How does an economy grow?

Without population growth and our natural resources, Australias economy would be stagnant There are four principle ways to grow an economy. The first way is to simply increase population. The more people in a country, the more economic activity there will be, therefore, GDP will increase. These are Australias GDP and Population figures for the last 5 years:
Year GDP $A Billions 2005 2006 2007 2008 2009 1,083.90 1,111.58 1,165.06 1,191.19 1,206.03 Increase in GDP % Population Millions 20.544 20.874 21.263 21.723 21.955 Increase in population %

2.6% 4.8% 2.2% 1.2%

1.6% 1.9% 2.2% 1.1%

As you can see, although we have achieved regular growth in our economy, most of that growth has come courtesy of population increase through immigration. Without those immigrants, our growth would have been much lower. That is why governments love immigration. It is the best way to avoid recession as we did (just!) following the global financial crisis. The second way to grow an economy is to use up its natural resources. Every time we dig a new mine or discover a new gas field, our economy will grow. We can also cause the economy to grow by introducing charges where there were no charges before. Eg if the local council decide to charge people to use Bondi Beach, that will increase our GDP. The third way is increased investment. If Warren Buffet decides to invest $3 billion into Australia by, say, building a new hotel, that will increase our GDP. Similarly if Australians stop saving money (or paying off their mortgage which is effectively the same) and instead, treat themselves to a holiday on the Gold Coast or buy a new car, that will increase our GDP. The fourth way of increasing our GDP is improving productivity. This takes us back to the need for ingenuity and innovation to improve our quality of life. This is the most important and the most difficult for a government to manage. That is why they dont like talking about it very much. The broadest measure of productivity is GDP per person. These are the figures for Australia for the last 10 years:

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

GDP per person Units 46,845.78 47,796.35 48,365.93 49,655.86 50,644.12 51,859.66 52,759.82 53,252.75 54,792.15 54,836.03 54,931.25

Increase % 2.0% 1.2% 2.7% 2.0% 2.4% 1.7% 0.9% 2.9% 0.1% 0.2%

However these are very broad numbers and are influenced by demographics (ratio of the working population to non working population) average weekly hours worked, how much we sell off our natural resources, etc. The Australian Bureau of Statistics uses a more tightly focussed calculation - Multi factor productivity. As they say on their website:The most comprehensive Australian measure of productivity available is multifactor productivity. It gauges the efficiency with which inputs are transformed into outputs. In the short term, this reflects the impact of an array of factors, such as the utilisation of available labour and capital, economies of scale, and resource reallocation. In the long-term, it represents improvements in ways of doing things (technical progress), which is the ultimate source of economic growth and higher living standards. And these are the figures for Australian industry for the ten years to June 2009:
Multifactor productivity(a), average annual growth rate - 1998-99 to 2008-09 Industry % Agriculture, Forestry and Fishing Mining Manufacturing Electricity, Gas, Water and Waste Services Construction Wholesale Trade Retail Trade Accommodation and Food Services Transport, Postal and Warehousing Information, Media and Telecommunications Financial and Insurance Services Arts and Recreation Services Selected industries Total Market sector industries(b) 2.6 -2.8 -0.1 -3.1 0.3 0.7 1.1 0.3 1.2 -0.2 1.4 0.6 0.2 -0.1

Not a very good set of numbers!

In summary, Australias economy has grown over the last decade primarily through increased immigration and the global demand for the resources that we dig out of the ground. So much for the smart country! Incidentally, the reason that productivity is seen as being so hard for politicians is that it needs long term investment in education, industry policy and infrastructure. And we all know how politicians have no time these days for long term policies. They would rather rely on more immigration and encouraging the plundering of our country. Now we have an understanding of our economy, let us now see how economic activity impacts on our environment.