Economic Growth is defined as the capacity of the economy to satisfy the material wants of its members
Growth is usually measured by calculating the rate of change in real Gross Domestic Product (GDP) over a period of time.
In Australia, the target rate of growth is 3-4 percent per annum.
Potential growth is determined by growth in the labour force, and growth of productivity
If for example, the labour force grew by 1.75 percent, and productivity by 1.5 percent.
Then potential GDP growth would be 3.25 per cent.
The actual rate of growth in any year, however, depends upon the level of aggregate demand at any point in time
Growth is the key objective because it delivers higher real income and enables people to satisfy more wants.
Growth creates more demand for productive resources, including labour.
The extent to which growth helps achieve higher employment depends, however, on whether the growth rate exceeds the rate of growth of the population and workforce.
Growth rates that are high, are unsustainable in a mature economy as they put pressure on factor markets (i.e. markets for raw materials and labour)
Economic Objectives - Price Stability
Price stability occurs when there is little change in the general price level- that is, there are low rates of inflation.
The Reserve Bank and the Treasury agree that the appropriate target for inflation rate is 2-3 percent, on average, over the course of the business cycle.
Price increases have been within the target range since the early 1990s (see read the red columns in fig 11.1, using the left hand scale)
2000 was an exception because the introduction of the Goods and Services Tax (GST) in July flowed through to prices.
Inflation has increased markedly in the last two years due to the combined effect of:
Supply side pressures - associated with the pandemic (interruptions to supply chains; periodic lockdowns; high rates of absenteeism from work), the war in Ukraine and floods in eastern Australia(SRAS)
Controlling inflation is a very important economic objective
Sustained inflation rates above the target range bring a number of economic costs.
Economic Objectives - Full Employment
Full employment occurs when everyone who is willing and able to work can find a job.
Given the dynamic structure of developed economies, it is impossible to achieve a zero rate of unemployment – this due to frictional and structural unemployment
The ‘friction’ associated with job search (uncertain matching of demand and supply across the labour market) is responsible for perhaps 1.5 to 2.5 per cent of the reported unemployment at any point in time
Structural unemployment occurs when there is a mismatch of available and required skills in a geographical or occupational sector of the economy
Currently, structural unemployment may account for 2-3 percent of the total unemployment rate.
Together, the frictional and structural rates constitute what economists call the ‘natural rate’ of unemployment – the lowest rate of unemployment that can be achieved without inflationary pressure developing.
In current conditions, the natural rate is thought to be 4 per cent of the workforce.
Cyclical or demand deficient unemployment adds to this during periods of lower economic activity.
Other Objectives - Income Distribution
Economic Growth, price stability and full employment are key macroeconomic objectives in all countries.
Other objectives such as equitable distribution of income and welfare can be achieved as a by product of achieving these objectives.
Most countries have considerable inequality of income and wealth.
Efficient resource allocation is also an important economic objective related to macroeconomic performance, although in a policy sense it usually involves changes at the microeconomic level (i.e. to individual sectors of the economy)
Moreover, increasing productivity and efficiency are regarded as key ways of increasing prosperity in the future.
