Discuss the Limitations of Australia’s Economic Growth and Its Effects on Unemployment

1308 Words Apr 24th, 2016 6 Pages
Discuss the limitations of Australia’s economic growth and its effects on unemployment

Economic growth refers to the increase in an economy’s output measured by percentage increases in real GDP. Unemployment refers to the unused labor resources in an economy constituted by individuals who are out of work and seeking work. Since 2012 the Australian economy has been growing below its trend growth rate of 3%, averaging at 2.5%; a rate forecasted to extend over the next two financial years. This is due to both cyclical and structural factors that place limitations on Australia’s economic growth. Cyclical factors such as the slowing resources boom has dampened growth, but will be resolved with structural change as Australia recovers from the
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A key limit on Australia’s trend growth is its ageing population. Between 1901 and 2009, the proportion of people aged 65 and over has grown from 4 to 13%, and is forecasted to reach nearly 25% by 2050. As the population ages, and Baby boomers increasingly leave the workforce, Australia’s participation rate currently at 65% will fall – down 0.3 percentage points from 2010. A higher aged dependency ratio would then result. On the demand side, economic growth would be dampened through weaker consumption levels. This is because retired workers are entitled to social welfare, which is often financed through greater tax rates. The greater tax rates lower disposable incomes and reduce the amount of G+S that can be bought by consumers.

Supply constraint graph – will be reviewed in class
Supply constraint graph – will be reviewed in class

On the supply frontier, an ageing population shifts the vertical edge of the AS’s curve to the left (AS1). This shows a reduction in trend growth, as once past the supply constraint, any increase in AD would only place inflationary pressures on the economy rather than increase GDP. The leftward shift occurs on the AS curve as labor resources which once produced goods and services and hence contributed to AS has left the workforce. As such, the trend growth rate has declined, shown by the contraction of GDP and leftward shift of the AD curve

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