Economic issues

Affect of indirect tax

Cost of factors of production increase, supply decreases, majority of tax passed onto consumer.

Indirect Tax winners losers

Gov and those affected by negative externalities win.
Consumer and producer lose.

Affect of subsidy

Cost of factors of production decrease, supply increases, price decreases, producer receives more than consumer paid.

Subsidy Winners losers

Consumer, producer, beneficiaries of positive externalities win
Gov, local taxpayers and overseas producers lose.

Effects of Quota.

Limit on amount of goods able to be produced, price increase, quantity demanded is lower.

Quota Winners and losers

Winners: Consumers if quota stops an industry “using up” resources, Those who can still produce near capacity.
Losers: If quota restricts number of producers then those who get shut out.

Effect of price ceiling

Maximum price imposed. Shortage of product.

Price ceiling winners losers

Winners: Those who could not afford product but now can, operators of black market,
Losers: those who miss out from shortage, producers from lower revenue, those affected by antisocial elements of black market.

Affects of Price floor

Surplus of product. Gov needs to handel surplus. Quota, licenses, buy surplus.

Price floor winners losers

Winners: those who are able to produce if there is a quota, if gov buys surplus taxpayer loses.
Losers: consumers (higher price, consume less), Consumers may indirectly win from better standards and stability, if surplus not handled producer who sells most wins and those who don’t sell enough lose.

During a boom what happens in regards to lending

• Overconfidence, fail to recognise risk in lending money

• Too much lending at low interest rate to unproductive uses

• People fail to pay back loans

• Contractionary pressure

What does GDP fail to take into account

• Goods and services not bought and sold by those who benefit from them (parks, schools)

• Leisure time

• Potentially, richer ≠ happier.

• Quality of life

• Externalities

Effects of unemployment

• individual: depression, crime

• Society: Crime, Output below max therefore living standards worse

• Government: Increased spending on welfare.

Effects of casualisation of work force

Uncertainty of job continuity or income, lack of benefits, individual hardship, less productivity, potentially underemployed but not seen as unemployed.

Effects of lack of universal affordable child care services

Forces carers to not work, unable to provide income, hardship for carer and child, lower productivity, excludes some from workforce particularly women.

Limitations of CPI

• poorly representative of buying habits and prices of suburban and rural area

• Not and indicator of prices/does not represent cost of living

• Does not show changes in product quaility.

What is imported inflation

Cost push inflation caused by the increase in the price of imported factors of production. (example petrol). Leads to overall inflation in our economy.

Effects of inflationary expectation

Consumers anticipate inflation, spend earlier, causees aggregate demand to increase, demand pull inflation. Same can occur with workers who demand high wages from expectation leading to cost push. Self fulfilling prophecy.

Effects of inflation on redistribution of income.

Away from lenders towards borrowers in fixed interest rate loans. Away from employees who cannot negotiate wage increases. Towards government due to progressive tax.

Why is inflation inefficient

Inflation disrupts price signals, harming allocative efficiency. It shifts investments to speculative assets, reduces incentives to work, and erodes confidence. This lowers investment and consumption, causing slower growth and contributing to economic "busts."

What is the wage price inflationary spiral

The wage-price spiral occurs when rising wages increasing demand, leading to higher prices. In turn, workers demand higher wages to keep up with inflation, creating a self-reinforcing cycle of rising wages and prices. Positive feedback loop.

Cause of stagflation

Stagflation is caused by supply shocks (e.g., rising oil prices) that increase production costs, leading to inflation and reduced output.

Why is some inflation necessary?

Moderate inflation encourages spending and investment by reducing the incentive to hoard money. It also allows wages and prices to adjust more flexibly, helping avoid deflation, which can harm economic growth.

Effects of Budget Deficits

• Borrowing from reserve bank: Inflation due to more money supply

• Borrowing from overseas: Appreciation of exchange rate, increase interest rates, Current account deficit

• Borrowing from Australians: Not inflationary as does not change money supply, generates future debt payed with tax money.

Limitations of budget deficits

• Crowding out

• Policy lags

• Political pressures

• Structural Deficit

Monetary policy strenghts

• Fast implementation

• Independent from government

• can increase demand without increasing debt

• can decrease demand without government making unpopular decisions

Monetary policy limitations

• Lags, caused by being indirect

• Contractionary policy may have little effect in times of confidence or caution

  Expansionary policy may have little effect in a period where banks perception of risk is very high

• Blunt intrument

• Not effective on cost push

Advantages of protectionism

• Infant industries

• Unfair competition and dumping

• Balance of payments issues

• Strategic industries

Disadvantages of protectionism

• Reduces benefits of international specialisation and trade

• Invites retaliation

• Protects inefficient domestic industries

• Consumers pay more

• Discourages competitiveness, efficiency and innovation

Effects of depreciation

• Volume of exports increases. Aggregate demand increases (X-M)

• Imports more expensive (potentially cost push inflation)

• Foreign debt payments may increase

Long term effects of current account deficit.

More need to be borrowed, paying interest back in future will be debits on current account. Can perpetuate current account deficits.

Advantages of Foreign investment

• Supplement to local saving to establish new businesses

• If investment opportunities exceed economies ability to save then foreign debt allows productivity.

• Allows new technology to enter country

Disadvantages of Foreign debt

• Government debt (typically not productive)

• Borrowing on consumption rather than production (no means to improve ability to pay back in future)

• Much of a countries earnings paid out

• Debt becomes so big that lenders are deterred

• More foreign ownership decreases government ability to exercise policy

How to control foreign debt

• Minimise proportion of government debt

• Increase level of personal savings (compulsory superannuation and tax incentives to save)