Everything Economics!

Macroeconomic Rationale

• Stabilisation and shifts in aggregate demand

Microeconomic Aim

• Aims to remove distortions in the allocation of resources to improve efficiency and productivity

• Lead to increase in AS

Allocative Efficiency

• Economies ability to shift resources to where it’s most valued

Dynamic Efficiency

• Producers alter output according to changes in consumer demand and tech over time

Technical Efficiency

• Resources allocated to maximise output, relative to input

Structural Change

• Changes in the means, modes and patterns of production to reflect changes

Effects of Microeconomic Reform

• Productivity Increase

• Improved Inflation

• Investment

• International Competitiveness (Cheaper exports)

• External stability (more exports)

• Employment

Regulation

• Government price, output or entry controls over the operations of market

• Created to avoid market failure

Deregulation

• Removal of government restrictions on market

• Motivated by belief that firms as firms are profit motivated, will be able to increase efficiency

Market Based Enviro Policies

• Provide incentive/disincentives to influence behaviour

• Increase marginal private cost, greater to social cost, or vise versa

• Including tax and subsidies

International Enviro Agreement

• Non enforceable

• Allow sharing of tech

Kyoto:

• Cut emissions by 5%

• Entered in 2005

Paris:

• Signed in 2015

• Pursue 1.5c rise in temp

Minimum Employment Standards

• Max 38 hours weekly work

• Flexible working arrangements

• Parental Leave

• Personal Leave

• Long service Leave

• Notice of termination
  

  Note:

• Unfair dismissal not in it

Modern Awards

• Provides a safety net, with minimum wage and conditions specific to each sector

• From 4300 to 133 awards after FWA

Enterprise Agreements

• Negotiated collectively between an employer and employees

Industrial Dispute

• When employees or employers take action to distrupt the production process to highlight a disagreeement

Arbitration

• A tribunal hands down a binding decision

Conciliation

• When employers and employees meet to dicuss in the presence of a neutral 3rd party

FWA Disputes

• Requires all agreements to contain a clause for dispute resolution

• All parties must bargain in good faith

Fiscal Policy Objectives

• Economic Growth, through influencing components of AD

• Allocation of Resources

• Distribution of Income

Fiscal Policy Structural

• Explicit changes in gov spending or taxation

Fiscal Policy Cyclical

• Changes in gov spending caused by changes in eco activity

Fiscal Discretionary

• Change expenditure (spending), income (tax), to influence AD

Fiscal Non-Discretionary

Utilisation of automatic stabilizers

• ie periods of low EG, large gov spending through welfare, low taxation increase gov spending

Fiscal Position

• Budget or Surplus

• Excludes one of items, like the sale of Telstra

Using a Surplus

• Funds deposited with RBA

• Pay off public sector debt

• Place in gov owned funds

Financing a Deficit

Overseas Investors:

• Potential to borrow from overseas

Reserve Bank:

• Monetising Debt (printing money)

Sell Government Assets

Purpose of MP

Achieve RBA objectives

• EG, Inflation, UE, AUD Stability

Forward Guidance MP

• Public comments made by the RBA to influence behaviour

• “Don’t see the cash rate increasing until 2024/2025”

Term Funding Facility MP

• Established in 2020

• Lower funding costs to as low as 0.10%, so financial institutions are able to access cheap capital, 3 year loans

Policy Interest Rate MP

• Lending set 25 basis above

• Deposit set 25 basis below

• Incentive finanicial institutions to trade ESA, achieving target

Quantitative Easing MP

• Purchasing of bonds from state treasuries to $640bn in 2020

• Increase supply of cash

Transmission Mechanism

• Savings and investment

• Wealth channel

• Balance sheet/Cash Flow

• Exchange rate

Limitations of MP

Time Lag

• Time to meet

• Flow throw channels, consumers respond to changes

Blunt instruments

• Affects all sectors

• Signifcant trade offs

Globalisation

Increasing level of economic integration between countries leading to the emergence of a global market place or a single world market.

• It has linked people in various countries at different stages of economic development

The Global Economy

The integration between economies of the world. The sum of all countries engaging in economic activity.

Gross World Product

The total value of goods/services that are produced worldwide over a period of time, etc a year. This is measured in USD, and can be used to indicate trends in economic activity.

Economic Integration

Process of removing trade barriers between nations

• Can lead customs union, common markets or monetary unions, lead to growing intra regional trade

• When trade barriers (tariffs and quotas) are reduced

• Technology has played a major role in increaseing economic integration

• Trends such as COVID-19 have reduced economic integration

Trade in Goods and Services

• There has been significant increase in goods and services, due to factors promoting globalisation, such as tech and free trade agreements

• Etc in 2018 Australia reduced tariffs to 2.23%, and promoted free trade, etc CHAFTA or APEC

• There has been change in flows, especially from China, and other developing economies, as they experience convergence.

Financial Flows

Flows of international capital, including direct, portfolio and other investments

• Allows firms to maintain greater financial flows to expand operations

• Technology has allowed this to happen, allowing efficient movement of interntional finance

• Financial deregulation, etc Australia floating the dollar in 1983 (where the dollar is allowed to fluctuate on the market)

Investment and Transnational Corporations

TNC, corporations which sell goods or services in more than one country

• There has been increased investments by TNC, etc McDonalds. This increases foreign investments

• Investments into TNC have also increased global cooperation

• Or firms taking advantage of lower labour costs in other countries

Technology, Transport and Communication

• Consumers around the world are now global, being able to access e-commerce and travel from other economies

• There has been increased transport, etc from cheap global shipping this allows increased globalisation,

• Technology, etc automation has increased efficiency

 

• Rise of Container Ship

  • Container ships came about during the 20th century, it allows for quicker loading and unloading, made quicker

  • Also made cheaper, by reducing costs of goods and services, as well as increasing productive capacity in key sectors

• Video Conferencing

  • Has made it quicker to conduct business

  • Made it easier to move labour, especially in service based sectors, increasing how labour can be utilised throughout the global economy

  • Increasing efficiency and output

International Division of Labour and Migration

• The allocation of labour to different countries in order to maximise specialization and efficiency, of the units of labour

• Some firms or TNC may establish production in emerging economies due to lower labour costs

• Immigration laws restrict lower skilled workers, to poorer countries

• However does increase the divide of skills across countries

International and Regional Business Cycle

• International business cycle refers to the changes in global economic activity, where this will have effects on domestic business cycles, if a country is well integrated into the global economy

• Regional business cycle refers to fluctuation in business activity in a geographical region over time, such as in the EU or Asia, this can also affect domestic business cycle

Strengthening the International Business Cycle

• Trade flows, reduced trade barriers between nations increase economic activity

• Increase financial flows, if there is deregulation it'll increase financial integration

• Investment flows, increased investment good

• Technology, more tech means more efficient use of resources

Weakening the International Business Cycle

• Trade flows, restrictions on activity, or higher tariffs

• Financial flows, if there is high fluctuations in forex, can cause volatility,

• Investment flows, reduced investment, for example in reaction to unethical treatment

• More recently: Rising US - China trade tensions, the Covid 19 pandemic, and Russian Invasion of Ukraine

Free Trade

Occurs when there is limited barriers imposed by governments on the flow of goods and services on international borders

Absolute Advantage

When a country can produce more output, with the same resources.

Comparative Advantage

When a country has lower opportunity cost when producing a good or service, where this is based on Ricardos theory of comparative advantage,

 

This is why free trade is so effective, it allows nations to do what they are good at, increasing global output,

Free Trade Advantage

• Allow countries to access their comparitive advantage

• Increased AS

• Meeting of Eco objectives

• Increased living standards

Free Trade Disadvantage

• Increase in unemployment and the closure of uncompetitive firms, this leads to increase burden on government

• May be difficult to establish business

• International firms may dump surplus production of a single market, causing cheap prices, etc Qatar airways flights into Aus, Qantas couldn't compete

• Negative externalities, higher environmental degradation

• May increase dependence on nations, etc wheat in Ukraine

Financial Flows

The flow of capitol into different countries through investment, the risk of these can be minimized through using derivates or diversification of assets.

Foreign Direct Investment

More than 10% stake and have controlling interest

World Trade Organisation

• Formed in 1994

• Doha Round in 2001, reduce agricultural subsides and tariffs

• Work towards the elimination of tariffs

• Promote stability of trading relations, ie by delivering decisions on trade disputes

International Monetary Fund

• Created in 1944

• Oversee stability of global financial system

• Promote monetary cooperatoion and exchange rate stability

• Provide policy advice to individual nations, exchange data and advise governments, also produce the global economic outlook reports to compare policies and how they impact other economies

• Lender of last resort, they lend to nations when there is a high risk and markets are not willing to, this is to prevent the negative effects of an economic downturn, such as low purchasing power and high unemployment.

• Greece Debt Crisis, 30bn Euro

World Bank

Created in 1944
Provides financing, advice and research to nations

• Development assistance, through providing financial aid and loans to developing nations to strengthen economic activity

• Support for long term investment projects

 

But the world bank and IMF require governments to implement specific structural reforms in their economies to receive assistance, this is called conditionality principle, and may impact state sovereignty.

OECD

Engages in research and consultation of economic issues. It only has 34 members and aims to promote sustainable economic growth and to maintain financial stability

• Publishes the OECD economic outlook, and makes policy recommendations

G20

Established after the GFC, to coordinate a global response.

• Coordinate fiscal stimulus around the world

• Improve supervision of global financial systems

• Discuss key issues in the global economy

Trading Blocs

Where countries enter preferential trade agreements, establishing free trade, while also putting external tariffs on countries outside the trading bloc, this may allow countries to utilise comparative advantage between themselves and others, however disadvantage countries not in it.

Monetary Union

When groups of countries share a common currency and monetary policy, etc the Eurozone, this increased am integrated regional market, boosting efficiency

Free Trade Agreements

Formal agreements between countries to reduce barriers, they can be unilateral, or bilateral

• Advantages: Allow greater volume of exports, and closer political relationships

• Disadvantages: Trade with non members may decrease, and trade may be divided along regional lines

Human Development Index

• Education

• Income

• Health among population

Economic Development

Structural change in an economy leading to higher rates of economic growth and living standards over time

Protection

Protection is the use of artificial barriers, which restrict the free flow of goods and services in international trade, giving domestic producers an advantage, and international ones, a disadvantage

Infant Industries

• Industries that are new, and don't yet have time to compete in the global market.

• New firms will struggle to compete against larger competitors in the global market

Domestic Employment

• If overseas countries offer cheaper production, then domestic jobs may be put at risk, as industries may not be able to survive.

• Likewise, may affect efficient export industries

Dumping

• If a country has an oversupply of goods, it may dump, etc Qatar dumping flights into the Australian market

• This may hurt countries who are struggling to compete, putting at risk domestic jobs

• Firms can't compete with artificially low prices

• Only argument accepted by the WTO

Tariffs

• A tax on imported goods imposed for the purpose of protection

• Harder to remove

Quotas

• Limit on level of imports, reduce international supply

Local Content Rules

• A certain percentage of domestic goods must be in the market

Subsidies

• Paid to domestic producers in order to be more competitive in the world market

• Increase supply, decrease price

• Subsidies offer a price advantage for local consumers, and there is less inflationary pressures as they are able to compete on the world market

• They are easy to remove

• However, are costly and can support inefficient industries.

Economic Growth

• An increase in the level of output, this is measured with GDP of a nation

Economic Development

• The structural changes needed for growth to occur within an economy to sustain an improvement in living standards, measured by GNI, HDI, life expectancy,

Advanced Economies

• Wide variety of industries, services based

• Market based economy

• Huge annual income levels

• However as they have almost reached peak, they experience slower economic growth

• Include Australia and the United States

Emerging Economies

• Fast growth in income and economic growth (5-10%)

• Focus on industrial and manufacturing industries

• Include China and India

Developing Economy

• Low income levels

• Moderate growth

• High population growth

• Strong reliance on Agriculture and foreign aid

China Economic Growth

• 14.1% in 2007

• 5% in 2024

• Projected growth of 2% by 2030

China Economic Inequality

• Rich around coast, poor inland

• Due to high level of urbanisation

• However HDI has in general increased, 0.76 (2020), 0.58 (2000)

• China must ensure the growth off the middle class as it fuels growth of aggregate demand, and investment for products and industries, however constrained by necessity of those in rural areas to move into urban regions, placing stress on social services

Economic Growth

• Incraeses in productive capacity measured by changes in GDP over time

Aggregate Demand

• Sum of components

Aggregate Supply

• The total volume of goods and services that all firms are willing to produce in an economy at a given time

Effects of Economic Growth

• Living standards

  • Higher economic growth, more demand for factors of production leads to higher income, greater purchasing power, thus higher living standards

  • Decrease in protection, allow greater variety of consumer goods from overseases

• Employment

  • As labour is a derived demand, increase in output needs more workers, decreasing UE

• Inflation

  • Occur if AD>AS, and demand outstrips output in economy

• Tax Revenue

  • Increase in EG lead to higher tax revenue, know as the 'growth dividend'

• Income Inequality

  • As high income people own most capitol goods, they will see a greater return

• EG and Enviro Sustainability

  • Greater use of land resources in the long term

Current Economic Growth

• GDP Growth has been slowing in Australia, especially since GFC, a trend of between 2-2.5%

  • Due to slow global economic growth

  • Weak domestic growth of microeconomic settings

    • Fiscal, there is week fiscal consolidation, reducing deficits over the liberal governments

    • Expansionary monetary policy

    • Weak productivity growth

MPS

Spending/Income

multiplier

1/mps

Employed

• Working at least 1 hour per week

Unemployed

• Must be actively seeking work

Frictional UE

• People between jobs

• Caused by lack of efficiency in the job market, in matching skills

• Examples include people between contracts, or individuals re-entering the workforce

  

Structural UE

• Structural changes in consumption and production

• A mismatch of jobs and skills

• Can be fixed with retraining

Cyclical UE

• As labor is a derived demand

• Changes in AD affect demand for labour.

• There is usually a 6 month time lag between changes in Eg and changes in cyclical employment

Under-employment

• Working but seeking additional hours

• Underemployed individuals are still counted as employed in the labor force statistics.

Factors Determining the NAIRU

• SEEK HELP

Groups Affected by UE

• Young People

• ATSI

• Industries undergoing structural change

Economic Implications of UE

• Opportunity cost - underutilized economic resources

• Higher expenditure - increased transfer payments

  • Welfare Payments

  • Increased spending on re-training schemes

• Lower tax revenue

  • Lower level of income tax

  • Lower level of GDP

• Decline in labor market skills and loss of human capital - as these skills not are being utilisted, over time there will be a loss in specialization of these skills

• Low wage growth

Social Implications of UE

• Crime

• Homelessness

Headline Inflation

• Measure of inflation with all basket of goods

Underlying inflation

• Excludes volatile

Demand Pull Inflation

• If there is high demand this will increase its scarcity, consumers will bid up the price of goods, hence increasing the price of goods

Cost Push Inflation

• If there is low supply, this increases scarcity, hence consumers will bid up the price of a good or service

• This may depend on the elasticity of a good or service

Inflationary Expectations

• Future expectations will change individual behavior

• Consumers may choose to bring forward purchases, or delay it

• If workers, expect higher wages in future, they will want higher wages, thus leading to cost-push inflation

Imported Inflation

• Transferred to Aus via international transfers

• If there is a depreciation of $AUD, make it less valuable, which thus increases price

• Higher cost overseas, increase global price