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National income, which reflects Australians' capacity to purchase goods and services, is a key indicator of material living standards. It is also important for other aspects of progress.
Not all income is spent on the current consumption of goods and services. Income that is saved can be used to accumulate wealth in the form of, say, houses, machinery or financial assets. These assets can directly satisfy individual and societal needs, or can generate future income and support future consumption.
The headline indicator exhibits some advantages over other measures of income (see box), but it does not account for everything of importance. National income does not take account of some non-market activities (such as unpaid household work) that contribute to material living standards. Some analysts would prefer an income measure that is adjusted to take account of changes in the value of natural assets, such as increases in value owing to technological advances in mineral extraction, depletion of resources used in the production process, or environmental degradation through pollution. Although these influences are not built into the headline income measure, commentaries on other progress indicators provide information about some of them.
While aggregate national income growth is a key element of progress, the distribution of income is considered by many to be important too. This is discussed in the commentaries National income: Looking more closely and Economic disadvantage and inequality.
SOME DIFFERENCES WITHIN AUSTRALIA
The headline indicator, real net disposable income, is available only at the national level. To understand some of the trends underlying the national indicator, one can look at State and industry contributions to GDP.
Real per capita Gross State Product (GSP) grew in every State and Territory during the 1990s. Growth was strongest in New South Wales, Victoria and Queensland (respectively averaging 2.5%, 2.7% and 2.6% a year) and weakest in Tasmania (averaging 1.3% a year). There were wide and persistent disparities in the levels of per capita GSP - in 2000-01, New South Wales, Victoria, Western Australia, the Northern Territory and the Australian Capital Territory were above the national average, and the other States were below. But State disposable incomes (if we could measure them) might not be so diverse, because there are significant government transfer payments and other financial flows between States that can moderate the differences.(SEE FOOTNOTE 2)
Although the output of every major industry (measured by real industry value added) grew during the past decade, the rates of growth differed appreciably. Broadly, some service industries showed stronger growth than many goods-producing industries. Growth was most rapid in Communication services (averaging over 10% a year) and Property and business services (around 5.6% a year).
More information about changes underlying GDP is provided in the commentary National income: Looking more closely.
FACTORS INFLUENCING CHANGE
The most fundamental influence on income growth is growth in the volume of goods and services produced (real Gross Domestic Product, (GDP)). Between 1990-91 and 2000-01, Australia’s real GDP grew by around 42% (averaging growth of 3.6% a year); in the same decade, population grew by a little over 12% (averaging around 1.2% a year).
GDP is, in turn, influenced by changes in labour, capital and other inputs to production, and by productivity change.
Between 1990-91 and 2000-01, real capital services used in market sector production grew by more than 46% (averaging growth of around 3.9% a year). In the same decade, the labour input to market sector production rose by almost 9% (averaging around 0.8% a year).
During the past decade, improvements in productivity (the amount of output per unit of input) have also made a strong contribution to GDP growth. Between 1990-91 and 2000-01, market sector multifactor productivity rose by 15% (averaging 1.4% a year).
Domestic production is not the only influence on national income growth. Between 1990-91 and 2000-01, income received from overseas rose by more than two-thirds, greatly outpaced by income paid overseas (which more than tripled). During the same period, Australia's terms of trade fluctuated widely, but showed a modest improvement over the decade (up by 0.6%, reflecting a 14.5% rise in export prices and an almost 14% rise in import prices).
LINKS TO OTHER DIMENSIONS OF PROGRESS
Australia's national income provides the material basis for many other dimensions of progress. For example, improvements in health and education may rely on expenditures funded out of income - such as the salaries of nurses and teachers, or the construction of hospitals and schools. Conversely, a healthier, more educated population can better engage in the economic activity that generates income.
Income can be spent on protecting or restoring the environment. But income-generating economic activity may also go hand in hand with environmental depletion or degradation.
Some of the growth in income may be channelled to the accumulation of national wealth that will generate future income. Or it may be spent to improve the welfare of economically disadvantaged Australians.
The income dimension of progress is strongly linked to work. Changes in income may reflect demographic and labour market trends. Income growth may result partly from a trade-off for longer working hours and reduced leisure.
See also the commentaries National wealth, Productivity, Education and training, Health, Economic disadvantage and inequality, Work, Land clearance, Land degradation and Water.
1 Unless otherwise indicated, all data in this commentary are derived from Australian Bureau of Statistics 2001, Australian System of National Accounts 2000-01, Cat. no. 5204.0, ABS, Canberra.
2 Australian Bureau of Statistics 2001, Australian National Accounts: State Accounts 2000-01, Cat. no. 5220.0, ABS, Canberra.