How a countries economy functions can be greatly affected by the economic growth rates in that country. The rate at which an economy grows is measured by the change in real Gross Domestic Product (GDP), i.e. the percentage increase in the value of goods and services produced in an economy in one year, adjusted for the rate of inflation. Either directly or indirectly the following are all affected by changes in the levels of economic growth rates:
- Unemployment
- Inflation
- External Stability
- The Distribution of Income
- The Environment
Unemployment
The demand for labour is a derived demand as it is determined from the demand of goods and services. During periods of low economic activity or downturns in the economy, the level of total demand in the economy is reduced, domestic consumption and investment spending decreases and therefore unemployment increases as workers are not needed and are therefore "fired".
The current level of unemployment, as of March 2005, is 5.1%, which is close to the government's aim of full employment. Full employment indicates a level at which the quantity of labor demanded is equal to the quantity of labor supplied. This doesn't mean zero unemployment as there is always going to be some unemployment due to frictional unemployment (workers changing jobs) or hidden unemployment (people doing unpaid work). The Howard government has been able to achieve this low level of unemployment through its concentration on policies to implement flexible workplace relations and expansion of enterprise bargaining between workers and employers.
Inflation
High levels of economic growth can result in price increases and larger wage claims contributing to a rise in the level of inflation. This occurs when spending is growing and the economy is close to its full capacity and growth in aggregated supply cannot keep up with demand for growth in aggregated demand. High levels of inflation is undesirable for an economy as it results in rising prices which in turn results in a decrease in the amount of disposable income of consumers. Consumers then seek higher wages, which further push up prices of goods and services. Inflation causes the countries currency to depreciate as investors lose confidence in the countries economic markets and results in a worsening of the balance of payments as exports become less desirable and imports become more desirable.
In 1992 the Reserve Bank of Australia (RBA) stated its aim to keep inflation between 2-3% by changing interest rates when inflation is too high or low in order to slow or speed up the economy. This was designed to reduce inflationary expectations and therefore reduce inflation. This has been why the RBA increased interest rates in March this year from 5.25% to 5.50%.
When this strategy is combined with increased competition and enterprise bargaining inflation can be kept too acceptable levels like was done in Australia during the 1990's and early 2000's. Inflation can also be kept low by ensuring that all factors of production are in sufficient supply and that there are enough markets for these goods and/or services to be supplied to.
External Stability
Australia's external stability is determined by a number of factors:
- Current Account Deficit (CAD)
- Australia's Foreign Debt
- Australia's Foreign Liabilities
- The size of the CAD as a proportion of GDP
- The size of Australia's net foreign debt as a proportion of GDP
- The value of the Australian dollar
- Australia's interest payments on its foreign debt
During periods of strong economic growth, individuals increase their spending as their wages increase. This leads to an increase in the amount of imports imported into the country, and therefore worsens our terms of trade. If the price of exports becomes unable to cover the increase in imports then the current account increases. In Australia this would lead to an increase in the Current Account Deficit (CAD), which would then mean that further repayments will be needed to be repaid to the loaning country resulting in the "debt trap". As of December 2004 the CAD is $53.8bn
Net foreign debt represents the total liabilities that we owe to overseas minus the foreign liabilities that are owed to Australians. Australia's net foreign debt has been increasing for some time as Australian borrow money for consumption of more goods rather than saving money as was done in the 1970's. In December 2004, our net foreign debt was $421.9bn up $15.7bn from September 2004's figure of $406.2bn. Economic growth increases the amount of money in which individuals can spend their money. This leads to further purchase of goods and therefore further debts as they spend too much money. In order to reduce the net foreign debt Australians would need to reduce their spending and start saving their money to reduce the massive debt before the debt become unserviceable and Australians go bankrupt.
