Chapter 14

Question 1

Define aggregate supply

Answer 1

total value of good and service available for sale in the economy in a given time

Question 2

Define aggregate supply policies

Answer 2

any government initiative that is designed to reduce the cost of production and / or improve supply conditions for businesses
So

Question 3

Aim of AS policies

Answer 3

So Australia’s productive capacity and living standards can be enhanced over time
As policies aim to improve living standards by improving supply condition and helping to simultaneously achieve strong and sustainable economic growth, full employment and low levels of inflation
Business costs may be reduced or efficiency improved – collective benefit of more productive businesses leads to low inflationary growth

Question 4

Major aim of supply policies

Answer 4

Advantages of increasing aggregate supply (shifting the curve to the right)
Increased productive capacity PFF
Higher output (production, gdp, eco growth
Lower unemployment
Lower inflation
- these lead to improvements in living standards. “low inflationary growth” is obviously the best type of eco growth

major aim = As policies aim to improve living standards by improving supply condition and helping to simultaneously achieve strong and sustainable economic growth, full employment, low inflation and indirectly external

Question 5

Define productive capacity

Answer 5

The point at which production (or GDP) is occurring at the maximum level possible in an economy

Question 6

Role of as policies

Answer 6

Fighting stagflation
Aliveting capacity constraints
Addressing short term supply shocks
Boosting productivity and international competitiveness

Question 7

Define stagflation and explain how as policies can help sf

Answer 7

Fighting stagflation:
Stagflation – periods of low economic growth, high unemployment and high inflation
AD policies are insufficient as if they are expansionary they will lift growth but exacerbate inflation. On the other hand contractionary AD policies would assist restraining high inflation yet worsen eco growth – therefore AS policies have to be implemented as they can create ‘low inflationary growth

Question 8

Define capacity constraints and explain how as policies can function to achieve this

Answer 8

Alleviating capacity constraints:
Capacity constraints – factors that prevent an economy from producing more goods and services, such as skill shortages and infrastructure bottlenecks – typically occurs when the economy is a productive capacity

AS policies seek to alleviate capacity constraints through boosting; productivity participation and population (three P’s

Question 9

Explain how as policies can assist addressing supply shocks in the short term

Answer 9

E.g. if the economy experienced shot-term increases in the price of oil, this will have negative implications for the economy because costs of production increase for most firms, placing upward pressure on inflation, reducing AD and GDP – to counter this problem gov’t can use it’s control of supply side policies such as company tax rates to provide temporary relief to businesses (dropping rate of tax) to those most disadvantaged businesses

Question 10

Explain how as policies can assisting in achieving international competiveness and productivity
Define international competivness

Answer 10

Boosting productivity + international competiveness:
International competiveness – improvements in Australia’s international competiveness means that Australian firms or industries are producing goods and services at relatively lower prices or higher quality compared to overseas competitors as they seek to increase their world market share

Generally improvements in productivity should increase international competiveness as average costs of production should fall allowing businesses to reduced prices or improve quality.
However increases in productivity will only result in an improvements in competiveness if suppliers actually pass on the productive gains (lower costs) in the form of lower prices (or higher quality) – this will result in more completive markets instead of those markets that are highly concentrated, such as monopolistic or oligopolistic markets
However if firms decide to absorb productive gains through retaining profits than competiveness will not be improved in the short term – in the long term the increased profitability of the firm will enable them to accumulate financial resourced so that it can work to increase market share some time in the future.

Question 11

Explain how as policies can achieve S+S

Answer 11

Strong + sustainable – By increasing aggregate supply or expanding productive capacity, the economy is able to achieve a higher rate of economic growth alongside lower inflation – this is commonly known as ‘low inflationary growth’ – this is because ‘downward pressure’ on prices tends to increase C + I + (X-M) which leads to an increase in real GDP (or eco growth)
Increases in As can derive from either increase in quantity of supply or increase efficiency

Efficiency:
Allocative efficiency – ensuring that all resources are used for areas of production that bests satisfy society’s needs + wants
Productive / technical efficiency – businesses producing at lowest cost possible
Dynamic efficiency – being adaptive and innovative particularly with regard to updating technology
Inter-temporal efficiency – balancing consumption and resources between current and future needs

Question 12

Explain how as policies can achieve low inflation

Answer 12

lower production costs means will see downward pressure on prices as firms pass on price reductions thereby lowering the cost of inflation – while still making a profit

Question 13

Explain how as policies can assist to achieve full employment

Answer 13

increase in production increases the derived demand for labour reducing unemployment
But efficiency gains (e.g. technology) may lead to some short-term structural unemployment

Question 14

Explain how as policies can assist in achieving equity

Answer 14

Equity in the distribution of income – relatively lower prices that result from increase efficiency and productive from AS policies should provide relatively greater benefits to low income earners as they tend to spend a much higher proportion of their income on g + s’s.
Further the incidence of transition incomes is likely to fall as demand for labour increases during periods of high production – providing proportionally more with a (factor) and higher income.
Further greater GDP growth will see the gov’t obtain greater tax revenue enabling them to more adequately direct essential g+s to those in need

Question 15

Explain how as policies can assist in achieving external

Answer 15

by increasing productive efficiency and obtaining the low inflationary benefits of As polices firms will become international competitive largely through lower prices. This will increase export demand increase BOMT and reduce the CAD
A lower CAD will too exert less pressure on the NFD levels via a reduction in the need to borrow offshore and the lower NFD will also help reduce the CAD via less pressure on net income section of current accounts

Question 16

Explain how supply policies assist with living standards

Answer 16

Living standards – should increase due to proportionally more Australians having access to factor income through increase employment opportunities to facilitate labour demand thus having greater purchasing power, further the lower costs of g+s will enable Australians to increase MLS though obtaining greater volume of G+S

Question 17

What are the 3 P’s

Answer 17

Participation
Productivity
Population

Question 18

Explain 3 P’s

Answer 18

Productivity:
Increase skilled immigration
Increased infrastructure spending
Business tax concessions for investment spending

Participation:
Increased child care rebate
Personal income tax cuts
Increase in the pension age
Population:
Increase in the baby bonus
Increase in migration intake
Legislated introduction of paid parental leave

Question 19

How can 3P’s be used to boost a nations productive capacity

Answer 19

By increasing the rate of productive growth, the average costs of production for businesses will fall and businesses will be able to supply bigger volumes of output with same inputs
Higher rates of labour force participation will help to reduce real unit labour costs overtime. This is because the maintenance of a bigger labour supply will tend to exert downward pressure on wages as the labour market loosens and the workforce has added incentive to increase efforts given that labour shortages are likely to be much less common. In addition a bigger labour supply means that there are more resources available to utilise in the production process, protecting against labour (or skills) shortages and capacity constraints
The higher population will help protect against anticipated decline in the size of the future labour force due to an ageing population, this will help to minimize labour shortages and boost available labour for the industry in the future

Question 20

The gov’t will use the budgetary policy to affect as via

Answer 20

Taxation

Infrastructure Spending

Question 21

Explain how infrastructure can effect as

Answer 21

In regards to infrastructure it is vitally important for the economy as many industries and sectors rely on it thus the govt usually invests heavily into public sector infrastructure projects and provide incentives for private sector to also invest in major projects – e.g. expenditure on roads means the delivery of G+S be undertaken at a faster rate, in addition less petrol may be consumed helping to further lower production costs

Question 22

How can changes in taxation affect as

Answer 22

There are a number of different taxation initiatives introduced to expand productive capacity including tax concessions for investment in capital, R+D tax concessions or cuts to company tax rates. By reducing costs for businesses, measures like these will encourage further investment in capacity and help to lift the nations productive capacity and As levels. However it is important to note that all tax changes must involve some economic cost along the way and the gov’t is careful with implementing policy changes in a way they offers the promise of positive ‘net benefits’

Question 23

Define industry policies

Answer 23

are government policies that seek to promote the development of local industries – a part of the governments aggregate supply policy

Today industry policy is generally limited to the provision of government support to the business sector in situations where there are clear longer term economy wide benefits.

Question 24

Define microeconomic reform policies

Answer 24

government reforms that seek to improve the structure and operation of markets (or industries) in an effort to achieve a more efficient allocation of resources (the point at which yields the greatest satisfaction to society)

Question 25

Aim of MRP’s

Answer 25

Typically involve the removal of impediments to achieving a greater productivity or efficiency of the Australian economy, so that the economy is better at utilizing existing resources and creating an environment that is more conducive to productive investment. MRP’s will typically involve a major restructuring of industries.
By making markets more flexible and responsive to changing economic circumstances such reforms have helped to achieve technical, dynamic and inter-temporal efficiency within the Australian economy
More importantly these reforms ensure resources are allocated to those areas in which Australia holds a ‘comparative advantage’ which maximizes the growth in MLS overtime
The bulk of Mrp’s aim to improve productivity and the international competiveness of the Australian economy – like all AS policies this then helps to expand productive capacity and permit higher rates of sustainable economic and employment growth. However it is possible for the gov’t to implement reforms to markets that seek to achieve a better balance between ‘equity’ and ‘efficiecny

Question 26

Define trade librelization

Answer 26

the movement towards international trading relationships that are not subject to protectionist policies – also defined as any government policy initiative that is designed to promote free trade or reduce restrictions or barriers to free trade
Free

Question 27

Explain forms of protection

Answer 27

Free trade means that nations can engage in international trade without facing ‘protection’ or ‘trade barriers’ from other countries
Protection mainly occurs through; quotas, tariffs and subsides
Quotas – restrictions on volume of imports
Tariffs – tax on imports
Subsides – financial assistance acting like a grant and tax concession providing protection

Question 28

Why is a protectionist stance not effective in the longterm

Answer 28

While it is accepted that ‘protection of output’ in the short term will have benefits directly to employment and incomes it is generally accepted that is tends to result in negative outcomes for the economy in the long-term. This is because higher levels of protection reduce competition for local import competing producers and result in less pressure (competition) to minimize costs and prices.
Therefore there is less incentive to improve efficiency and performance. Overtime-foreign producer tend to become relatively more efficient as they are exposed to greater competitive pressures – they are then able to reduce prices and gain a foothold in the Australian market. Under threat local industries ask for further protectionist polices. This process becomes destructive as inefficiency of local import competing producers becomes entrenched, raising the cost structure of the Australian economy and increasing the likelihood that foreign governments will retaliate and protect their local producers from those Australian exporters that have a comparative advantage, such as our mining or education

Question 29

Aim of trade lib

Answer 29

trade lib is designed to force local producers to restructure in an effort to combat higher levels of competition and then take advantage of any new opportunities by tapping into export markets
“Reducing government imposed restrictions on trade at home has the beneficial effect of exposing local businesses to international competition, compelling them to innovate, to be efficient and to restrain the prices they charge local consumers. Australia’s trade policy will be driven by ongoing productivity-raising domestic reforms coupled with the negotiation of improved access for exporters to overseas markets. The best trade policy is domestic economic reform designed to boost productivity and international competiveness of Australian businesses”

Question 30

5 trade policies of trade librelization

Answer 30

Unilateralism – economic reform that is perused at home should not be conditional upon similar reforms being undertaken by our trading partners
Non – discrimination – seeking to minimize the number of agreements that offer preferential treatment to some countries only and therefore discriminate others
Separation – to ensure that there is a clear separation of trade policy and foreign policy such as geo-political tensions do not prevent Australia from extracting the economic gains that are offered by free trade
Transparency – the negotiation of agreements with other countries and the direction of Australia’s trade policy more generally should be open to scrutiny allowing informed and meaningful debate
The indivisibility of trade policy and economic reform – Trade policy and microeconomic reform policy go hand in hand such that trade liberalization is a key platform of the governments reform agenda

Question 31

Benefits of trade librelization

Answer 31

Increased competition imposes a discipline on those industries to focus on lowering their average costs and offering the products that best meets the consumer’s needs. By lowering trade barriers Australian producers are forced to increase productivity and focus on using resources in the most efficient way – tradelib therefore promotes technical efficiency (output-input) helping to expand AS and boosting the nations eco growth

Tradelib also promotes the re-allocation of resources in the economy – protectionism essentially distorts price mechanism because government interference in the market alters the structure of relative prices. However when protection is removed, the competitive market is free to do what it does best, despite the decline in some industries. Economists would argue that this is mainly a short term problem because resources that are released from redundant industries (car industry) can be re-deployed to other industries where Australia has a ‘comparative advantage’ This improves Allocative efficiency and improves the ability of Australian producers to sell exports into foreign markets. It may also mean that a greater volume of goods and services are produced because Australia is utilizing resources in those industries who are responding to the needs of consumers (both domestically and internationally)

Tariff cuts also lower the cost of production for firms who use imports in the production process. It also encourages firms to be more outward looking in their businesses models. They are more likely to discover that opportunities exist in the foreign markets because they have taken the necessary steps to remove unnecessary waste and expenses – this could further help to improve Australia’s external position

Question 32

Define comparative advantage

Answer 32

theory stating that a country should produce those goods and services where it is more efficient at producing, relative to another country. That is, a country will trade where the opportunity costs of producing goods + services are lower than other countries

Question 33

Define protection

Answer 33

efforts by governments to protect local import competing producers from the threat of imports – commonly implemented by tariffs, quotas and subsides

Question 34

How does trad lib affect all goals

Answer 34

Strong + sustainable – greater efficiency as businesses tend to specialize in areas of ‘comparative advantage’ which leads to business expansion in the long term (short term may see some businesses close down)

Full employment – business expansion ^ production ^ derived demand for labour to facilitate rise in production ^ unemployment falls, however there may be some short-term structural unemployment

External – long-term gains lead to greater export demand increase BOMT decreasing the CAD
(short-term M^ bomt down CAD ^)

Inflation – greater efficiency from domestic producers leads to lower cost side inflation – cheaper imports

Equity in the distribution of income – improves as; higher incomes are received from businesses expanding (lower income earners can buy more essential G+S’s)
Lower unemployment – reduced incidence of transition incomes, more people earning a factor income
And lower supply side inflation reduces cost of g+s’s proportionally increasing purchasing power

Question 35

Define + explain tariffs

Answer 35

Tariffs – a form of ‘protection’ involving tax on imports
Indirect tax
Makes imports less attractive to consumers due to increases production costs being passed onto consumers in the form of higher average prices
Local producers may be able to compete even through they might have a comparative disadvantage
Local firms can remain inefficient with no external pressures (competition) to change operations – leading to higher prices for consumers
Other countries will retaliate imposing similar tariffs on Australia’s exports – leading to a fall in global trade and economic activity
China free trade deal signed December 2015
$98,210 Million of exports to $54,258 Million imports

Question 36

Define + explain subsidies

Answer 36

a form of ‘protection’ involving the government providing local producers with financial or other forms of assistance
Incidence of subsides has fallen over the decade, but still exist in some industries particularly R&D
Effects of subsides are similar to tariffs (decreased long-term efficiency) and may contribute to a reliance on handouts as not exploited to real competition

Question 37

Define quotas

Answer 37

A form of protection involving controls or limits on the volume of imports entering the country