ACE - Lecture 5
ACE - Lecture 5
ACE - Lecture 5
development 1
Recommended reading
Richard Morris., ‘Economics Down Under’,
VCE Economics, Units 1 and 2, 9th Edition,
Jacaranda.
Reading for lecture 5: Chapter 2
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Lecture Outline
The meaning of living standards, economic
growth and sustainable development
The measurement of economic growth
The business cycle and recent trends in
Australia’s economic growth
Factors affecting Australia’s rate of economic
growth
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Meaning of living standards
Most people throughout the world would like to be
better off and enjoy improved material living
standards.
This means having higher incomes per person and
being able to consume or purchase more goods and
services.
Economic growth means that over time the nation’s
productive capacity gets bigger, enabling more needs
and wants to be satisfied and improving material
living standards.
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Meaning of living standards
Society’s wellbeing is not only influenced by material
considerations.
It is also affected by non-material aspects including
freedom, happiness, job satisfaction, quality of family life,
justice, amount of leisure time, crime and pollution levels.
It is worth noting, too, that material and non-material
living standards affect each other, in both positive and
negative ways.
Accelerating economic growth can help to promote our
non-material welfare experience
However, it can also cause damage to non-material
aspects.
In other words, there is a trade-off.
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Meaning of sustainable development
Concern about these issues and the broad impacts of
economic growth, gave rise to the concept of
sustainable economic development.
This concept is commonly defined as a method of
expanding the economy’s production levels to meet
the needs of the present population for goods and
services, without undermining the ability of future
generations to meet their own needs.
Another definition of sustainability is of an economy
where production is in equilibrium or balance with
the environment and its ecological support systems.
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Meaning of economic growth
Nowadays, the most common indicator of the growth rate in
national production is the percentage change in Gross Domestic
Product (GDP).
Here, GDP statistics attempt to estimate the total annual value
of all final goods and services produced by a nation.
To make one year’s GDP results comparable with another’s, the
exaggeration of the value of production caused by the effects of
inflation or generally rising prices is removed statistically.
The resulting measure shows changes in the volume of goods
and services produced and is called Real GDP.
GDP figures are prepared by the Australian Bureau of Statistics
(ABS) every quarter (three-monthly intervals), and the four
quarters may then be combined to calculate the annual rate of
economic growth.
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Gross Domestic product
GDP defined
This definition has four parts:
Market value
Final goods and services
Produced within a country
In a given time period
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Real GDP, Nominal GDP and GDP Chain
Volume Measure
Nominal GDP is the market value of all final goods
and services produced within a country in a given
year valued at the prices that prevailed in that same
year.
Nominal GDP = Qcy x Pcy
Where, Qcy = Quantity in the current year.
Pcy = Price in the current year.
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Real GDP and Nominal GDP
Real GDP is the market value of all final goods and
services produced within a country in a given year
when valued at constant prices.
Real GDP = Qcy x Pby
Where, Qcy = Quantity in the current year.
Pby = Price in the base year.
We can use any one year, against which to compare
other years and that is called the base year.
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Limitations of GDP
Exclusion of non-marketed production
Some non-marketed goods and services are not included in the GDP
figure.
For example, do-it-yourself home production (e.g. painting, housework,
and gardening) and production involved in the cash economy (e.g. sideline
jobs) and black market (e.g. production of drugs) are not included causing
the value of Australia’s GDP to be underestimated, perhaps by 10–15 per
cent.
Inaccurate estimations of some types of production
Because of the lack of an alternative, the value of some non-marketed
production making up GDP has to be estimated, or imputed, leading to
inaccuracies.
For example, estimations are made only of that part of a farmer’s
production that is consumed on the farm and the annual value of
accommodation provided by houses occupied by their owners. This leads to
inaccuracy in Australia’s GDP figures.
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Limitations of GDP
Failure to take account of negative externalities that lower non-
material living standards
Negative externalities (i.e. environmental and other costs imposed
on third parties that result from production economic activity) are
not taken into account in calculating GDP.
For example, economic growth sometimes undermines our
personal wellbeing (e.g. through the loss of leisure time for
families to spend together, increased stress levels and loss of job
satisfaction due to pressure to be efficient), and
destroys the natural environment (e.g. the depletion of
environmental resources, generation of pollution, acceleration of
global warming and climate change).
Because these costs are not subtracted from the annual value of
production, GDP exaggerates our living standards.
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Limitations of GDP
The need to take account of population size
On its own, GDP takes no account of the number of
people who have to share the nation’s production pie.
So, to indicate whether society is becoming better off
materially, the value of GDP needs to be divided by the
number of people making up the total population.
Here, annual GDP per capita is often quoted as a
general indicator of average material living standards.
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Limitations of GDP
Failure to take account of the way goods, services and incomes are
distributed
Having economic growth and a bigger GDP do not necessarily
guarantee that people are better off.
Material living standards are greatly affected by the way we share
or distribute the goods, services and incomes resulting from
production.
If a few people benefit because of great economic inequality,
average material wellbeing is lower than if the production and
national income were divided or shared more evenly
Australia’s pattern of distribution is fairly uneven, at least prior to
the government’s policies designed to redistribute incomes more
equitably.
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United nations Human Development
Index (HDI)
There have been other attempts at measuring the well-being of
a country. The United Nations has developed one such measure
called the Human Development Index (HDI)
The HDI is a summary composite index that measures a
country's average achievements in three basic aspects of human
development: health, knowledge, and income.
The HDI was created to emphasise that people and their
capabilities should be the ultimate criteria for assessing the
development of a country, not economic growth alone.
The HDI brings together in index number form, three different
aspects of living standards:
Gross National Income per capita as a reflection of the improvement in
standard of living.
Life expectancy at birth as a reflection of quality of health care and of diet.
The mean years of schooling and the expected years of schooling as a
reflection of educational standards and attainment.
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The business cycle and recent trends in
Australia’s economic growth
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The business cycle and recent trends in
Australia’s economic growth
The expansion
The expansion phase is where the level of GDP is rising and growth rates
are quite fast (perhaps around 3–4 per cent or more per year).
Here, it is common to see unemployment rates fall and inflation to
accelerate
The peak (perhaps a boom)
The peak phase occurs when GDP reaches its maximum level and the
rate of growth usually starts to ease.
If inflation are rising quickly and unemployment rates are very low this is
usually called a boom (e.g. possibly between 2005 and mid-2008).
The contraction
The contraction or slowdown phase is where the rate of growth in GDP or
production is sluggish.
Typically, unemployment gradually starts to rise and inflation eases.
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The business cycle and recent trends in
Australia’s economic growth
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The business cycle and recent trends in
Australia’s economic growth
moderate.
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The business cycle and recent trends in
Australia’s economic growth
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The business cycle and recent trends
in Australia’s economic growth
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Factors affecting Australia’s rate of
economic growth
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Factors affecting Australia’s rate of
economic growth
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Factors affecting Australia’s rate of
economic growth
Aggregate demand factors affect Australia’s actual
cyclical level of economic growth
Disposable income
Consumer confidence
Business confidence
Interest rates
Budgetary policies
Exchange rate
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Key points
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