Inflation target of 2-3%

[hdxx]

Why does an inflation target of 2-3% help our international competitiveness?

[Cranium002]

The set inflation of 2-3% in Australia allows the RBA to be flexible when shifting goals and will enable them to instead work on economic growth goals and employment goals. Inflation erodes international competitiveness. A inflation above 3% is undesired and considered as a high inflation, and will result in higher interest rates, ultimately decreasing interest rates, resulting as a lower purchasing power of consumers. Due to the low demand in goods and services, firms react to this 'lack of demand' by limiting their production.

Further details:
If  the inflation levels of Australia is higher than other economies, then it is said that the internatonal competitiveness between Australia and other countries are said to erode. In this case, we can say that the ablity to maintain the tradeables in Australian economy is challenging. Therefore, due to the high inflation rate, foreign buyers are forced to switch to other suppliers. This will potentially result as  LOWER EXPORT INCOME, LOWER GROWTH IN AD OR GDP AND NEGATIVE EFFECTS ON EMPLOYMENT GROWTH. National income is likely to drop and the ability to improve material living standards of Australian are said to be another challenging aspect, especially for those individuals/ businesses that are dependant on the tradeables sector.

Hope it helps

[hdxx]

Thank you!