Application Exercise 6g: Factors affecting growth.
- Since 2020, world rates of economic growth have increased, from -3.1% to as high as 6.1%. This is likely to have had a favourable impact on Australian rates of growth given the fact that Australia is a major global producer of commodities (e.g. resources such as iron ore and coal) that are required by other countries to fuel their rates of growth. In simple terms, stronger growth overseas will typically lead to an increase in the demand for Australian exports, which boosts Australia’s level of aggregate demand and real GDP.
- The standard variable home loan rate has increased from 4.52% in September 2020 2 5.27% in June 2022. This is likely to reduce the rate of growth in both aggregate demand and real GDP. This is largely because it will cost more for Australian households to service any given mortgage, which reduces their cash flow (or discretionary income) and leads to a reduction in the growth of consumption demand and therefore contributes to a decline in the rate of growth in AD and real GDP.
- Between September 2020 and June 2022 there has been a downward trend in consumer confidence [despite the increase that occurred over 2020-21]. This overall decline in consumer confidence is likely to reduce aggregate demand and economic growth. Consumers will be much more circumspect about spending as they are less confident about future economic conditions. this will contribute to consumers devoting more of any given level of income to savings and less to spending. as a consequence, consumption demand decreases, which contributes to a decline in the rate of growth in AD and real GDP.
- During the last half of 2020, the ‘rate’ of productivity growth declined from 4.8% growth in the June quarter of 2020 to 1.7% in the December quarter of 2020. While productivity continued to grow over this, having favourable effects on the economy in absolute terms, the decline in productivity ‘growth’ has negative implications for growth in real GDP relative to earlier periods. It typically means that growth in output per unit of inputs will be less than earlier periods as will the fall in average cost of production. To the extent that costs of production are higher than what they could have been [if Strong productivity growth was maintained], it negatively impacts on aggregate supply as prices are [relatively] higher leading to a negative influence on AD and real GDP.
- Since September 2020 the terms of trade has increased by approximately 30%, from 100.0 two 130.7. This stimulates growth in aggregate demand and real GDP because the higher prices received for Australian exports leads to an increase in the income received by exporters [i.e. the value of exports increase]. To the extent that the higher terms of trade has occurred (in part or in full) because of a decline in the prices paid for imports, it will also lead to a fall in the value of imports. The combined effect is a rise in net export values (X -M), which is a component of AD and therefore contributes to growth in real GDP. [Note: the growth in Australia’s terms of trade that has occurred over recent years is primarily a result of strong growth in the prices received for Australia’s commodity exports. This leads to growth in incomes received by exporters which then flows through to boost the demand for Australian made goods and services more generally – thereby adding to AD and real GDP over time.]
- The exchange rate fell since December 2020, from 0.77 USD to 0.69 USD. This depreciation resulted in negative supply-side effects because it caused the price or cost of imports to increase. Given that Australia is a heavy importer of capital (e.g. machinery) and or intermediate/unfinished goods (e.g. parts or fuel that are further used in the production process), it leads to an increase in the costs of production, raising prices and inflation. However, the depreciation helps to stimulate net export demand as the international competitiveness of Australia’s exports (as well is import competing goods) necessarily increases. For example, it was cheaper for foreign tourists to travel to Australia which generates export income and it was more expensive for Australian tourists to travel abroad which meant that they were more likely to have travelled within Australia, which reduced import expenditure.