Economic Activity - Supply side Factors

[sick muzza]

would anyone be able to explain how the following affect the level of economic activity in australia

1. Real Unit Labor Costs
2. The Exchange rates (supply side)
3. Interest Rates
4. Government Policies(micro)
5. climate

i missed the lesson cos i was on a geography excursion, and our teacher is a prick, wont go through anything with anyone.

[mtwtfss]

1. Higher labour costs -> supply factor -> reduce supply due to higher production costs
2. Exchange rates -> supply factor -> higher exchange rates allow for cheaper imports and vice versa, therefore cheaper production costs
3. Interest rates -> supply factor -> interest rates is the cost of borrowing money...higher cost of borrowing money results in businesses borrowing less money to invest/expand etc
4. not sure really.. could be something to do with regulating the markets, and making it harder for companies to provide g+s
s or something...not sure
5. Climate - > supply factor -> for farmers, and other similar industries if desirable weather conditions occur e.g. constant heavy rain, providing water for crops, then their production processes will be made more effective, resulting in a larger or improved product.

[sick muzza]

thanks man. that helps a lot. just had a look on mr wood and he had some good info as well.

[SoLe!]

Answers in terms of economic activity...
(assuming this is what you meant)

1) Economic activity will decrease if labor costs are high, because it causes prices to rise, which causes demand (exports) to fall, which decreases jobs.... and vice versa
2) If exchange rates increase allow for cheaper imports...but reduce demand for our exports, which lowers economic activity (and vice versa)
3) If interest rates is the cost of borrowing money...then the higher cost of borrowing money results in businesses borrowing less money to invest/expand etc, which decreases economic activity (and vice versa, taken from mtwtfss)
4) Yeah....not really precise...can't really answer
5) Climate, assuming this is with reference to the drought, then economic activity falls significantly...but rains, desirable weather conditions will increase economic activity..

Yeah that probably wasn't helpful at all....kinda just regurgitated what mtwtfss said, and tacked on economic activity. :S How they effect economic activity depends in the sense that they are used, like they're too broad imo..

[sick muzza]

cheers. ill go corner the teacher this week. or borrow someones notes.

[ReVeL]

4. Government Policies(micro)

You guys probably haven't covered Microeconomic Policy yet, but its basic purpose is to improve resource allocation within the economy and inturn promote greater efficiency and productivity.

Assuming they are successful, these micro policies would reduce supply side production costs, allowing for a higher sustainable rate of economic growth in Australia.

[brendan]

1) Economic activity will decrease if labor costs are high, because it causes prices to rise, which causes demand (exports) to fall, which decreases jobs.... and vice versa

That is not the most logical channel through which high labour costs lead to "decreased jobs". Think of the labour market as any other market. An increase in the cost of labour is a shift of the Labour supply curve to the left. This reduces the quantity of labour employed, i.e. "decreased jobs".

[brendan]

3) If interest rates is the cost of borrowing money...then the higher cost of borrowing money results in businesses borrowing less money to invest/expand etc, which decreases economic activity (and vice versa, taken from mtwtfss)

There is more than just one channel through which higher interest rates can reduce output.

1. Higher interest rates increase the cost of capital, reducing investment. An investment is only profitable if the return on that asset is greater than the cost of capital. E.g. An asset returns 10% pa, if your cost of funds used to finance that asset is 5% p.a. then the project is profitable, if the cost of funds rises to 12%, then it is no longer profitable.
2. Higher interest rates => investors increase their demand for Australian bonds => increase in demand for Australian dollars => higher exchange rate
3. There's probably more than i cna't think of atm

[brendan]

5. climate

That's much to vague and uncertain.