Topic 4 – Economic Policies & Management (Summarised)

Resource Description

ECONOMIC GROWTH AND QUALITY OF LIFE

• Economic growth: increase in the productive capacity of an economy over time, measured by the annual change in real GDP
• Benefits of EG:
  o Increased standard of living
  o Improved job prospects for labour force
  o Opportunity for increased investment in infrastructure and public services à higher Gov tax revenue

FULL EMPLOYMENT

• NAIRU: level of UE at which there is no cyclical UE à economy is at full employment à natural rate of unemployment
  o Always going to be a certain level of frictional, seasonal, structural and hard-core UE
  o NRU: 5-6%
• Benefits of full employment:
  o Maximises economy’s capacity to produce, therefore maximising living standards
  o Minimises economic and social problems associated with UE

PRICE STABILITY

• Price stability: keeping inflation at an acceptable level – 2-3% p.a. à minimal distortion to economy
• Inflation is a problem because of economic consequences:
  o Reduces real value of income and wealth
  o Reduces international competitiveness b/c rising costs of production
  o Causes a depreciation in EXR à loss of confidence
  o Creates uncertainty about future costs and distort economic decision making
  o Distorts pattern of resource allocation à encourages speculation in relatively unproductive activities, e.g. buying and selling existing real estate

EXTERNAL STABILITY

• CAD – achieving a sustainable position e.g. balancing payments for M and X, as well as income and transfer payments
  o Keeping any deficit at a level low enough not to have adverse economic effects
• AUD – maintaining international confidence in value of AUD on global financial markets – esp. investors
•  NFD as % GDP – acceptable level where an economy can service the debt
  o Capacity to service NFD measured by debt-servicing ratio à % of X revenue spent on interest payments

DISTRIBUTION OF INCOME AND WEALTH
• Gov makes provisions for needs of people who cannot provide for themselves e.g. aged persons, disabled, UE, ill
• Redistribution policies à progressive tax + social security payments

ENVIRONMENTAL SUSTAINABILITY
• Specific objectives: reduced greenhouse gas emissions, improved energy efficiency, reduced use of old forests, limit
development in some areas
• Conflict of environmental objectives with benefits of increased economic activity
o Gov’s may trade off some longer term environmental objectives in favour of benefits of increased economic activity

POTENTIAL CONFLICTS AMONG OBJECTIVES

• In an effort to achieve one goal, the Gov may have to forego its chances of achieving another
• Achieving a simultaneous reduction in UE and inflation:
  o Trade-off b/w lower UE and inflation in short-medium term
  o Stronger growth in demand decreases UE but puts upward pressure on prices à Phillips Curve
  o Aus Gov gives low inflation priority
• Achieving economic growth and external balance
  o Strong growth = ­ consumption and investment à can cause volume of M to rise
  o BOP constraint: limitations on rate of growth b/c impact of high growth on CAD
• Other:
  o Economic growth à environmental damage, greater inequality in income distribution
  o Environmental preservation + equitable distribution are long term challenges for Gov policy
  o Conflict between short + long term objectives