Chapter 14 - The nature and operation of aggregate supply policies Flashcards Preview

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Flashcards in Chapter 14 - The nature and operation of aggregate supply policies Deck (23)
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1
Q

What is the definition of aggregate supply (AS) policies?

A

AS Policies: refer to any government initiative that is designed to reduce the costs of production and/or improve supply conditions for business so that Australia’s productive capacity and living standards are enhanced over time.

2
Q

What are the effects of AS policies on Growth, Inflation and Employment?

A

Overall AS policies can increase real GDP and employment in the longer term, without adding to inflationary, external and/or environmental pressures. In this respect, AS policies help to achieve:

  • Strong and sustainable economic growth
  • Low Inflation
  • Full Employment
3
Q

What are the effect of AS policies on equity in the distribution of income?

A

Whilst the effect on unemployment may be negative in the short term with some AS policies (e.g. microeconomic reforms), the improvement to economic growth in the long term is expected to create enough employment to provide a net reduction in the unemployment rate. In this respect, AS policies can assist to reduce absolute poverty therefore contributing to the goal of greater equity in the distribution of income.

4
Q

What are the effects of ​AS policies on external stability?

A

With respect to external stability, AS policies provide clear benefits over time. Any improvement in productivity or efficiency will help to reduce production costs, minimise inflationary pressure and increase international competitiveness. This should boost the BOGS and reduce both the CAD and NFD to more sustainable levels.

5
Q

What are the effects of AS policies on living standards?

A

Overall, the successful implementation of AS policies should help to boost both material and non-material living standards.

Material living standards can improve because there will be a greater volume (and/or quality) of goods and services available at lower prices.

Non-material living standards can improve via greater efficiency in production helping to reduce strain on resources and the environment.

6
Q

Impact of AS policies on price levels and real GDP

A

AS policies effectively push the AS curve out to the right, lift the nation’s productive capacity and enable higher output and employment levels to take place alongside lower levels of inflation.

Lower production costs enable firms to reduce prices for any given output, level or increase output at any given price level.

7
Q

Fighting Stagflation

A

AS policies are particularly important when an economy experiences stagflation; high inflation and low economic growth

8
Q

Alleviating Capacity Constraints

A

AS policies are important when an economy experiences supply constraints where the nation’s productive capacity is stretched to the limit and output cannot keep pace with growth in AD.

9
Q

The growing importance of aggregate supply policies

A

With an ageing population and an end to the terms of trade boom, which have provided significant boosts to Australia’s income since the early 2000s, the role of AS policies becomes all the more important. Well targeted AS policies that ultimately boost Australia’s productivity over time are needed to fill the void. Without productivity enhancements, Australia’s future rates of economic growth will be limited and average living standards will be compromised.

10
Q

Addressing short-term supply shocks

A

AS policies are also useful to counteract the effects of a short-term supply side shock to the economy.

11
Q

Boosting productivity and International Competitiveness

A

An improvement in Australia’s international competitiveness means that Australian firms or industries are producing goods & services at lower prices or higher quality compared to overseas competitors.

Generally, improvements in productivity should increase international competitiveness as average costs of production fall, allowing businesses to reduce prices or improve quality. This will only occur in a competitive industry; thus competition is the largest incentive to increase productivity.

12
Q

How do AS policies help to achieve the government’s goals?

A

Low Inflation and Sustainable Growth: by increasing AS, or expanding productive capacity, the economy is able to achieve a higher rate of economic growth alongside low inflation; this is sometimes referred to as low inflationary growth

Employment: with higher levels of AS and real GDP, we should expect to see an increase in the derived demand for labour, boosting employment and reducing the rate of unemployment over time.

Equity in the distribution of income: the relatively lower prices (or lower inflation rate) that results from AS policies should provide relatively greater benefits to lower income earners as they tend to spend a much higher proportion of their income on goods and services.

External Stability: the successful implementation of AS policies should result in downward pressure on both the CAD and NFD over time.

Living Standards: overall, AS policies should benefit living standards for Australians (despite possible short-term effects) as Average incomes across the economy should increase and real GDP per capita should expand, providing Australians with a greater ability to purchase goods and services.

13
Q

What is the definition of ​productivity?

A

Productivity refers to the volume of output that is produced from a given number of inputs.

14
Q

What is the definition of capital, labour and multi-factor productivity?

A

Capital productivity is best defined as output over the number of capital hours used.

Labour productivity is best defined as output over the number of labour hours worked.

Multi-factor productivity is defined as output over a combination of inputs, such as capital and labour.

15
Q

What is the effect of a change in the participation rate?

A

Higher rates of labour force participation will help to reduce real unit labour costs over time. This is because an increase in the labour force size reduces labour shortages and exerts a downward pressure on wages.

16
Q

What is the effect of a changing ​population?

A

The higher population will help to protect against the anticipated decline in the size of the (future) labour force due to an ageing population.

17
Q

What is the definition of government assistance?

A

Government Assistance can be defined as any government act that helps a person or business to undertake some form of business activity.

18
Q

What are MRP’s and what are their uses?

A

MRP’s involve 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.

MRP’s aim to improve productivity and international competitiveness 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.

19
Q

What are examples of supply side initiatives from the 2016-17 budget?

A
  • Lowering tax rate for business over time to an internationally competitive level. (The company tax rate will be progressively lowered to 25% by 2026-27 for all companies and the Government will also extend a range of concessions already available to small businesses with turnover less than $2M to all businesses with turnover less than $10M from 1 July 2016)
  • The $1.1B National Innovation and Science Agenda and new measures to support innovation will put Australia on the right track to becoming a leading innovator.
  • The Government has committed to a record $50B in infrastructure investment between 2013-14 and 2019-20 for roads, rails, airports and dams.
  • The $840M Youth Employment Package will provide an innovative approach to help up to 120,000 vulnerable young people secure jobs. (The Youth Jobs PaTH Programme will comprise three stages: Employability Skills Training (6 weeks), Internship Placement (4-12 weeks); and Employer wage subsidies of up to $10,000 paid over 6 months.
  • The Government is encouraging entrepreneurship, including through expansion of the successful New Enterprise Incentive Scheme (NEIS) to encourage young job seekers to start their own businesses.
20
Q

What are examples of supply side initiatives from the 2015-16 Budget?

A
  • Supporting small businesses, with annual turnover under $2M, by cutting small companies’ tax rate by 1.5% and giving a 5% tax discount to small unincorporated businesses.
  • Encouraging Investment by allowing small businesses to immediately deduct each asset costing under $20,000 that is purchased between Budget night and 30 June 2017.
  • Reducing red tape and unnecessary regulation for small businesses, and supporting start-ups and entrepreneurship
  • Delivering a $3.5B reform package to make child care simpler, more affordable, accessible and flexible, to support workforce participation.
  • Providing $250M to continue the Drought Concessional Loan Scheme.
  • Establishing a new $5B Northern Australia Infrastructure Facility to provide concessional loans to catalyse the development of major projects in the North.
21
Q

What are examples of supply side initiatives from the 2014-15 Budget?

A
  • Creating a $11.6B Infrastructure Growth Package, to boost total infrastructure investment by Commonwealth, State and local governments, as well as the private sector, to over $125B by 2019-20.
  • Consolidation of Government programs and bodies as well as the intended increase in outsourcing of ‘non-essential’ government functions in order to achieve efficiency gains.
  • The Government has cleared the backlog of unenacted tax legislation and is reducing the regulatory burden on business, individuals and the community by $1B a year through an aggressive agenda to cut red and green tape.
  • A $200M boost to the Export Finance and Insurance Corporations capital base, and a $50M boost to the Export market development grants program will help more small and medium-sized businesses to access export markets.
22
Q

What are examples of supply side initiatives from the 2013-14 Budget?

A
  • The Government is investing $9.8B over six years from 2014-15 in once in a generation school reforms to enhance Australia’s future productivity and wellbeing.
  • The Budget commits $24B to the next wave of vital infrastructure, bringing the Government’s total investment to around $60B from 2008-09 to 2018-19.
  • The Government is continuing investment in the NBN to put Australia at the cutting edge of broadband technology, boosting productivity and securing Australia’s place among the world’s top digital economies.
  • The rollout of DisabilityCare Australia, with $19.4B invested from 2012-13.
  • The Government is investing around $300M over four years to support job seekers transition into work. This includes encouraging labour force participation​ by increasing the income free area under Newstart Allowance and other similar allowances.
23
Q

What are examples of supply side initiatives from the 2012-13 Budget?

A
  • Allowing companies to carry back tax losses so they get a refund against paid in the previous year, providing a tax benefit of up to $300,000 per year.
  • Tax Breaks for small business, like the increase to the instant asset write-off threshold to $6,500 providing added incentive for businesses to upgrade or purchase new assets or equipment.
  • $1.75B National Partnership Agreement with state governments on Skills Reform
  • Investing an additional $225.1M in Jobs, Education and Training.