Goals of aggregate supply (AS) policies
Like all policies, the ultimate goal of AS policies is to increase the welfare and prosperity for all Australians.
Governments are increasingly paying attention to the need for AS policies in an effort to expand the nation's productive capacity and ensure that our resources can continue to meet the growing needs of our population. By raising the nation's productive capacity (or improving supply conditions for industries), AS policies facilitate higher output and employment, alongside lower inflation. This occurs because lower production costs enable firms to reduce prices for any given output level, or increase output at any given price level - all without sacrificing profits.
Alternatively, a bigger productive capacity facilitates greater national output before capacity constraints (and inflation) become a problem. In this respect, AS policies allow strong growth rates to be more sustainable into the future as inflationary pressures are minimised. In addition, AS policies may also help to increase the uptake of new technology, increase efficiency and create less stress on the environment.
Overall, AS policies are designed to increase real GDP and employment in the longer term, without adding to inflationary, external and/or environmental pressures. In this respect, AS policies help to achieve:
The effect on unemployment may be negative in the short term with some AS policies. For example, labour saving technologies might result in some workers becoming redundant or firms may close down in the face of intensive competition (via microeconomic reforms) which results in some workers becoming unemployed. However, the improvement to economic growth in the long term is expected to create enough employment to induce a net reduction in the unemployment rate. In this respect, the AS policies can arguably assist efforts to reduce absolute poverty (and a reliance on welfare) and therefore contribute to the achievement of greater equity in the distribution of income.
With respect to external stability, AS policies provide clear benefits over time. Any improvement in productivity or efficiency will help to reduce production costs, minimise inflationary pressure and increase international competitiveness. This should boost the Balance on Goods and Services and reduce both the CAD and NFD (or Net Foreign Liabilities) to more sustainable levels.
Overall the successful implementation of AS policies should help to boost both material and non material living standards. Material living standards can improve because there will be a greater volume (and/or quality) of goods and services available at lower prices. Non-material living standards can improve via greater efficiency in production helping to reduce strains on resources (e.g. better quality fertilisers increasing the quality of any given parcel of land and reducing the need for farming land to encroach further on the natural environment causing deforestation, etc.). In addition, greater levels of productivity should increase employment in the longer term and/or improve working conditions (as technology can take over mundane tasks previously performed by labour).