Economics (Economic Objectives + The Keys) - Year 12

The introduction to HSC Economics

What is Okun’s Law?

the relationship between economic growth and unemployment

What does Okun’s Law state?

For unemployment to fall, the rate of economic growth > productivity growth + labour force growth

What does NAIRU stand for?

Non-Accelerating Inflation Rate of Unemployment

What is NAIRU?

The natural rate of unemployment after the elimination of cyclical unemployment. The remains of frictional, seasonal, structural and hardcore unemployment

What is full employment?

There is no cyclical or deficient-demand unemployment and all individuals seeking employment can find it. Also involves the full use of F.O.P.

What are the main long term objectives for an economy?

Full employment, price stability, economic growth, distribution of income and wealth, external stability, environmental sustainability

What is economic growth?

The increase in the volume of goods produced in an economy

How is Economic growth measured?

By the annual change in real GDP.

What is external stability?

Sustainability on external accounts so that economies can service their foreign liabilities in the medium-long term. Also includes acceptable levels of foreign debt and equity.

What is environmental sustainability?

Ecological and sustainable development to conserve the resources of an economy for now and future generations.

What objectives may the Govt. do to establish environmental sustainability?

Reducing green house gases or improve energy efficiency

What is the distribution of income and wealth?

The way the income and wealth of a nation is divided amongst its population

What does the distribution of income and wealth address?

The problem of poverty, inequality, the needs of people who are unable to provide for themselves or are socially disadvantaged

How is the distribution of income and wealth measured?

Lorenz curve and the Gini-coefficient

What is price stability?

Refers to keeping inflation at an acceptable rate

What is the RBA target band of inflation?

2-3% over the course of the business cycle.

What conflicts may arise form achieving all long-term economic objectives?

Price Stability (Inflation) VS Full Employment

Economic Growth VS External Stability

Economic Growth VS Environmental Sustainability

Economic Growth VS Inflation

Economic Growth VS Distribution of Income and Wealth

Full Employment VS Distribution of Income and Wealth

Would Govt. focus more on short term or long term objectives? Why?

Short-term, as they may gain more popularity with immediate benefits rather than long term objectives that may take substantial costs

What are the types of economic states an economy may be in?

Recessionary: high unemployment, low inflation

Inflationary: low unemployment, high inflation

Full Employment: lowest natural rate of unemployment

What is the Phillips Curve (PC)?

Demonstrates an inverse relationship between unemployment and inflation

What is a trade-off?

Opportunity cost, to gain more of something, something else must be reduced

Draw the Phillips Curve

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What is the conflict between economic growth and external balance called?

Balance of Payments (BOP) constraint

What is the Balance of Payments (BOP)?

Record of Int. Transactions between an economy with the rest of the world through the Current Account (CA) and the capital and financial account (KA/FA)

What is the Current Account (CA)?

Records flow of G/S in and out a country (imports and exports, debits and credits)

Why does increase economic growth lead in the deterioration of the CA and the BOP?

Higher economic growth —> higher consumption and investment —> volume of imports begin to rise > exports

What practices lower environmental sustainability but increase economic growth?

Mining and certain agricultural practices

How can Govt. attempt to curb carbon emissions?

Carbon tax or emissions trading scheme

What is IBG and IBG+?

Individuals, Businesses, Governments and economic objectives

What is ADAS?

Aggregate Demand and Aggregate Supply (a tool to work out the impact of a change from objectives)

What is the key binary?

Trade flows and financial flows

What is the “big picture” of the global economy?

How globalisation works, is supported, and is impeded in higher trades and financial flows

What is IBG usually used for?

To analyse the impact of any economic change in an economy

In economics, what are the 2 most important objectives?

GDP growth (economic growth), Quality of life (economic development)

How do Govt. achieve economic growth and economic development?

Internal stability (Price stability, full employment) and external stability (Foreign liabilities, Terms of Trade, Exchange Rates, Int. Competitiveness)

How is quality of life/economic development measured?

By the United Nations (UN) Human Development Index (HDI)

What is the target goal of unemployment for full employment (Australia)?

4.25% unemployment rate

What is the formula for Aggregate Demand (AD)?

C + I + G + (X - M)

Consumption + Investment (capital) + Govt. Spending + (Exports - Imports)

What is the formula for Aggregate Supply (AS)?

C + S + T

Consumption + Savings + Taxation

What is the ADAS model?

Illustrates that GDP can increase through either or both AD or AS increasing

What does an increase in AD lead to in the ADAS model?

higher GDP —> lower Unemployment (more labour needed to produce more goods) —> higher Inflationary pressures

What does an increase in AS lead to in the ADAS model?

More Productivity —> higher AS —> higher GDP —> lower inflationary pressures (if change in productivity > GDP, less labour will be in demand and may increase unemployment)

Draw the ADAS model

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How is the ADAS model useful (what is it used for)?

Provides answers to what happens to full employment and price stability as a result in the change of AD

What is the Gross Domestic Product (GDP)?

Total monetary or mkt. value of all finished G/S produced within an economy over a period of time

What is another term for macro policy?

Demand side economics (it impacts Aggregate Demand)

What are the key micro reforms in the global economy?

Trade liberalisation and financial deregulation

What is trade liberalisation?

The removal or reduction of barriers on the free exchange of goods between nations

what is financial deregulation?

The process of removing Govt. rules controlling the way financial organisations operate

What are the financial flows and trade flows in AD?

In the AD formula, financial flows (debt, equity and liabilities) are in I (investment) whereas trade flows (exports and imports) are in X (exports) and M (imports)

What are the short term impacts of trade liberalisation?

Lower barriers protecting domestic producers, imports may rise in supply (with no impact on exports) —> short term lower AD, AD curve will shift left —> lower GDP —> higher Unempolyment —> lower Inflationary pressures

What are the long term impacts of trade liberalisation?

Higher Labour Productivity —> labour moves to competitively advantaged industries —> higher AS (from increased productivity) and higher AD (as higher X and higher C) —> higher GDP

How do the economic policies regarding globalisation impact an economy?

Capital Controls (lower potential financial flows) and Protection Policies (lower potential trade flows) will increase or reduce the effect of globalisation on a given economy