and our rate of economic growth.
  1. During 2012-13, our terms of trade were relatively weaker which helped to reduce the value of exports relative to imports, slowing AD, production and the rate of economic growth.
8. Changes in the exchange rate for the Australian dollar.
1. Influences the attractiveness and demand for Australian exports relative to imports (X-M)
2. affects AD, stocks, production and the rate of economic growth.
3. When our dollar falls, Aus exports become cheaper while imports dearer. Increases the rates of exports and decreases imports increasing AD and eco growth.
  1. When the dollar increases it depresses the value of our exports, AD and economic growth.
9. Using the AD-AD diagram to show the recent effects of changing demand side conditions
1. illustrates the impact of demand side conditions on the level of AD and economic growth.
  1. strong conditions causes the economy to be pushed to its maximum level of productivity which can cause shortages and demand inflation.
2. optimum rate of growth occurs when AD crosses the AS line
  1. demand side conditions are weak, falling spending levels cause eco growth to slow perhaps resulting in a recession.

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3.3 Part 5: Recent and future influences on Australia’s economic growth.

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