Essay: Analysis Of Australian Household Consumption Expenditure And Economic Growth.

Using data from the Australian Bureau of Statistics (ABS) http://www.abs.gov.au/ collect information on Australian household consumption expenditure and household disposable income over the period 2000 to 2017 inclusive. Employ annual figures. Be explicit and define and provide sources for the data obtained, cite the ABS catalogue and table numbers.

Plot the relation between consumption expenditure and disposable income to identify the household consumption function. Using annual changes determine the marginal propensity to consume (MPC) over this period. Explain what the MPC measures and reasons for its behaviour overtime. 

In the 2018-2019 Federal Budget, the Government seeks to pursue ‘stronger growth to create more jobs’.  In part, the policies designed for improving economic growth consists of a focus on the following elements:

• lower taxes to support growth
• building a smart economy by investing in science and technology
• delivering major transport infrastructure
• a world health industry leader
• securing access to export markets
• backing our farmers

https://www.budget.gov.au/2018-19/content/jobs.html (accessed 18/09/18)

Discuss and evaluate this government’s focus on how it wishes to promote growth in the context of the typical determinants of economic growth. That is, compare and contrast the standard economic determinants of economic growth with these articulated policies in the 2018-19 Federal Government Budget.

Define the concept of the underemployment rate and contrast it to the concept of the unemployment rate. Using data from the Australian Bureau of Statistics (ABS) http://www.abs.gov.au/ collect information on both underemployment and unemployment rates for the period 2000 to 2017 inclusive. Employ annual figures. Be explicit and define and provide sources for the data obtained, cite the ABS catalogue and table numbers.

Plot the underemployment and unemployment rates over-time and provide an explanation of any time-series patterns.

Employ the aggregate demand and supply model for the Australian economy, to analyse the consequences for real GDP and the general price level of the following scenarios. Assume that the economy operates in the intermediate range of the aggregate supply curve. In your response clearly state your assumptions and illustrate your answers with diagrams. 

(a) the price of electricity increases substantially,

(b) the United States imposes some tariffs on Australian exports to the United States,

(c) the government reduces personal income tax rates,

(d) house prices fall substantially.

Household Consumption Function and Marginal Propensity to Consume

The main determinant of household consumption is income. Given all other factors, there exists a positive relation between household consumption and income. The figure below explains trend in consumption expenditure and disposable income for Australian household.

 

Figure 1: Consumption and Disposable income

(Source: abs.gov.au, 2018, Cat no. 5204.0, Table 36)

The scatter diagram of consumption and disposable income reveals a positive linear trend. This implies income is positively related with consumption. In other words, consumption increases with increase in income. From the trend equation consumption function is obtained as

 

Marginal Propensity to Consume captures the additional change in consumption resulted from additional change in income (Mankiw, 2014).The best way to compute MPC is to measure the percentage change in consumption arising from percentage change in the income.

 

Figure 2: Overtime changes in Marginal Propensity to Consume

Personal consumption expenditure in Australia is an important component of Gross Domestic Product. The MPC for Australian household is significantly high. From the consumption function, the associated coefficient of income is 0.8. This actually indicates MPC of the household. The estimated MPC suggests for 1 unit change in income consumption raises by 0.8 unit. The trend in MPC though reveals a fluctuating trend meaning there is some variation in MPC overtime, in most of the years it remains close to 1. MPC closer to 1 implies tendency of household to spend more when income increases. There are some years in which MPC exceeds 1. This means consumption increases more than income reflecting dissaving on the part of household. This trend is supported from the fact of recent slow wage growth associated with a higher consumption in Australia. A gradual increase in wealth supports larger consumption resulting in a decline in saving propensity.

Economic growth indicates ability of an economy to produce more goods and services overtime. It is captured through rate of increase in the aggregate output overtime. Gross Domestic Product of a nation measures the value of goods and services produced in a year (Goodwin et al., 2015). Percentage change in Gross Domestic Product of nation is commonly used to measure economic growth. given year.

The first primary determinant of economic growth is natural resource. Access to a large amount of natural resources increase productive capacity of an economy leading to a higher economic growth.

Stock of physical capital is an important determinant of economic growth. Physical capital refers to factory, machines, equipment and other capital goods used in production process. High stock of physical capital means workers have a large amount of capital to work with. This increases productivity and growth.

Determinants of Economic Growth

In addition to physical capital, another form of capital necessary for economic growth is human capital. This refers to knowledge, health, education and other attributes of labors useful for economic growth (Teixeira & Queiros, 2016).

Technology is the key to economic growth. Advanced technology increase output by employing resources more efficiently.

Lower tax to support growth: Government aims to provide a tax relief to the small and medium sized businesses. The lower tax encourages business investment, supports creation of more jobs, higher payment, and hence, results in higher growth.

Building a smart economy by investing in science and technology: Technology is a crucial determinant of economic growth. Government investment to improve technology infrastructure would support a higher growth in terms of increasing productivity.

Delivering major transport infrastructure: Transport infrastructure is a part of physical capital. Investment in projects related to transportation stimulates productivity and economic growth.

A world health industry leader: Under this policy, government takes a medical industry growth plan. This is similar to the investment in human capital and increase economic growth by improving workers; health and productivity.

Securing access to export markets: This contributes to economic growth by offering businesses a larger market to sell their product or service.

Backing our farmers: As agriculture is one primary sector of the economy, supporting farmers will result in a higher productivity in the agricultural sector. This in turn contributes to economic growth.

The concept of unemployment differs from that of the concept of underemployment in terms of signifying a different condition of labor market. Unemployment is a state of labor market where an active member of the labor force despite active job search is unable to find an appropriate job. Under condition of underemployment, though people are actively involved in jobs but the current job does not utilize the skills fully (Livingstone, 2018). Unemployment therefore is condition of joblessness. Underemployment on the other hand reflects a situation where people have jobs but the current jobs undermine their skills.

Underemployment now has become a growing concern in many of the advanced country. It though contributes to a declining trend of unemployment but may lead to dissatisfaction among the workers.

 

Figure 3: Unemployment and underemployment in Australia

(Source: abs.gov.au, 2018, Cat no. 6202.0, Table 22)

Both unemployment and underemployment in Australia in 2000 was close almost same. It is since 2003, when unemployment though started to decline but incidence of underemployment continued to grow. This increased the gap between the rate of unemployment and underemployment. Unemployment in Australia is largely declined due to creation of job opportunities in service sector. Many of these jobs are part-time which increases the problem of underemployment (Healy, 2016). The underemployment rate in Australia constitutes an upward trend since the first recorded in 1978. The problem of underemployment aggravated during economic slow-down as experienced during Global Financial Crisis. The economic expansion and growth of industrial and service sector creates job opportunities in different field lowering unemployment in Australia. Today part time employment constituted more than 90 percent of Australian labor force (Abs.gov.au, 2018) Females are more likely to remain underemployed compared to their male counterparts.

a) In almost all industry, electricity is used as one of the primary inputs. It constitutes a larger part of production cost for a firm. When electricity price rises, firms face a higher energy cost for every unit of output. Increase in production cost interrupts aggregate supply in the economy.  There will be a decline in aggregate supply. The fall in aggregate supply, shift the aggregate supply curve leftward. Given the aggregate demand, decline in aggregate supply lowers real GDP while price level increases.

 

Figure 4: Impact of substantial increase in electricity price

b) United State is one of major export destination for Australia. Now if United State imposes a tariff on Australian export, the price of Australian export in the domestic market United States increases. This reduces volume of imports in United States. This in turn means a decline in volume of export in Australia lowering the aggregate demand (Baumol & Blinder, 2015). Consequently, the aggregate demand curve shifts to the left. The Australian economy contracts in terms of a lower GDP and lower price level.

 

Figure 5: Impact of tariff on Australian export

c) Reduction in personal income tax is a part of government expansionary fiscal policy. The disposable income of household increases following a cut in personal income tax. As households are now able to spend more, there is an increase in consumption expenditure. Rise in personal consumption expenditure raises aggregate demand shifting the AD curve to the right. The economy expands with an increase in real GDP and inflation.

 

Figure 6: Impact of a reduction in personal income tax

d) Sudden decline in housing price negatively affect confidence of consumers. Household faces a decline in their wealth following a fall in price of housing. The adverse wealth effect discourages consumption spending resulting in a decline in aggregate demand. The fall n aggregate demand with the given supply in effect reduces price level and real GDP.

 

Figure 7: Impact of a decline in house price

References

Abs.gov.au. (2018). 5204.0 - Australian System of National Accounts, 2016-17. Retrieved from https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5204.02016-17?OpenDocument

Abs.gov.au. (2018). 6202.0 - Labour Force, Australia, November 2018. Retrieved from https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6202.0November%202018?OpenDocument

Abs.gov.au. (2018). 6202.0 - Labour Force, Australia, September 2018. Retrieved from https://www.abs.gov.au/ausstats/[email protected]/Lookup/6202.0main+features10September%202018

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson Education.

Budget.gov.au. (2018). Budget 2018-19 - Jobs and growth. Retrieved from https://www.budget.gov.au/2018-19/content/jobs.html

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in context. Routledge.

Healy, J. (2016). The Australian labour market in 2015. Journal of Industrial Relations, 58(3), 308-323.

Livingstone, D. W. (2018). The Education-Jobs Gap: Underemployment Or Economic Democracy? Routledge.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Teixeira, A. A., & Queiros, A. S. (2016). Economic growth, human capital and structural change: A dynamic panel data analysis. Research policy, 45(8), 1636-1648.