HSC Economics Topic 3

economic growth

Refers to an increase in a countrys productive capacity as measured by changes in its real GDP over time

Real GDP

National output of goods and services adjusted for changes in inflation

Growth rate of GDP formula

Current GDP- Previous GDP/previous GDP x100

Equilibrium level of national income

the level of national income at which aggregate demand equals national income; alternatively, the level of national income at which saving demand equals investment demand

Aggregate Demand

the total demand for final goods and services in an economy at a given time

Aggregate Supply

Total level of income in an economy over a period of time. Determined by the quantity and quality of the factors of production

Factors increasing Aggregate Supply

-population growth

-discovery of new resources

- workers acquiring new skills

- increased capital

- adoption of new technology

- measures to improve efficiency

- government policies (regulation)

Aggregate Demand formula

AD = C + I + G + (X-M)

Aggregate Supply Formula

AS(Y) = C+S+T

Multiplier

1/(1-MPC) or 1/MPS

multiplier effect

Greater than proportional increase in national income due to an increase in aggregate demand

multipler formula

Change in Y= k x change in AD

Real GDP formula

(nominal GDP x 100)/CPI

Nominal GDP

the production of goods and services without adjusting for inflation

Drivers of economic growth

- production

- population growth

- participation

Benefits of economic growth

- living standards

- employment creation

- encourage higher savings

- higher rates of productivity and technological progress

- increased taxation revenue

- business investment

- increase in exports

Costs of economic growth

- damage to environment

- Structural unemployment

- income inequality

- demand pull and cost push inflation

productive capacity

the maximum output that an economy can sustain over a period of time without increasing inflation

aggregate supply curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

Increase in Aggregate Supply

an increase in the ability of firms to produce goods and services at lower price levels; represented as a rightward shift of the aggregate supply curve

Microeconomic policies used for economic growth

- taxation reform: reducing income tax rates to reduce burden on households and drive consumption

- Tarif increases : increase in tariffs have increased import competition thus encouraging efficiency in industries

Targeted sustained economic growth range

3-4%

Macroeconomic policy for economic growth

- Monetary: recently cutting interest rates down to 0.75% to increase investment and drive consumption

- Fiscal: reducing tax rates and increase government expenditure to drive economic growth

unemployment

the number of people who are actively looking for work but aren't currently employed

Major macroeconomic objective for labour market

Achieving full employment

labour force

people aged 15-65 and over who are either employed or unemployed

Labour force participation rate

The percentage of the working-age population who are members of the labour force.

Participation rate formula

labour force / working age population x 100

unemployment rate formula

number of unemployed/labor force x 100

limitations of unemployment rate

- does not account for the utilisation of labour force as it doesn't account for number of hours worked

- doesn't take into account hidden unemployment

Recent trends in unemployment

Increasing percentage of underemployed individuals. Rather than retrenching labour, owners decide to reduce hours and hire on more casual basis hence underemployment rate of 8.7%

current unemployment rate

5.2%

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

structural unemployment

Caused by mismatch in skill of labour and requirements of jobs from new industries and structural change

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Underemployment

the number of people who work part time because they cannot find full-time jobs

hidden unemployment

Unemployment that is not accounted in official unemployment statistics because of such factors as the exclusion of discouraged workers, the practice of considering part time workers as full-time workers, and others.

long-term unemployment

Unemployment lasting for more than a year

Hard-core unemployment

Where a person is unemployed due to mental, physical or other characteristics that prevent them from receiving a job offer

Okun's Law

To reduce unemployment, annual rate of economic growth should exceed the sum of percentage growth in productivity + increase in size of labour force

Keynesian deflationary/ unemployment gap

At a given level of income, the gap where expenditure on aggregate supply exceeds aggregate demand

NAIRU (non-accelerating inflation rate of unemployment)

the rate of unemployment at which there is no tendency for inflation to change

Changes in NAIRU

- when unemployment is above NAIRU: spare capacity, stimulate economic growth aim to reduce unemployment

- when below NAIRU: economic growth will cause inflation to rise

Long Run Phillips Curve

Relationship between the inflation rate and the unemployment rate in the long run, looks at long-term natural rate of unemployment.

Groups affected by unemployment

- 15-19 year olds

- ATSI

- Immigrants from overseas

- Rural And Remote

Economic costs of unemployment

- opportunity cost (less income and less expenditure)

- lower living standards

- decline in labour market skills

- costs to government

- lower wage growth

Social costs of unemployment

- increased inequality

- poor mental emotional and social health

Inflation

a general increase in prices and fall in the purchasing value of money.

Deflation

a decrease in the general level of prices

price level

a measure of the average prices of goods and services in the economy (CPI)

Inflation Rate Formula

(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100

target inflation rate

2-3%

Headline inflation

measure of inflation that includes all of the goods that the average consumer buys

Underlying inflation

A measure of inflation that excludes volatile and one-off seasonal prices

Limitations of CPI

- not an indicator of the price level (measures the rate of price changes)

- Quality changes (ignores price changes due to change in weight and quality)

- substitution bias (doesn't account for changes in household spending patterns when substitutes are purchased

Types of Inflation

- demand pull

- cost push

- imported inflation

- inflationary expectations

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

cost-push inflation

When prices rise due to an increase in the cost of factors of production.

Imported inflation

inflation due to an increase in price of imports. Price of imports increases, prices of domestic goods using imports as raw materials also increase, causing an increase in the general price of all goods and services. Imported inflation may be caused by foreign price increases or depreciation of country's exchange rate.

Inflationary expectations

The views of households and firms of the future level of inflation. High inflationary expectations can lead to inflation rising due to increased spending currently

Stagflation

persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Exchange rates and inflation

high inflation will result in depreciation of AUD which thus increases imports

Macroeconomic policy to reduce inflation

- contractionary monetary policy (raising interest rates)

- contractionary fiscal policy (increasing revenue and decreasing spending)

Macroeconomic policy to reduce inflation

- deregulating markets to increase competition and lower prices

income

Earnings from work or investment

wealth

The total value of money and other assets, minus outstanding debts

income inequality

the unequal distribution of household or individual income across the various participants in an economy

Lorenz Curve

Graph showing how much the actual distribution of income differs from an equal distribution

Gini Coefficient

A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.

Gini Coefficient formula

Area A / (Area A + B)

Current gini coefficient in australia

0.33

Economic costs of income inequality

- diminishing marginal utility

- increase social welfare payments

Economic benefits of income inequality

- forces labour to work harder and longer

- increased savings

Social cost of income inequality

- rising poverty levels

- social barriers due to gap between wealthy and non- wealthy

Social benefit of income inequality

- drives people to get a job and work to overcome relative poverty and lack of funds

- more opportunities for higher income earners

Policies to reduce inequality

- progressive tax system

- fringe benefits tax (tax on capital gains, shares, houses sale and other assets)

3 ways to measure economic growth

- quarterly (every 3 months)

- year on year (particular quarter corresponding with quarter from previous year)

- annually (this year vs last year)

Equilibrium of economy

Y=E=O