Unit 4 AOS 2 - Chapter 6: Policies For Managing Aggregate Supply Flashcards

Question

4. Explain how aggregate supply policies promote full employment in the long run, through better efficiency.

Answer 1

In the long term, aggregate supply policies can often help firms to lift their efficiency, cut costs and make stronger profits. When profits are good, fewer firms close down and more start up or expand. This should eventually help to reduce structural unemployment and create more jobs. Living standards should benefit from this. However, it is possible in the short term that some aggregate supply policies used to promote cost cutting and greater efficiency by firms, may also cause a rise in the level of structural unemployment.

Answer 2

By increasing our long-term efficiency and productive capacity, aggregate supply policies can help to promote an equitable distribution of income by ensuring that people have improved access greater quantities of basic goods and services and enjoy better living standards.

Answer 3

This could happen in several ways. • Greater efficiency lowers production costs and inflation, and makes goods and services more affordable. • With greater efficiency and lower costs, firms become more profitable and competitive. In the long term, fewer firms close down and more expand their operations, so there is less structural unemployment and incomes are higher. • Increased efficiency helps a nation produce more output of goods and services from the same inputs. This helps to lift average GDP and income per capita. People can now have a larger slice of the nation’s production and income ‘cakes’, so material living standards improve. • Greater efficiency and growing GDP and incomes cause the government’s tax revenues to rise. This allows for a better provision of community services and more generous welfare payments to the neediest individuals.

Answer 4

Microeconomic reforms are one type of aggregate supply policy. These are cost-cutting, efficiency promoting measures that seek to boost allocative, dynamic and technical efficiency by producing more output or GDP from fewer inputs or resources. Achieving greater efficiency and lifting productivity often involve structural change or trans- forming the way particular industries, firms, markets and sectors within the economy, organise their production of goods and services. In turn, increased efficiency grows the economy’s productive potential or capacity.

Answer 5

. Labour market reforms . Trade liberalisation* . Deregulation of key markets . National competition policy (NCP) *only need to know one of these*

Answer 6

This is the removal or reduction of restrictions or barriers on the exchange of goods and services between nations. This includes the removal of tariff obstacles (eg. Duties and surcharges) and non-tariff obstacles (eg. Licensing rules and quotas). Australian governments used to (up until the 1970's) heavily protect local industry from imports and foreign competition. This was done mainly using: . high tariffs (indirect taxes levied on imports to make them dearer than the local item) . generous subsidies (cash pay-ments to exporters or import-competing firms to help them cover their production cost, allowing them to sell more cheaply) . and import quotas (legal restrictions on the quantity and type of imports permitted into the country). Assistance like this sought to help local firms (often infant industries) survive foreign competition and, supposedly, create more jobs and fuller employment.

Answer 7

The Australian government signalled the start of a change in its strategy of protecting local industry from foreign competition. Increasingly, it adopted the policy of trade liberalisation. This involved progressively: . Cutting tariffs . Reducing subsidies . Abolishing import quotas . Increasing the number of bilateral free trade agreements . Scaling back other protective devices.

Answer 8

Increasing trade liberalisation means that national borders no longer restrict the movement of goods, services and money capital between countries. With freezer trade movement and globalisation, we are forced to allocate resources into areas of production where Australia is most efficient and has a comparative cost advantage.

Answer 9

This is the spread of businesses and international trade across national borders as if there was only one large market.

Answer 10

Either they must cut their costs, adopt world's best practice in production and become internationally competitive, or they will face extinction.

Answer 11

Greater allocative efficiency means that more output can be gained from the same inputs of resources, accelerating the sustainable rate of economic growth.

Answer 12

Cost cutting and greater efficiency also leads to reduced prices for goods and services (low inflation). This makes local firms more internationally competitive and increases export sales as well as incomes, thus cutting the structural CAD.

Answer 13

In addition, greater allocative efficiency and competitiveness cause employment to grow (in the long term, despite the possibility of structural unemployment in the short term), and thus real incomes and material living standards rise.

Answer 14

It promotes a free trade marketplace. The concept of free trade is based on the belief that there are benefits to be gained from competition between nations and is aimed at improving international competitiveness.

Answer 15

. Tariff cuts . Reduced subsides and other assistance to local producers . Abolition of import quotas and licenses . Increased number of free trade agreements . Other policy changes

Answer 16

Tariffs or import duties simply represent an indirect tax levied on selected imported goods. In general, tariffs are added on to the price of imports to make them dearer or less attractive to local consumers. There have been debates for years about the appropriate level of tariff protection for Australian industry. Tariffs limit foreign competition and restrict the supply of goods and services in local markets, so many economics agree that high tariffs cause resources to be allocated inefficiently. into industries where we have a comparative cost disadvantage.

Answer 17

High tariffs and weaker competition mean that local firms can remain inefficient and uncompetitive and still survive, and local households and businesses consuming Australian-made goods and services must pay higher prices for these items, reducing living standards.

Answer 18

These problems of protection offset the gains from any possible increase in incomes and employment arising in the short term from having tariffs.

Answer 19

When one country raises its tariffs, this becomes a justification for other nations to retaliate and increase their protection. As a result, world trade volumes and domestic economic activity contract in the long term, reducing living standards.

Answer 20

Look in booklets given to you and do research

Answer 21

Subsidies are government cash payments made to local producers to help them cover some of their production costs. They can enable Australian firms to export at a lower, more competitive price.

Answer 22

Page 277 and booklets

Answer 23

Page 277 and booklets

Answer 24

Australia has increasingly tried to negotiate bilateral free trade agreements (FTAs) with two or more individual countries.

Answer 25

* - one you must know in depth

Answer 26

The aims include: . Improving efficiency in resource allocation by directing resources into areas of comparative cost advantage . Lifting the competitiveness of our exporters . Establishing a business presence abroad . Expanding Australia’s market share in overseas countries . Delivering stronger economic growth . Reducing costs paid for imports by local firms and the prices paid for imports by households . and Making Australia a more attractive destination for overseas investment.

Answer 27

The China-Australia Free Trade Agreement (ChAFTA), which entered into force on 20 December 2015, builds on Australia's large and successful commercial relationship with China, by securing markets and providing Australians with even better access to China across a range of our key business interests, including goods, services and investment. Trade and investment with China is central to Australia's future prosperity. My explanation: ChAFTA is the China-Australia Free Trade Agreement (ChAFTA), which entered into force on the 20th of December 2015. China is Australia's largest trading partner and ChAFTA builds on this large and successful commercial relationship. This is because it secures markets and provides Australians with even better access to China. As a result, China is expected to buy even more than $90 billion worth of Australian exports ($90 occurred in 2014/15).

Answer 28

More than 85% (rise to 93% in 2019 and 97.9% in 2029 - when ChAFTA is fully implemented) of Australia's goods are exported to China ($90 billion value in 2014/15) now enter duty free or at preferential rates thanks to ChAFTA. China buys more of Australia's agriculture than any other country. Dairy - tariffs up to 20% eliminated by 1 January 2026

Answer 29

In a free trade environment, the ready availability if imports expands competition in the domestic market, which means that domestic producers cannot raise....

Answer 30

Microeconomic reform policy involving trade liberalisation helps to lift allocative, technical and dynamic efficiency, grow Australia’s productive capacity and increase AS, resulting in impacts on on the government’s key economic goals.

Answer 31

The adoption of freer trade and stiffer competition from imports has led to greater efficiency in resource allocation. Resources move into areas of comparative cost advantage or greatest efficiency. As well as cheaper imports of new equipment and more efficient technology, this has helped to reduce local production costs and promote the goal of low inflation.

Answer 32

With trade liberalisation there is increased competition from imports. This helps to strengthen allocative efficiency in the use of resources. In the long term, by directing resources into areas of comparative cost advantage, improved efficiency lifts the sustainable rate of economic and employment growth. More output or GDP is gained from the same inputs. Even so, it is possible that lower tariffs (such as those in 2010), the signing of more FTAs and stronger competition from imports may, in the short-term, lead some businesses to close, causing structural unemployment. As a result, pro- ductive capacity and GDP may temporarily shrink.

Answer 33

Trade liberalisation has helped to improve Australia’s allocative, technical and dynamic efficiency in the use of resources, thus lowering production costs. In the long term, this has probably helped to strengthen the international competitiveness of Australian export and import-competing firms, thus tending to lower the structural CAD and promote better external stability. In addition, the increased number of bilateral free trade agree- ments is likely to grow the size of our export market and thus help to reduce the size of Australia’s CAD. This is because the abolition of overseas tariffs on Australian exports makes them more attractive to foreign customers, increasing sales and export incomes. However, in the short term it is possible that the shift towards freer trade (for example, lower tariffs that made imports relatively cheaper) has led to more imports, a bigger CAD and reduced external stability.

Answer 34

In the long term, trade liberalisation should have helped to increase equity in income distribution and living standards. This is because these policies often lead to greater efficiency and production, lower cost inflation and cheaper goods, higher real incomes and increased purchasing power. However, in the short term, individuals who became structurally unemployed when local firms closed down due to competition from cheaper imports may suffer reduced real incomes, equity and living standards.

Answer 35

Budgetary polices involve changes in the level and composition of budget receipts and expenses. Particular budget receipts budget receipts, outlays and outcomes may also be effectively used to improve our long-term levels of technical, inter-temporal, allocative and dynamic efficiency, grow productive capacity and lift aggregate supply. When this occurs, cost inflation is slower, sustainable economic growth stronger, struc- tural unemployment lower, and our international competitiveness and external stability enhanced. Ultimately, achieving these government economic goals helps to raise Australian incomes and living standards.

Answer 36

If budgetary policies are used to increase efficiency and grow Australia’s productive capacity and aggregate supply from AS1 to AS2, this boosts national pro- duction and employment from GDP1 to GDP2. At the same time, this slows cost inflation from P1 to P2. Also, under these conditions, incomes are higher, purchasing power is greater, the international competitiveness of local firms is stronger, the CAD is smaller and living standards are superior.

Answer 37

. Tax reform in the budget . Budget outlays on infrastructure . Budget outlays in education and training . Budget taxes along with outlays on welfare and childcare (increases labour force participation too)

Answer 38

Various governments have recognised that periodically, the tax system needs to be reformed. Indeed, governments can alter: . the tax mix (that is, whether most revenue comes from direct taxes like personal or company, or indirect taxes such as excise or tariffs), . change tax rates (the tax burden), . introduce new taxes . and redirect how tax revenues are used.

Answer 39

In particular, during the last few years to 2013, the federal government continued to lower some tax rates to help increase efficiency. Many economists believe that this helps to increase the incentives to work hard and invest more in new equipment and technology that lifts efficiency and expands business capacity. In turn, these incentives help to strengthen economic growth, reduce structural unemployment (caused by firms closing due to poor after-tax profits), lower cost inflation, bolster international competitiveness, depress the CAD, lift incomes and grow living standards.

Answer 40

Many economists argue that lower income tax rates like these can help to improve personal effort and the motivation to work hard or seek longer hours. This helps to increase work output and labour efficiency, build productive capacity, and add to the level of aggregate supply and the sustainable rate of economic growth. Similarly, lower PAYG tax rates increase personal rewards for gaining extra skills, training or job promotion. Again this helps to build aggregate supply. Moreover, lower income tax rates can stimulate individuals to participate in the labour force, rather than rely on welfare benefits where there is a burden on taxpayers. Lower rates here also help to avoid the ‘brain drain’ caused by our talented labour force being seduced abroad by offers of higher income and lower tax rates.

Answer 41

Hence, failure to cut our income tax rates could diminish the quality of our human capital, lower efficiency and erode Australia’s productive capacity and living standards. Additionally, unless PAYG tax rates are reduced over time, rising incomes mean a growing tax burden as individuals move into higher tax brackets. This is called ‘bracket creep’. Without reductions in tax rates, there are greater disincentives to efficiency and work effort.

Answer 42

Company tax: 30% to 28.5% (and eventually to 27.5%)

Answer 43

Lower rates of company and capital gains taxes both help to create powerful inducements for businesses to invest in new plant, equipment and technology. This is because after-tax profits are higher. As a result of better returns, profit-hungry firms and individuals allocate resources to improve efficiency and grow their productive capacity. This helps to make local export and import-replacing firms even more internationally competitive, improving external stability. In addition, lower company tax rates locally help to attract extra investment from abroad. This strengthens efficiency, productive capacity, employment, incomes and living standards.

Answer 44

By contrast, high company or capital gains tax rates relative to those prevailing among our trading competitors make local firms uncompetitive in both domestic and international markets, destroy jobs causing structural unemployment, and slow economic and income growth.

Answer 45

Lower rates of indirect tax can lift efficiency in resource allocation. Lower rates of indirect tax, including tariffs and excise duties, can help to increase efficiency in resource allocation by reducing the distortions caused by government intervention. For instance, lower tariff rates on imports force resources to be used more efficiently and allocated into areas of comparative cost advantage. Lower tariffs also force local firms to cut costs through structural change, slowing cost inflation.

Answer 46

However, by contrast, high tariffs only result in the misallocation of resources to areas of greatest inefficiency and weakness. This holds back economic growth, adds to inflation, reduces purchasing power and undermines Australian living standards.

Answer 47

Infrastructure mostly involves capital equipment that is used to produce goods and services such as roads, railways, airports, electricity, telecommunications, and water supply. These things are regarded as economic infrastructure. Additionally, social infrastructure makes a valuable contribution to these outcomes. It refers to the provision of education and training (schools, universities, research facilities, TAFE colleges and libraries), as well as hospitals.

Answer 48

Infrastructure provides the vital surroundings or economic climate needed for: • increasing efficiency in the use of our resources, • improving the international competitiveness and profitability of Australian businesses needed for growing jobs • growing productive capacity (shifting the AS line outwards and to the right), including domestic and export capacity • boosting the sustainable rate of economic growth • improving Australian living standards

Answer 49

Australia’s economy running near full capacity. This is because it: . limits aggregate supply . undermines our international competitiveness . slows the sustainable rate of economic growth . and restrict improvements in our incomes and living standards.

Answer 50

Economic infrastructure - involves the provision of capital equipment, such as roads, railways, telecommunications and water supply, often by governments, that is mainly used collectively by firms to produce other goods and services. Social infrastructure - focuses on the provision of collective community services, such as education and health.

Answer 51

1. The rising average age of our public infrastructure (rose from less than 18 years to more than 20 years). Due to inadequate levels of government investment spending and a tendency to allow these assets to run down. 2. The ability of our infrastructure to support economic activity is well behind that of leading or advances economics such as Germany, France and the U.S.

Answer 52

Usually, supply-side shortages in markets are indicated or signalled by rising prices and increased profitability. This attracts extra resources into this area of production. However, despite recent federal, state and local government reforms some infrastructure markets (such as urban and rural water, power, road and rail transport, and gas) are still not perfect or responsive in this way. Here, price signals coming from markets are not always effective in allocating extra resources into these uses.

Answer 53

. $857.2 million for the Melbourne metro rail project . $115 million in the next two years for the Badgerys Creek airport (a second airport for Sydney) . $594 million boost to an inland freight rail link through Victoria, NSW and Queensland . $2 billion in loans for dams and other water infrastructure

Answer 54

It acts to stimulant AD, economic growth and jobs in the short-term. However, in the long-term it provides supply-side benefits to the economy by increasing productivity and expanding the productive capacity of the economy. Eg. Quality rail and roads should reduce travel times and fuel costs, improving the willingness and ability of businesses to supply goods and services. The corresponding increase in aggregate supply serves to promote higher rates of non-inflationary economic growth.

Answer 55

High-quality infrastructure contributes to productivity growth which drives down the average costs of production. These lower costs of production can be passed on to costumers as lower prices in domestic or overseas markets. Lower prices raise the international competitiveness of Australia's tradable sector and their share of global trade. This acts to boost export credits relative to import debit in the Current Account, which in turn lowers the Current Account Deficit. A smaller CAC means that less needs to be borrowed from overseas to fund the CAD, which helps to restrain growth in Australia's NFD.

Answer 56

. There are often long lead times involving many years between recognising a bottleneck and implementing policies to correct this problem. . Demand for some infrastructure can change quite quickly, as we have recently seen in connection with recent mining booms. T . The other worry is that while returns on some infrastructure investment can be very attractive, even to the private sector (or perhaps in partnership with government through public–private partnerships or PPPs) this is not always the case (especially in those instances where there are positive externalities that benefit society generally).

Answer 57

For some infrastructure projects, low profits in the short term cause them to become relatively unattractive. With this background in mind, we now turn our attention to how the budget can address infrastructure bottlenecks, lift efficiency, build productive capacity, increase AS and improve society’s living standards.

Answer 58

Providing infrastructure usually means that there must be budget outlays to allocate resources towards government capital or investment spending (G2). Although this expenditure affects the level of aggregate demand (AD = C + I + G1 + G2 + X – M), it also grows productive capacity and aggregate supply.

Answer 59

Public–private partnerships (PPPs) occur when the government works with the private sector to build infrastructure such as a tunnel or major road. The private sector may, for example, fund the building, maintenance and operation of the facility, but the government would lease these back for periods up to 30 years.

Answer 60

Government budget outlays on education and training can affect the efficiency of Australia’s labour resources. In turn, this helps to determine our nation’s productive capacity or aggregate supply. Eg. in recent years there have been labour bottlenecks caused by a shortage of skilled and educated workers in areas like the trades, health, medicine and engineering.

Answer 61

The budget uses both capital (for example, buildings and equipment) and operating outlays (such as, payment of staff and supplies) on education to lift educational and training standards and improve school retention rates. Year 12 school retention rates: 78% in 2001 to 85% in 2011, Tertiary study rates: 9% in 1971 to 29% in 2001 and 33% by 2011. As an aggregate supply policy, all this can be expected to:

Answer 62

Without a suitably qualified labour force, industry cannot expand and capacity will be limited.

Answer 63

As an aggregate supply policy, all this can be expected to: • grow the skills and productivity of the labour force so there is more output per hour worked • reduce production costs for firms • strengthen our international competitiveness and export sales abroad • improve employability through retraining and reduce structural unemployment • ease labour bottlenecks or shortages • grow Australia’s productive capacity, aggregate supply, sustainable rate of economic growth and incomes • lift Australia’s material and non-material living standards.

Answer 64

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Answer 65

Supply-side aspects of budgetary policy, including cuts in tax rates, infrastructure outlays, changes to welfare and measures to increase national savings, can all be used effectively to grow Australia’s productive capacity and the AS line. In turn, this will generally help to better achieve the government’s key economic goals and grow living standards.

Answer 66

Supply-side budgetary policies can help slow cost inflation in several ways. . Reductions in tax rates can slow cost inflation. Lower rates of personal income tax can perhaps lead to increased worker incentive or efficiency, along with reduced wage-cost pressures. . Reduction in the rate of company tax lifts after-tax profits, allowing companies to reduce their selling prices, and encourages firms to invest in new equipment and more efficient technology. Cutting tax rates as promised would also help slow cost inflation pressures. . Infrastructure outlays on communications (such as the NBN), transport and education could also help to lower production costs by boosting efficiency, again leading to lower cost inflation. . Budget measures to promote higher levels of national savings may help depress interest rates on credit paid by firms, again allowing them to cut costs and keep prices down.

Answer 67

Supply-side aspects of budgetary policy can also help bolster the sustainable rate of economic growth. . Increased efficiency and lower cost inflation may result from lower tax rates. Some argue that lower tax rates create stronger personal incentives for people to work hard and for firms to expand their investment in new equipment. This lifts both technical and dynamic efficiency, grows our productive capacity and accelerates Australia’s sustainable rate of economic growth. . In addition, using budget outlays to pump more resources into national infrastructure projects and education also helps to grow Australia’s productive capacity, as do budget measures aimed at raising the labour force participation rate. Again the sustainable rate of economic growth can be faster and living standards higher.

Answer 68

Lower company and PAYG tax rates, measures to encourage national savings and government infrastructure and education outlays as aggregate supply-side measures in the budget can all help to strengthen our international competitiveness and improve external stability, partly by lifting efficiency and slowing cost inflation. . Greater efficiency and lower costs should make local producers more competitive both in Australia and overseas, allowing them to sell exports and compete in local markets against imports. . In addition, infrastructure projects involving water, power, transport and communications can help to ease bottlenecks currently limiting production, grow our export capacity, reduce the structural CAD and thus help Australia to better achieve external stability.

Answer 69

Supply-side budgetary measures that boost efficiency such as lower rates of company tax, infrastructure projects and encouragement of national savings, can help to slow cost inflation and hence raise the purchasing power of family incomes. As a consequence, basic goods and services become cheaper and more affordable, promoting greater equity in income distribution. These measures can also help improve business conditions and after-tax profits, reducing the level of business closures. In turn, this should lower structural unemployment, lift disposable income and strengthen living standards.

Answer 70

These days, Australia’s immigration policy is a strategic supply-side approach to managing the number and composition of migrants coming to Australia from overseas. In other words, apart from important humanitarian and family considerations, the federal government’s current immigration program especially tries to attract young, English-speaking and suitably skilled people who are likely to make a very valuable and ongoing economic contribution to the labour force and the Australian economy.

Answer 71

This is a key aspect of aggregate supply side polices. The aim is to manage the number and composition of migrants to best support future economic growth.

Answer 72

Australia’s immigration policy continues to emphasise the building of our nation. A central feature of this strategy remains the immigration target. This places a desired limit on the number of new arrivals accepted by the Department of Immigration and Citizenship. The target is then broken down into three sub-categories.

Answer 73

The immigration target represents the desired level of immigration (with sub-categories including skilled, family and humanitarian).

Answer 74

1. The skilled stream 2. Family migrant stream 3. Humanitarian migrant stream

Answer 75

The skilled migrant stream has four sub-categories. – General skills migration based on a points system (here points are awarded based on those likely to make the greatest economic contribution based on criteria like work experience, age and education) – Employer-sponsored migration program (employers can recommend selected people who have the particular skills they seek, and these people can become permanent residents) – Distinguished talent (for those who have international recognition in their field of expertise) – Business innovation and investment program (for those with financial backing and who have previously set up successful businesses)

Answer 76

This enables family reunification of, for example, spouses, children and parents.

Answer 77

This includes refugees.

Answer 78

Because Australia is one of many countries seeking suitable migrants, our immigration program needs to compete with those abroad.

Answer 79

Clearly immigration policy offers a fairly quick and easy solution to labour shortages. Immigration policy also has other effects on Australia’s labour market. It has helped to ease critical skills shortages that restricted productive capacity and aggregate supply. In addition, without a large intake of trained migrants, Australia would be losing more than 35 000 skilled people each year overseas as a result of permanent departures (a brain drain) by our nationals, creating even worse labour shortages. Another impact of recent immigration on the labour market is that it has helped to increase the labour force participation rate. Finally, some people feel that immigration might tend to increase the unemployment rate. This is not generally Australia’s experience. Usually, recent immigrants have had a lower unemployment rate than that of other members of the labour force. In addition, while migrants certainly do increase the supply of labour perhaps adding to unemployment, they also add even more to the demand for goods and services, creating additional job vacancies and hence lower unemployment.

Answer 80

Normally when graphed, a country’s age–sex distribution is a fairly regular shaped pyramid where the sides slope inwards as age increases. This is because as we move towards the top of the graph, increasingly fewer people survive accidents, sickness or older age. However, irregularities do occur in the pyramid’s shape. Often these are due to: . social factors (such as family size, acceptance and use of effective contraceptives, and the roles of women) . economic events (a depression or the cost of having children) . and political developments (such as wars and changes in immigration policy) in Australia and overseas.

Answer 81

Australia has an ageing population. This means that a growing proportion of the population is in older age groups nearing or beyond retirement. If no action is taken to correct the ageing of the population, perhaps through immigration, serious economic problems will arise. An ageing population is expensive for federal governments who need to provide welfare benefits for the aged and the latest costly medical treatments. Second, an ageing population where there are fewer young people working means that the labour force is growing more slowly, resulting in labour shortages.

Answer 82

These could lead to restrictions on Australia’s productive capacity and aggregate supply, slowing our sustainable rate of economic growth. Labour shortages can also lead to higher wage costs and mounting inflationary pressures. They also mean that there are fewer taxpayers of working age, again weakening the federal government’s financial position. If nothing is done about these worries, they may eventually lead to rising budget deficits or reduced living standards for the growing number of ageing Australians.

Answer 83

Indeed, immigration helps to increase the size of Australia’s production possibility frontier (potential annual output of goods and services) because it grows the quantity and quality (skills and efficiency) of our labour resources. Immigration (especially skilled migration) helps to grow the aggregate supply line from AS1 to AS2. This increases the sustainable level of national production from GDP1 to GDP2. It also helps to lower wage–cost pressures, slow inflation and cause the general price level to fall from P1 to P2. In turn, these changes should also lead to higher incomes, more purchasing power and equity, less cost inflation, stronger international competitiveness and, ultimately, better material living standards. However, although immigration can expand our productive capacity, some economists have drawn attention to the effects of immigration on Australia’s environment and the impact that more rapid population growth has on water, land for housing, non-renewable natural resources, urban congestion, waste disposal and greenhouse gas emissions. These adverse environmental impacts could reduce our non-material living standards.

Answer 84

Without immigration, the size and skills of Australia’s labour force would have been in decline since 2010, so immigration is needed to continue to grow our labour force, increase our productive capacity, level of aggregate supply, sustainable rate of economic growth and future living standards.

Answer 85

Whether immigration lessens or worsens inflation depends on its effect on the level of aggregate demand versus aggregate supply and the time period considered. In some ways, immigration might slow cost inflation in the long term. Firstly, it increases the supply of workers by adding to the size, participation and skill of the labour force. When the economy is near its capacity, this can help to ease labour shortages. As a result, wages should rise more slowly than otherwise, reducing cost inflation. Secondly, for some Australian firms, the small size of the local market (only around 23 million people) places them at a cost disadvantage. In this respect, immigration has quickly grown the size of the domestic market for goods and services. This allows local firms to produce on a bigger, more efficient scale with larger production runs. Business fixed costs (such as product development, machinery and advertising) can be spread more thinly over more units of output, allowing greater economies of large-scale production, with lower costs and cheaper consumer prices.

Answer 86

However, it is also possible that immigration could contribute to inflationary pressures by adding to the demand for resources, goods and services more than it adds to their supply. Here for example, we might think of the specific impact that immigration has had in pushing up property prices and reducing housing affordability for Australians.

Answer 87

Immigration can both add to and reduce Australia’s unemployment rate, depending on whether we are looking at the aggregate supply-side effects or the aggregate demand- side impacts. . On the one hand, immigrants are an aggregate supply factor and grow the size of our labour force. They also often have a higher participation rate than others. One would normally expect that this would tend to increase our unemployment rate. Indeed, there is some evidence of this, particularly those whose English language and vocational skills are limited and who have only recently arrived. However, the rate falls with time. Moreover, migrants from some areas and countries are more likely to be unemployed than the locally born, while those from other regions of the world can have unemploy- ment rates below that of other Australians. . On the other hand, immigration also helps to reduce our unemployment rate because migrants also become consumers of goods and services, adding to aggregate demand, economic activity and the demand for labour. This would tend to reduce Australia’s level of cyclical unemployment.

Answer 88

Immigration may have mixed effects on the size of Australia’s CAD. . On the one hand, by growing the size, skills and labour force participation rate, immigration is likely to help increase Australia’s GDP and export capacity, thus reducing the structural CAD. Immigration also helps to keep wage costs lower than otherwise, thus helping to improve the international competitiveness of Australia’s exports relative to imports, perhaps lowering the structural CAD. In addition, most immigrants transfer their savings to Australia, bringing additional credits on the capital account. . However, it is possible that immigration may result in increased debit transactions such as those associated with imports of goods (food and clothing, for example) and services (such as travel), and perhaps even extra income payments abroad to family members or relatives in their country of origin. In this case, the size of the CAD could rise.

Answer 89

Some argue that immigrants, especially those with poor English language skills or who are unskilled, are generally likely to be on lower incomes than the population generally. Higher unemployment rates for this group also reduce their incomes and living standards and puts strain on the welfare system. Additionally, some claim that by doubling population growth rates, immigration has made housing more expensive and less affordable for lower income earners, reducing access to basic goods and services for others. An alternative view is that skilled migrants with generally higher participation rates and education are likely to be on higher incomes. Therefore the overall the impact on income distribution may not be large.

Answer 90

2015/16: (double check this) . 128,550 places for skilled migrants . 57,400 places for family migrants . 565 places for humanitarian migrants

Answer 91

A lot of concern has been expressed in the last few years about environmental issues like: • rising greenhouse gas emissions including CO2 and global warming, melting of the polar ice caps and rising sea levels endangering island and coastal communities • severe weather events including floods, cyclones, prolonged drought and bushfires that cause loss of life, destroy infrastructure and productive capacity • destruction of the ozone layer, deteriorating air quality and waste disposal issues • acid rain and toxic substances entering our food chain • deforestation • the lack of healthy environmental river flows and • destruction of biodiversity and the resulting extinction of plant and animal species.

Answer 92

Greenhouse gas emissions include methane, nitrous oxide, sulfur hexafluoride and hydrofluorocarbons released into the atmosphere as a result of economic activity and the burning of fossil fuels. Most people believe that these gases are also contributing to global warming, melting of the polar ice caps, rising sea levels and extreme weather events like droughts, fires, floods and storms.

Answer 93

Climate change refers to unusual variations in average global temperatures and the distribution of rainfall. Most research suggests that global warming is connected with rising levels of economic activity and associated increases in CO2 emissions due to the burning of fossil fuels.

Answer 94

Environmental policies, such as the Direct Action Plan, which are designed to reduce of mitigate environmental destruction caused by economic activity as well as the production and consumption of goods and services.

Answer 95

There is one type of input that has not been properly costed into selling prices and calculations of profits. These inputs are environmental resources, such as clean air, water and soils. Until recently, these were usually seen as so abundant that they were available free of charge to use, but often such resources were misused. When economic activities cause the environment’s quality to be depreciated, this is an instance of market failure resulting in negative environmental externalities (costs that are created by businesses that have simply been passed onto others and future generations).

Answer 96

Negative environmental externalities represent the costs to the environment that are created by producers and consumers as a result of economic activity such as pollution, resource depletion, destruction of natural beauty spots, urban congestion and crime that have simply been externalised or passed onto others and future generations.

Answer 97

An obvious way to protect the environment is to create a market so that firms depleting or abusing environmental resources will incur a cost that erodes their profits.

Answer 98

In particular, environmental strategies might help to: • mitigate or reduce the severity of weather events and the damage resulting from climate change (for example, the massive insurance claims and loss of life) • protect rural production from the devastating effects of drought, floods, fires and storms resulting from climate change • avoid the destruction of low-lying coastal communities and cities from rising sea levels as a result of global warming • create new investment, business expansion and jobs in low-emission industries using clean technology • keep up with other countries’ efforts to mitigate damage associated with climate change.

Answer 99

The direct action plan.

Answer 100

The Direct Action Plan is the Governments overarching plan to reduce Co2 emissions by 5% on 2000 levels by the year 2020. The key policy initiatives which will drive the achievement of this goal are: . Emissions Reduction Fund AND . Clean Energy (under the management of the Clean Energy Finance Corporation).

Answer 101

The Direct Action Plan is a replacement to the Labour Government’s Carbon Tax and instead provides financial incentives for polluters to reduce emissions. The centrepiece of this policy is the Emissions Reduction Scheme. The Direct Action Plan aims to reduce greenhouse gas emissions to 5 per cent below 2000 levels by 2020. This plan also involves creating a 15,000 strong Green Army to conduct conservation work.

Answer 102

The Emissions Reduction Fund is the centrepiece of the Government’s climate action policy. It will work with other incentives under the Direct Action Plan to help meet Australia’s target of reducing emissions by five per cent below 2000 levels by 2020. It operate alongside existing programmes that are already working to reduce Australia's emissions growth. The Government has provided $2.55 billion (2014) to establish the Emissions Reduction Fund, with further funding to be considered in future budgets. The fund will call for businesses to submit tenders for projects that will either lower emissions or offset them. It will then operate as a reverse auction (businesses compete and undercut each other to win a contract and with it, the Government's money).

Answer 103

The clean energy regulator will run four auctions a year. The government will buy those carbon credit units (Payment comes via clean energy regulator).

Answer 104

The gov has committed $2.55 billion over 4 years to reduce CO2 emissions via the E.R.F. . The E.R.F. is one arm of the Direct Action Plan. The other arm is invested in renewable energy (clean energy corporation). . The E.R.F. works via reverse auctions. 1. Firms put in tenders (bids) to show how they could reduce CO2 emissions. 2. The gov authority will determine which tenders or projects are the most cost effective. 3. The gov pays (subsidies) those businesses to introduce the intiriatuve

Answer 105

Inflation - ⬆️ subsidies = ⬇️ costs = ⬇️ prices = ⬇️ cost inflation = ⬆️ buying power and therefore living standards rise too. Economic growth - more favourable aggregate supply-side conditions (⬇️A⬇️C⬆️E) = encouraged production (AS line shifts to the right) = ⬆️ economic growth (may actually help us enjoy better material and non- material living standards than would otherwise be possible) = In the long-term, it should enable Australia to grow its aggregate supply with less environmental damage, and ultimately sustain better material and non-material living standards. Full employment - as a result of some firms being able to ⬇️ prices (due to subsidies), other businesses may lose customers and close down = ⬆️ structural unemployment in the short term. However, with ⬆️ AS and in turn ⬆️ sustainable economic growth = increased employment in the long term. External stability - ⬇️ prices = ⬆️ international competitiveness = ⬆️ credits and ⬇️ debits for net goods and services in the current account = ⬇️ CAD = ⬇️ reliance on overseas borrowing = ⬇️ NFD = Australia living within its means (external stability). Equity in income distribution - ⬇️ prices = ⬆️ equity however ⬇️unemployment in the short term = ⬇️ equity.

Answer 106

When pursuing its key economic goals, the Australian government seldom uses its aggregate demand policies or aggregate supply policies in isolation. Rather, it tries to employ the most effective combinations or mixtures of these two strategies to help achieve low inflation, strong and sustainable economic growth, full employment, external stability and an equitable distribution of income. This blend of measures is called the policy mix.

Answer 107

From a supply-side perspective the direct action plan is inefficient in that it relies on government subsidies to reduce CO2 emissions. Therefore, in the short term it can be argued that the Direct Action Plan (D.A.P.) reduces or slows the growth in AS, but in the long term by preserving the environment the D.A.P. and global equivalent policies allow for AS growth to continue by preserving current land resources. (Think ⬇️ arable land due to ⬆️ temperature + more severe weather events and possible seas level rises).

Answer 108

. Upgrading commercial building and vehicles (eg. Putting in insulation = less heaters needed = ⬇️ CO2 emissions). . Improving energy efficiency of industrial facilities and housing. . Reducing electricity generated emissions. . Capturing land fill gas (controversial). . Reforest info and revegetating marginal lands. . Reducing coal mine waste gas.

Answer 109

Policy mix refers to the combination of aggregate demand policies and/or aggregate supply policies that the government uses to pursue particular economic goals and improve living standards.

Answer 110

Compatible policies are a combination of government measures that reinforce each other and work in complementary ways to help pursue a particular economic goal. Conflicting policies are a combination of government measures that undermine or work against each other in pursuing a particular economic goal.

Answer 111

AD - monetary policy - 1.5% expansionary - budgetary policy - $39.9 2015/16 (actual) - $37.1 2016/17 (forecast - mildly contractionary) AS - budgetary supply side - Infrastructure - microeconomic policy - Trade Liberalisation (ChAFTA) - immigration policy - environmental policy - long term goal to ⬆️AS All AS initiatives have the goal of increasing AS - therefore compatible Note: the forecast budget outcome for 2016/17 is seen as mildly contractionary, however, the final budget outcome for 2016/17 may well be a larger deficit than 2015/16 (which would be expansionary). This may arise due to decreased company profits and therefore decreased company tax collections.

Unit 4 AOS 2 - Chapter 6: Policies For Managing Aggregate Supply Flashcards

(140 cards)