Determinants of economic growth

3 P’s

The average increase in Real GDP from the year 2000 to 2020 was 3% per annum:

• contribution from 3 P’s

• Population (working age): increased by 1.6 percentage points, making up half of the total

• Productivity (average labor productivity): increased by 1.5 percentage points, making up almost half of the total

• Participation: increased participation rate by 0.3 percent, employment slightly below the natural rate by -0.1 percent, and a fall in average hours worked by -0.3 percent

• Summary- about half of total growth is due to population and productivity increases. A small rise in workforce participation is balanced out by small falls in average hours worked per week and employment

Supply side capacity

capacity to produce goods and services/ aggregate supply

to increase supply side capacity, you need a combination of:

• using MORE resources- quantitative supply source/ capital widening- capital stock increases at the same rate as the labor force and depreciation rate, so capital per worker ratio and productivity per worker is constant and economy will expand in terms of aggregate output.

• using BETTER resources- qualitative supply source/ capital deepening

• using resources in a BETTER way- increased allocative efficiency of different resources e.g. workers can be more productive if they have more/ better capital and there’s effective business management.

Resource types

• land (natural resources)

• labor (human resources)

• capital (produced resources)

• enterprise

Land

• capital widening: trading (importing raw materials), exploration (finding more natural resources for extraction and use in production), reclamation (improving and rehabilitating land to increase areas available for productive use)

• capital deepening: research and technology (better crop yields, sustainability, optimizing use of natural resources and spatial planning)

Labor

• capital widening: natural population growth and net inward migration (increased workers available for workforce participation and employment

• capital deepening: education and training (increased worker skills, productivity and efficiency, boosts output, innovation and economic growth), health (workers in the workforce for longer, higher quality of work and productivity, boosts output)

Capital

• capital widening: investment and increased finances (e.g. foreign investment) (more funds available for capital accumulation, increasing output and productivity, boosting economic growth + productive capacity of economy)

• capital deepening: embodied technology (integrating technological innovation physically into physical capital for increased productivity e.g. improvements in hardware, machinery), research and development (improves capital utilization with innovation, improved productivity, efficiency, productivity), foreign investment (transfer of ideas/innovation, technologies)

Enterprise

• capital widening: reduce tax rates, provide subsidies or grants, provide risk or start up finance

• capital deepening: management training, innovation

Productivity and production

• production/ output level can be increased if economy has access to more resources

• Or if there’s a rise in productivity (because of better quality resources, better management and better resource allocation) - instead of more resources, the production/output level will also increase

• indicators: labor productivity (output per hour worked), capital productivity (output per unit of capital), multi-factor productivity (output from a given combination of capital and hours worked)

Aggregate demand

• sustained growth needs a combination of rising aggregate supply and rising aggregate demand

• aggregate demand- sum of consumption spending, planned investment spending, government spending, and net export purchases.

Without aggregate demand, the economy may experience

• low levels of investment in capital goods .e.g. expansion plans may be cancelled

• depreciation of capital stock e.g. may not be possible to reopen mothballed factories

• lower levels of tax revenue and government spending e.g. on transport infrastructure

• reduction in labor force e.g. outwards migration, discouraged workers

• fall in international competitiveness and loss of net exports e..g new technology isn’t built into production processes

Factors hindering Australia’s growth (7)

Demographic changes: The labor force participation rate has been falling due to the retirement of baby-boomers and the sluggish performance of the economy

Labour productivity: Output per worker has fallen partly because of changes to industrial relations laws

Private sector investment: Investment in the private sector has been held back by low confidence, excessive government regulation and an over-valued dollar

Consumer confidence: Consumer confidence or expectations remains low reducing growth in consumption demand

Education and training: Australia's performance in international comparisons of educational standards has been relatively poor

Tax structure: Australia collects a relatively high proportion of its tax revenue from direct tax. This may act as a disincentive.

Covid pandemic: Disruption to supply chains and the legacy of fiscal and monetary policies that have heightened inflation and led to high interest rates which is impacting economic growth.

Factors helping Australia’s growth (5)

Growth in China, India and Southeast Asia: Demand for mineral and energy exports led to the 'mining boom' and an increased production capacity

Population growth: Australia has relatively high population growth due to both natural population growth and migration.

Infrastructure investment: The public and private sectors have invested in, for example, transport and communications infrastructure

Strong financial sector: Australia has a stable banking and financial sector, capable of providing finance to business

Foreign investment: Australia has a AAA credit-rating and is able to attract foreign investment to finance an increase in capacity.