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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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As mentioned earlier, productivity is defined as output over inputs (outputs/inputs) and describes how efficiently our resources are being used to produce goods and services.  A common type of productivity is labour productivity, measured as total output divided by the number of hours worked.  Other common measures of productivity are capital productivity (output/capital inputs) and total or multi factor productivity (output/several inputs, typically labour and capital).

A fall in productivity means that any volume of output must now be produced with more resources.  Alternatively, it means that existing resources will produce less output.  Lower productivity will, therefore, have negative supply side effects because it causes:

Lower productivity results in upward pressure on prices as higher costs are typically passed onto the consumer in the form of higher prices (or lower aggregate supply levels force prices up).  This makes it more difficult to achieve low inflation.  The higher prices or inflation levels will then have a negative impact on AD, via lower Consumption, Investment and net exports (X-M), thereby reducing the growth rate in real GDP and jeopardising the achievement of the economic growth goal.  With lower AD and economic growth, there is a smaller demand for labour causing less employment growth and a rising unemployment rate, making it more difficult to achieve full employment.  With higher unemployment, or less employment, there is likely to be a greater reliance on welfare, leading to a less equitable distribution of income.  

With respect to the impact on the achievement of external stability, higher inflation rates tend to reduce international competitiveness, leading to a lower value for net exports, ultimately adding to CAD pressures (as the Balance on Goods and Services is reduced) and increases Australia’s reliance on NFLs (NFD or NFE).

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