Trend in Expenditure Components of Australian GDP

This article analyzes the trend in different expenditure components of Australian GDP since 1987 and evaluates their impact on the economy. It also provides insights into the causes of low real wage growth in Australia and its effects on macroeconomic equilibrium. Additionally, it suggests policy recommendations to mitigate the adverse effects of low real wage growth.

Running head: ECONOMICS FOR BUSINESS
Economics for Business
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Table of Contents
Question 1..................................................................................................................................2
Introduction............................................................................................................................2
Analysis..................................................................................................................................2
Conclusion..............................................................................................................................6
Question 2..................................................................................................................................6
Introduction............................................................................................................................6
Analysis..................................................................................................................................7
Insights into low real wage in Australia.............................................................................7
Conclusion............................................................................................................................11
References................................................................................................................................12

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Question 1
Introduction
Gross domestic product is a composite measure of aggregate output level of a nation.
It gives an overall estimate for monetary value of goods and services that an economy
produces in a certain accounting year. Under expenditure method of GDP, estimation GDP is
presented as a sum of expenditure on consumption, investment, government and net export.
The section evaluates trend in different expenditure components of Australian GDP since
1987. Data on different expenditure components are collected from Australian Bureau of
Statistics. The data are then converted into real per capita estimate by dividing measured
expenditure by population. The observed trends are evaluated with necessary economic
explanation.
Analysis
Different components of GDP
Private consumption expenditure
Private consumption expenditure refers to aggregate spending on durable, semi-
durable and non-durable goods and services conducted by all household and other non-profit
organization in the current year (Dullien et al. 2018). Real per capita consumption shows
consumption per person in real terms. The figure below shows the trend in real per capita
consumption in Australia.

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1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
20000.00
25000.00
30000.00
35000.00
40000.00
45000.00
Real per capita consumption
Year
Consumption
Figure 1: Trend in the series of real per capita consumption from 1987 to 2018
Household consumption is one important contributor of Australian GDP. As the graph
suggests there is an overtime-increasing trend in per capita real consumption expenditure. Per
capita consumption declined slightly in 2009 as shown by a downward break in consumption
line during this time. Consumption is a function of income and varies positively with income.
Increase in per capita consumption is largely resulted from an increase in income overtime.
Faster increase in consumption relative to income results in an overtime increase in per capita
consumption (abs.gov.au, Catalogue no: 3105, Table no. 1.1)
Investment expenditure
Investment indicates change in physical capital stock in a certain period. Investment
expenditure component of GDP measures the aggregate value of capital investment in an
economy. Investment includes purchase of machinery for construction of housing,
construction of factory and any addition to firms’ stock of inventory (Cohn 2015). Figure 2
shows trend in per capita real investment in Australia overtime.

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1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
0.00
5000.00
10000.00
15000.00
20000.00
25000.00
Real per capita investment
Year
Investment
Figure 2: Trend in the series of real per capita investment from 1987 to 2018
The series of real per capita investment shows a relatively volatile trend. There are
some phases during which, investment declined compared to previous period. After
increasing sharply since 1987 to 1999, investment declined in 2000. Then again, investment
recovered and started to increase since 2000. The pace of investment slowed down in 2009
due to global financial crisis that caused recession in the economy. Investment again slowed
down since 2012 due to significant decline in mining and construction investment. The main
reason for decline in mining investment is the decline in export demand of minerals due to
slowdown in China’s growth (Parham, 2018). Housing crisis in the property market
discouraged investment in construction sector. All these together contribute to a decline in
investment in Australian economy.
Government expenditure
Government expenditure refers to aggregate spending that government of a nation
spends on different goods and services. Government spending are used as a proxy measure of
government output. The following figure summarizes trend in real per capita government
expenditure for the sample period.

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1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
8000.00
9000.00
10000.00
11000.00
12000.00
13000.00
14000.00
Real per capita Government
Expenditure
Year
Government expenditure
Figure 3: Trend in the series of real per capita government expenditure from 1987 to
2018
The trend in government expenditure explains fiscal position of government in a
nation. In case of Australia, per capita government expenditure shows a sharply increasing
trend supporting a strong fiscal position (abs.gov.au, 2019, Catalogue no: 5204, Table no. 2.
5204.0). Government makes investment to finance large-scale infrastructural projects to
develop a strong physical infrastructure supportive to economic growth. In addition to
infrastructural projects, government also finances different social security schemes.
Net Export
The net export component of GDP is related to the external account of a nation. Net
export is computed as a difference between export and import of a nation (Mitchell 2019).
Figure 4 represents the trend in real per capita net export.

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1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
-4000.00
-3000.00
-2000.00
-1000.00
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
Real per capita net export
Year
Net export
Figure 4: Trend in the series of real per capita net export from 1987 to 2018
The trend in per capita net export shows that net export initially increase from 1997 to
1999. After that, per capita net export declined since 2000 due to widening trade deficit. After
reaching to the lowest level in 2013, net export recovered gradually due to increase in service
export and other non-mining export (Tyers, 2015).
Conclusion
The summary of trend movement in different expenditure of GDP shows that except
net export, all the three components increases overtime favoring a steady growth of GDP.
Question 2
Introduction
This section aims to study the effects of low real wage growth on macroeconomic
equilibrium with particular focus on the impact of low real wage growth in the context of
Australia. The causes of low real wage growth in Australia found to be low inflation rate and
low aggregate demand that created a vicious cycle. The low real wage affects macroeconomic
equilibrium by affecting through aggregate demand channel. It also affects the consumption

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choices and social life of the people. In addition to analyzing trend, cause and impact of low
real wage, the study also gives some suggestive ways for effective governmental policies to
mitigate the adverse effect of low real wage growth. Effective policies to improve real wage
include legislation of minimum wage and tax cut.
Analysis
Insights into low real wage in Australia
Australia experienced a relatively lower economic growth since the past few years.
The low real wage growth has become one of the key domestic challenges for Australian
economy. Real wage declined to an unexpected low level in the last quarter of 2018. As
revealed by ABS, hourly wage rate excluding bonus grew only by 0.54 percent since the last
three months to December. This is below the expected wage rate of 0.6 percent (Scutt, 2019).
With this, real wage growth reached to the lowest since third quarter of 2017. Nominal wage
marginally grew at an annual rate of 2.27 percent. This is below the annual wage growth rate
in the last year. The wage growth though is in line with market expectation but it is below the
rate forecasts by RBA. With an average inflation of 1.8 percent, real wages actually grew at a
rate of 0.5 percent. Wage in the private sector grew at a faster rate than that of the public
sector.
Figure 1: Seasonally adjusted wage price index in Australia

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(Source: Scutt, 2019)
Various factors led a consistently lower real wage growth in Australia. Prolonged low
inflation rate is one of the key factors that pushing back the wage growth. As a result of
RBA’s inflation targeting policy, rate of inflation remained within the targeted limit of 2
percent since the past 5 years. A low inflation rate has an obvious consequences of lower
profitability. Lower than expected profit discourages producers to expand their productive
activities. Decline in labor demand is one of the significant factors contributing to low wage
growth in Australia (Bishop & Cassidy, 2017). Together with a low nominal wage and low
inflation rate real wage has reached to an unexpected low level. As per Australian Bureau of
Statistics, the lowest ever growth rate in wage price index of Australia is 0.5 percent. Because
of low real wage, workers are discouraged to work hard. This leads to lowers demand from
household and hampers productivity. The existence of spare capacity is one of significant
factor contributing to slow wage growth (Treasury.gov.au., 2017). In the presence of large
spare capacity, proportion of unemployed persons is significantly large reducing the
bargaining power of employees. This reduces the speed of wage growth. The current rate of
unemployment in Australia is above the equilibrium rate of unemployment. This further
weighs growth of wages.
Low real wage and macroeconomic equilibrium
Wage is the main source of income of labors in an economy. Household income
depends on the growth of wage. Real wage that is nominal wage adjusted for inflation
determines the level of household expenditure. A persistently low wage hurts consumers’
confidence lowering consumption expenditure. Consumption expenditure is one vital
component of aggregate demand. Decline in consumption expenditure resulted from a low
wage cause aggregate demand to decline (Gottheil 2013). This shifts the aggregate demand
curve to the left. Contraction of aggregate demand given aggregate supply adversely affect

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macroeconomic equilibrium by lowering both GDP and price level. This is explained in the
figure below.
Figure 6: Impact of low wage growth in AD-AS model
The above figure illustrates macroeconomic equilibrium using the framework of
aggregate demand and aggregate supply. Initial macroeconomic equilibrium occurs at point
A. At this point the aggregate demand (AD) meets aggregate supply (AS). Associated
equilibrium price is P* and that of equilibrium GDP is Y*. Now a decline in real wages
reduces household expenditure by hurting confidence of average household. This shifts the
aggregate demand curve towards the origin to AD1. Consequently, position of macroeconomic
equilibrium changes to B. At the current equilibrium, GDP lowers to Y1 along with a decline
in price level to P1.
The impact of low wage growth in Australia is in line with what macroeconomic
theory suggests. Lower than expected wage growth is pulling back economic growth rate to a
low level. Low real wage means a decline in income in real terms making household

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financially weak (abc.net.au, 2018). As income decline, the average household are facing
trouble to meet their daily expenses. Despite strong support from government spending and
net export, domestic economy weakens because of soft household spending. Average per
capita income of household decline significantly causing household to withdraw their savings
in order to meet necessary expenditure. Decline in real wage is a significant factor that is
suppressing economic growth. The Australian economy grew only at a rate of 1 percent in the
second half of 2018 as against a growth rate of 3.8 percent in the first half (Holden, 2019).
Low real wage also gives rise to the problem of lower productivity of labor, forcing people to
engage in informal sector aggravating the problem of underemployment.
Policy recommendation
Given the adverse consequences of low real wage growth, active government
intervention is needed to break the vicious circle of low real wage. Expansionary policies
need to be undertaken to stimulate economic activity. One way is to take expansionary fiscal
policies by increasing government expenditure. By supporting household expenditure
government can boost the aggregate demand which raise both price level and GDP.
Government should carry out major investment to improve social and physical infrastructure
(Preston, 2018). As infrastructure improve and price recovers, producers are again
encouraged to expand productive activity stimulating labor demand and wage. With recovery
of wage growth, productivity of workers improves leading to an increase in economic
growth. Another remedy to low real wage growth is impose legislation to increase minimum
wage. Minimum wage is the minimum level of wage legally set by the government to
improve the condition of laborers in the economy (Chatterjee, Singh & Stone, 2016). This is a
kind of price floor aiming to secure a minimum wage for active labor force. However, this
policy may have an adverse consequence in terms of aggravating the problem of
unemployment. Australian government can improve productivity and real wage by increasing

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spending on health care, education and transport. Another way to encourage producers to
expand productive activity is to offer them a subsidy. Subsidy by lowering the effective cost
of production increases production, boosts labor demand and increases wage.
Conclusion
From the discussion made above, it can be concluded that low wage has become one
of the major concerns for Australian economy. Wages has already reached to the lower level
than ever expected. Low real wage hurts consumers’ confidence by making them financially
weak. Household consumption is one of the largest contributor of economic growth of
Australia. Weak household spending resulting from weak wage growth lowers economic
growth. Government should take active interventionists measure to rescue the economy from
circle of low real wage. Some of the effective ways of government intervention include
increase investment for physical and social infrastructure, legislation of minimum wage,
subsidy to producers and other supportive measures.

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References
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