Sac 2A Essay

Economics Sac 2A:

Chapter 3 - Economic growth:

Outline/ Measurement and Target- Economic growth occurs when there is an increase in the volume of final goods & services produced in an economy over a period of time. It is measured by monitoring annual percentage changes in real Gross Domestic Product (real GDP). It involves a sustained increase in the real rate of production of goods and services (defined as the value of production adjusted for inflation). A growth rate of around 2% per annum is required if the economy is to avoid rising levels of unemployment. It is believed economic growth. It is believed economic growth is to be sustainable in that it should not bring about negative environmental impacts or result in worsened living standards.

Limitations-
Economic growth is measured by the chain volume gross domestic product or GDP where the effects of price changes on the value of national production have been removed, facilitating comparisons between different years. Chain volume GDP as a measure of economic growth has its limitations: it excludes the value of household non-market activity and the cash economy the value for the production of some important items must be imputed, leading to error there is potential error associated with excluding the impact of price changes on the value of production it fails to take account of externalities, changes in product quality or hours worked to generate a given level of output.

Statisticians and economists have attempted to create superior measures of living standards than chain volume GDP per head. One example is the Genuine Progress Indicator or GPI (where there are additions and subtractions to production values to better reflect the impact on our wellbeing). Another is called Measuring Australia’s progress or MAP (where many indicators are used to build up a picture of Australia’s economy, society and environment). Some claim that these are better measures of wellbeing and progress than simply relying on chain volume GDP, although they too have weaknesses.

Demand and supply side factors- Australia’s recent rates of economic growth has moved cyclically in response to volatile changes in demand-side conditions that affected the level of AD (C + I + G + X − M). When spending grew faster, stocks tended to fall. To replenish these stocks and meet stronger sales and orders, firms lifted output (provided they had access to some unused productive capacity), thereby stimulating economic growth. In reverse, weaker expenditure on domestic production, caused unsold stocks to rise and new orders to shrink. In this case, firms were forced to cut production and defer new investment, slowing Australia’s rate of economic growth. By contrast, supply-side factors affect the availability of resources, costs, profits, business closures and the ability and willingness of firms to produce goods and services. In so doing, supply-side structural factors alter the economy’s productive capacity or the sustainable speed limit at which AS or national output can grow. In the past four years, a mixture of both more favourable and less favourable aggregate supply-side conditions (both domestic and international in origin) affected Australia’s rate of economic growth. Generally, better or favourable supply-side conditions make firms more willing and/or able to produce and expand the business by cutting costs, boosting profits, improving access to resources or by growing efficiency. This means Australia’s AS line or productive capacity is larger than previously so the economy can sustain growth at a faster speed. By contrast, generally less favourable supply-side conditions might slow the sustainable rate of economic growth.

Recent trends- These two sets of factors combined to affect Australia’s growth rate. Australia's economy is dominated by its services sector, yet its economic success is based on abundance of agricultural and mineral resources. The first half of 2012 was aided by the

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