Economists are deeply puzzled by our desire to have children. First, kids are really expensive – the biggest financial decision most couples will make. Forget the cost of buying the family home; the kids you choose to populate it with will end up costing just as much, or more, over a lifetime. A survey released last week by AMP and the National Centre for Social and Economic Modelling found the typical Australian family spent $812,000 raising two kids. This is an increase of nearly 50 per cent in just six years. …Economists like to assume we are rational individuals who make decisions based on anticipated costs and benefits.
-The Sunday Mail (Qld) May 26 2013
You are the senior Economic advisor to the Prime Minister who is currently considering how to reduce the cost of having children and promote more economic growth. Some of her party want to continue John Howard’s “baby bonus” scheme that provides a lump sum of cash to parents upon the birth of a child. Others argue that the government should instead aim to focus on lowering the costs of educating children by making tertiary education free.
A) Discuss how each of these options will affect wages and labour productivity, potential GDP and real GDP. Will they lead to growth in real GDP and rises in real GDP per capita? use the potential GDP and labour market diagrams in your answer. (6 marks)
B) Imagine that whatever strategy will be chosen, it will be kept for the next three decades. In terms of achieving growth in the long run, discuss which strategy would lead to higher growth rates and explain why (2 marks)
C) How would each strategy affect the standard of living? (2 marks)