After a period of economic transition, the Australian economy is showing signs of a more balanced recovery. Current forecasts suggest GDP growth of 2.6%. Unemployment has declined to 4.2% of the workforce, reflecting strong hiring in service-oriented industries. However, some economists warn that a significant positive output gap is still far off, indicating that spare capacity remains.
Over the medium term, sustainable non-inflationary growth depends on increasing both the size of the labor force and labor productivity. Recently, productivity growth has been subdued. However, as business confidence strengthens and borrowing costs stabilize, capital investment should rise, enhancing productive capacity and driving long-term economic expansion.
Yet, critics point out that this recovery relies too heavily on household consumption supported by rising mortgage debt. This pattern of growth tends to suck in consumer imports rather than building the foundations of competitiveness that come from investment in capital, technology, and skills.
Extract F states that: 'as business confidence strengthens and borrowing costs stabilize, capital investment should rise, enhancing productive capacity and driving long-term economic expansion.'
Explain why a rise in capital investment should help to increase the rate of economic growth in an economy such as Australia's.
327 exam-style questions on AQA A Level Economics 2.3 Economic performance, covering 2.3.1 Economic growth and the economic cycle, 2.3.2 Employment and unemployment, 2.3.3 Inflation and deflation, and 2.3.4 Possible conflicts between macroeconomic policy objectives. Each one has a worked solution and a mark scheme showing where the marks go.