“c05AggregateSupplyPolicies_PrintPDF” — 2022/6/14 — 4:32 — page 447 — #63
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So, while the adoption of trade liberalisation policies is not the only cause of Australia’s reduced inflationary pressures (there were also other aggregate supply-side government policies that helped such as tax reform, outlays on education and deregulation of the labour market), it is likely to have been one important contributing factor. In other words, cutting tariffs and subsidies, as well as signing more FTAs, has strengthened competition in domestic markets, helping to promote the goal of low inflation.
Effect of trade liberalisation on the achievement of strong and sustainable economic growth
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Another core macroeconomic objective of the federal government is to promote the goal of strong and sustainable economic growth. This is defined as the fastest average rate of growth in real GDP, around 3 per cent per year, that does not significantly accelerate inflation and is consistent with achieving other economic and environmental goals.Trade liberalisation should strengthen the economically sustainable rate of growth in several ways, particularly over the medium- to longer term: • Trade liberalisation leads to greater production specialisation in areas of comparative cost advantage, leading to a more efficient allocation of resources involving lower opportunity costs. This means there is more output gained from the same or fewer inputs, thereby growing Australia’s production possibility frontier or productive capacity. This increases the potential, non-inflationary rate of GDP growth. • With trade liberalisation, local businesses need to restructure their operations more efficiently to allow them to survive stronger competition from imports and become more internationally competitive. This allows for an increase in productive capacity and hence the potential rate of economic growth. • Trade liberalisation has allowed our local firms to access better equipment, materials, and technology at a lower cost, creating the more favourable aggregate supply conditions needed to grow Australia’s GDP at a faster rate. • Trade liberalisation has grown the size of Australia’s export market, turbocharged sales and encouraged firms to boost production levels and expand GDP. By increasing the non-inflationary rate of GDP and employment growth, trade liberalisation has helped to boost real national incomes. This has improved average real disposable income and consumption per head, and thus material living standards.
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For instance, one comprehensive investigation concluded that trade liberalisation had delivered a rise in average family incomes over the two decades since trade liberalisation, of around $3900 per family per year by adding 1.8 per cent to real GDP (Benefits of Trade and Trade Liberalisation by DFAT and Centre for International Economics). Again, over the medium- to long-term, at least some of the rise in average real disposable incomes per head might be attributable to the Australian government’s policy of trade liberalisation. However, despite the longer term benefits of stronger economic growth, in the shorter term, in some ways, trade liberalisation may have slowed Australia’s rate of economic growth. The main reason is that certain local firms and industries have been unable to cut their costs quickly enough by restructuring their operations more efficiently. This forced some companies to close due to low profits. Here we might think of recent casualties like firms in the car industry, textiles, clothing and footwear, and low-end manufacturing.
TOPIC 5 Aggregate Supply Policies
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