Activity 8(h)

Activity 8h: The most recent budget forecasts and the implications

  1. Over 2023-24 Australia’s economic performance is expected to deteriorate as evidenced by the fall in nominal GDP (-1% growth) and the decline in economic growth (from 3.25% to 1.5%), as well as the increase in the rate of unemployment from 3.75% to 4.5%.

 

  1. Nominal GDP refers to value of production over any given period that has occurred due to a combination of changes in production volumes as well as changes in prices. In contrast, real GDP refers to the value of production over any given period that has occurred entirely due to changes in the volume of production.  Accordingly, the key difference between the two values of production is the change in prices (including commodity prices) that occurred over the given. When prices are rising it will result in nominal GDP exceeding real GDP and the reverse occurs during periods of falling prices.  If prices have not changed over any given. Then real GDP will be the same as nominal GDP.  [Note the prices used to deflate nominal GDP to arrive at real GDP are not the same as the prices used in the CPI – the measure is much broader and includes commodity prices.]

 

  1. If the terms of trade rose (instead of fell as forecast by the government) then the actual budget deficit will be lower than forecast for both years. This is assuming that the higher terms of trade has occurred because of higher than expected growth in commodity prices, which has a favourable effect on national income (e.g. company revenue) and government tax receipts.

 

  1. The growth in the terms of trade is an example of a cyclical factor that contributes to a lower budget deficit (or a higher budget surplus). This is because it typically reflects changes in the global demand and supply for commodities such as iron ore and coal which are largely determined by the rate of growth in global economic activity (e.g. stronger global growth means that countries require more inputs, including commodities such as those in which Australia produces in abundance). 
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