Economic inflation, growth, business cycle

Inflation

A persistent and appreciable rise in the general level of prices across a range of goods and services over time.

Deflation

The opposite of inflation, where the general price level falls from one period to the next, implying a negative inflation rate.

Disinflation

A slowdown in the rate of inflation, such as a decrease from 3% to 2%.

Consumer Price Index (CPI)

A summary of price movements across goods and services consumed by households, serving as the 'headline' measure of inflation in Australia.

Index Numbers

Used in statistics to summarize changes in related items, with the CPI being a summary of price movements across goods and services consumed by households.

CPI Basket

A collection of thousands of goods and services sorted into major groups, sub-groups, and classes of spending, weighted to indicate their importance in household spending patterns.

GDP Deflator

A measure capturing the change in prices of all domestic goods and services, providing a more accurate measure of 'true' inflation compared to the CPI.

Demand Pull Inflation

Occurs when higher levels of aggregate demand lead to price increases, often associated with a strong economy and the expansion phase of the business cycle.

Cost Push Inflation

Explains price increases resulting from rising input prices being passed through to consumer prices.

Economy is strong

Little spare capacity, low unemployment, higher wages, and strong consumer demand.

Cost push inflation

Occurs when rising input costs are passed on to buyers.

Effects of inflation on purchasing power

Real purchasing power falls with inflation; e.g., 4% inflation means $100 today will buy $96 worth of goods a year from now.

Inflation effects on competitiveness

Inflation can harm a country's competitiveness in overseas markets.

Inflation effects on economic efficiency

Inflation can divert activity from productive to speculative purposes.

Inflation news sources

Access latest inflation news from ABS website for CPI updates and monthly inflation indicators.

ABS Media release on inflation (Jan 2024)

CPI rose 0.6% in Dec 2023 quarter and 4.1% annually; significant contributors were Housing, Alcohol and tobacco, Insurance and financial services, and Food and beverages.

Construction of Consumer Price Index

Accounts for goods taking a greater percentage of total household spending by giving a weight to the goods.

Inflation rate calculation

Inflation rate is calculated as the percentage change in the Consumer Price Index over a period.

Groups affected by economic conditions

Creditors, debtors, exporters, and importers are affected by changing economic conditions.

Factors contributing to cost-push inflation in 2022

Factors include higher oil prices, fuel costs, currency depreciation, natural disasters, supply chain issues, and war affecting wheat production.

Consumer Price Index (CPI) increase indication

An increase in the average cost of living is indicated by an increase in the CPI.

Consumer Price Index (CPI) basket categories

The two largest categories in the CPI basket are housing and food.

Inflation rate calculation from CPI data

The inflation rate is calculated as the percentage change in the Consumer Price Index over a period.

Effects of inflation on lenders and borrowers

The burden of inflation falls more on lenders than borrowers as lenders are paid back inflated dollars.

Inflation impact on exports

Inflation can make a country's exports more expensive relative to other countries.

Inflation impact on economic uncertainty

Inflation can lead to uncertainty in estimating costs for contracts and investment decisions.

Inflation impact on economic activity

Inflation can divert economic activity from productive to speculative purposes.

Inflation impact on fixed incomes

Inflation burdens people on fixed incomes like pensions more than those who can negotiate or speculate.

Inflation impact on real purchasing power

Inflation causes real purchasing power to fall over time.

Inflation impact on interest rates

Higher inflation forces interest rates upwards to maintain a positive real interest rate.

Inflation impact on competitiveness

Inflation can harm a country's competitiveness in overseas markets.

Inflation impact on economic efficiency

Inflation can divert economic activity from productive to speculative purposes.

Business Cycle

Fluctuations in economic activity around a growth path

Real GDP

Main indicator measuring changes in economic activity

Recession

Phase with two successive falls in quarterly real GDP

Potential GDP

Level of GDP at full employment, growing at a constant rate

Actual GDP

Varies unpredictably due to economic shocks

Output Gap

Difference between actual and potential GDP affecting unemployment

Expansion

Phase of increasing real GDP between trough and peak

Peak

Upper turning point with economy operating above capacity

Contraction

Period of falling real GDP with negative growth rate

Trough

End of contraction phase, low demand, high unemployment

Business Cycle Length

Expansions last up to 10 years, contractions brief (1-2 quarters)

Global Business Cycle

Cyclical fluctuations in economic activity across economies

External Shocks

Events like droughts, pandemics impacting economic activity

Expansion Phase Characteristics

Rising consumer & business confidence, production, employment

Peak Characteristics

Economy above capacity, high inflation, slowed GDP growth

Contraction Phase Features

Decline in production, employment, investment, consumption

Macroeconomic indicators

Economic variables providing insight into the economy's health

Procyclical variable

Variable increasing in expansion and falling in contraction

Countercyclical variable

Variable decreasing in expansion and increasing in contraction

Leading economic indicators

Variables changing before the rest of the economy

Coincident economic indicators

Variables moving in line with economic activity

Lagging economic indicators

Variables changing after economic activity changes

Economic growth

An increase in the real output of goods and services produced in a country over time, measured by Real Gross Domestic Product (real GDP).

Real GDP

The value of output excluding the effect of changes in prices, used to measure economic growth.

Nominal GDP

The value of output including the effect of changes in prices.

Real GDP per capita

Real GDP divided by the population, providing a measure of economic output per person.

Production Possibility Frontier (PPF)

A graphical representation showing the maximum combination of goods and services that can be produced given available resources and technology.

Aggregate Production Function (APF)

A mathematical relationship showing how much output can be produced with a given amount of inputs.

Labour force growth rate

The rate at which the labour force of a country is increasing over time.

Labour productivity growth rate

The rate at which the productivity of labour, i.e., output per worker, is increasing over time.

GDP growth rate calculation

Percentage change in real GDP from one period to the next, calculated by ((GDP in later period - GDP in earlier period) / GDP in earlier period) x 100.

GDP % change formula

GDP % change = ((GDP in later period - GDP in earlier period) / GDP in earlier period) x 100.

GDP as a measure of economic welfare

While GDP measures economic activity, it does not account for non-market activities, quality improvements, well-being, or negative externalities.

Negative Externalities

Costly side effects of economic activity, like pollution.

GDP Data

Information on the economic output of a country.

Well-Being Metrics

Alternative measures to GDP for assessing prosperity.

Aggregate Production Frontier (APF)

Models the relationship between economic growth and resources.

Diminishing Returns

Output increases at a decreasing rate with additional inputs.

Labour Input

Quantity of workforce contributing to production.

Capital Deepening

Increasing capital per worker to enhance productivity.

Technological Progress

Advancements that promote economic growth and efficiency.

Determinants of Economic Growth

Factors influencing a country's potential economic growth.

Three Ps

Population, Participation, and Productivity as growth determinants.

Labour Productivity

Output per worker or per hour worked.

Population Growth Impact

Effects of population increase on demand and labor force.

Immigration Impact

Immediate growth effects due to working-age migrants.

Participation Rate

Percentage of working-age population in paid or seeking work.

Productivity Increase

Enhancing output from the same input quantity.

Capital deepening

Increasing the stock of capital equipment per worker, resulting in a higher capital-labor ratio.

Multifactor productivity

Improving labor skills and efficiency through factors such as education, training, infrastructure, and better management.

Human capital

Investment in education and training to enhance labor skills and efficiency.

Social overhead capital

Investment in more infrastructure like transport and communication networks to improve productivity.

Productivity

Main driver of potential economic growth in developed economies, enhancing the efficiency of all factors of production.

Population

One of the '3 Ps' contributing to real GDP growth, alongside participation and productivity.

Participation

One of the '3 Ps' contributing to real GDP growth, alongside population and productivity.

Unemployment rate

Percentage of the labor force that is unemployed and actively seeking employment.

Labor productivity

Output per hour worked, a key factor influencing economic growth and efficiency.

Income inequality

The unequal distribution of income among individuals or households within an economy.

Resource depletion

The exhaustion of natural resources due to economic growth, leading to future scarcity and price increases.

Sustainability

The ability to maintain economic growth without depleting resources or causing negative impacts for future generations.

Optimal rate of growth

The rate at which the benefits of economic growth are maximized while minimizing the associated costs.

GDP per hour worked

A measure of labor productivity, showing the economic output generated per hour of work.