Hunt on for reasons behind America's slowing growth

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America’s rate of economic growth has been slowing for decades, and one major reason is a weakening in productivity growth. Nobel prize winner Professor Paul Krugman attributes it to a decline in competition. Other reasons include lower flexibility in the labour market and increases in government protection.

How does this relate to the HSC syllabus?

  • Economic growth can be defined as a change in a country’s productive capacity, measured by changed in its real gross domestic product over time. A key driver of this is an economy’s aggregate supply, which is related to the productivity of an economy, which refers to the level of output over input. (HSC Topic 3)
    • One reason for the productivity decline in the US is lack of competition in American markets. With less competition, domestic firms will innovate less and do not need to perform as well to ‘survive’.
    • The evidence of reduced competitive pressure is the increase in market share amongst the larger players in the industry. For example, the top 10 banks’ market share increased from 20 to 50 per cent over the 30 years to 2010.
  • Another reason for lower competition is increasing barriers to entry.
    • A barrier to entry is something that impedes new firms from entering an industry. For example, a barrier to entry in the airline industry is the high startup cost required to purchase planes.
    • Some of these increasing barriers to entry are caused by increased protection. This refers to government assistance to domestic firms. (HSC Topic 1)
  • Another reason for lower productivity is reduced “labour market dynamism” – how often workers change employers.
    • When workers are moving around less, labour resources in an economy are less likely to allocated where they more efficient. In other words, there is a loss of allocative efficiency.

There are two Australias: Things are bad outside the Sydney-Melbourne bubble

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There is increasing disparity between “VicNSW” and the rest of Australia. There are greater employment opportunities, levels of demand and levels of investment in these two states compared to the rest of Australia.

How does this relate to the HSC syllabus?

  • This ‘two Australias’ idea echoes the sentiment from a few years ago during the mining boom called the ‘two speed economy’. This was the idea that mining states such as Queensland and WA benefitted greatly from the mining boom and grew at growth rates significantly higher than the rest of Australia. Now that the mining boom has subsided, we are seeing the opposite occur.

    • In VicNSW, employment is rising at an annual rate of 2.2 per cent, while jobs are vanishing at a rate of 0.8 per cent elsewhere.
    • In VicNSW, business investment grew by 1.4 per cent, while it fell by 17 per cent in the rest of Australia.
  • This reflects the idea that globalisation can worsen income inequality and cause economies to be over-reliant on the growth of other economies.

    • The mining boom was driven by globalisation and China’s strong economic growth. As a result, it led to a phenomenon known as the Dutch disease, where the demand for mining resources led to an appreciation of the Australian dollar, which in turn, harmed other industries in other states, such as manufacturing.
    • Now that the mining boom subsided, so has the economic growth in the mining states. Because these states specialised so much in mining, they became over-reliant on overseas demand for their economic growth.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

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