Topic 3: Economic Issues

economic growth definition

increase in the volume of goods and services that an economy produces over a period of time

how is econ growth measured

annual rate of change in GDP

economic growth % formula

((real GDP current - real GDP prev) / real GDP prev) x 100

three time periods for calculating economic growth

quarterly, year on year, annual

when does the financial year start and end

1 July to 30 June

John Maynard Keynes stated that the most important influence on economic growth was the …

total level of expenditure in an economy

AD formula

C + I + G + (X-M)

aggregate supply

total level of income in econ

AS formula

C + S + T

leakages formula

S + T + M

injections formula

I + G + X

AD changes the level of EG in ____________ term

short to medium

why is consumption a large determinant of AD

consumption by households form at least half of AD

three greatest influences on APC

consumer expectations, level of interest rates and distribution of income

how will increasing general interest rates affect individuals’ spending

Higher interest rates reduce borrowing, leading to decreased consumer spending

the more __________ the distribution of income, the higher the rate of overall spending

equitable

what are the three components of AD that influence it

consumption, investment and gov spending and taxation

two influences on investment as part of AD

cost of capital and business expectations

three things affecting cost of capital

interest rates, gov policies, changes in price or productivity of labour

federal gov spending makes up ______% of AD

20-25

exports and imports are equal to between ____ and ___ of AD

1/5 and 1/4

what is the main influence on exports and imports

levels of overseas and domestic income

when overseas income rise, Australia’s exports tend to rise/fall

rise

the multiplier (definition)

greater than proportional increase in national income resulting from an increase in AD

formula for total increase in income using the multiplier

k x ΔAD

when can AS be increased

when increase in quantity and quality of FOPs

when AD > AS, econs experience ______________, causing ________ to rise

capacity constraints, inflation

faster EG results in an increase in __________ per capita

real GDP

a major aim of macroecon policy is to

sustain growth without increasing inflation

higher disposable income —> increased consumption of _______ goods —> ____ can worsen —→ ____ increase

imported, BOGS, CAD

TOT boom periods that influenced Australia’s BC

2005-2011, 2017-2022

why did TOT boom recently

large increases in commodity export prices

the australian treasury estimated that Australia’s long term sustainable rate of EG is around

2.5% of GDP

give an example of the RBA conducting pre-emptive monetary policy

the RBA reduced the cash rate 3 times before COVID due to weak EG and reduced cash rate to 0.1% in COVID

wealth effect

large increases in asset prices increase wealth of households —> greater borrowing and consumption

The _________________’s 5 year Productivity Inquiry reported in ____ that labour productivity growth averaged __% per year in 2010

Productivity Commission, 2022, 1.1

Australia’s ____________________ projected a fall in annual growth from __% per year in the past 4 decades to __% in real GDP for the next 4 decades

2023 Intergenerational Report, 3.1%, 2.2%

fiscal policy uses __________________ to influence level of AD and therefore level of EG

Commonwealth Government’s Budget

2 examples of fiscal policy during COVID in Australia

jobKeeper wage subsidy and JobSeeker welfare payments

microecon policies aim to increase econ’s __________ by increasing __

sustainable growth rate, AS

labour market policies focus on improving

labour productivity

labour force

Employed + UE in country at any given time

people not included in the labour force

• under 15 years

• full time students above 15

• full time domestic duties

• not looking for work

size of the Australian labour force in 2023

14.5 million

Labour force participation rate

labour force / working age population x 100

distinction between labour force and working age population

labour force doesnt include those who arent willing to work/actively seeking for work

unemployment rate in percentage formula

number of persons unemployed / total labour force x 100

in june 2023, australia’s UE rate was ___%

3.5

when did australia’s peak of UE occur (after the Great Depression) and what was the UE percentage

UE peaked in early 1990s at 10.7%

what worsened the second major peak of UE (after the GD)?

extensive structural change and microeconomic reform

During the ____s, Australia’s UE was between ____% which was just below the average for advanced econs

2010s, 5-6

Due to COVID, UE peaked again at ___ % in ____ 2020 (highest rate of UE in 20 years)

7.4, July

in mid 2023, UE rate was ___%

3.5

underemployment increased during COVID pandemic, reaching ___% in 2020 before falling back in mid 2023 to ___%

13.7, 6.4

Australia needs EG rates above _% to reduce UE (assuming no change in _____________ trends in immigration, family sizes, productivity and participation).

3, medium term

okun’s law

to reduce UE, the annual rate of EG must exceed percentage growth in productivity + increase in size of labour force in any one yr

one implication of Okun’s law in the short term

higher rates of productivity growth makes it more difficult to reduce the rate of UE

australia’s labour force participation is predicted to decrease from ___% in May 2023 to ____% in 2062 according to the Treasury in 2023

66.9, 63.8

two reasons for structural UE

changes in tech, pattern of demand for G&S

most of australia’s long term unemployment is due to

structural unemployment

why does cyclical UE occur

downturn in level of econ activity

frictional UE

people temporarily UE as they change jobs

the presence of hidden UE appears as

a decline in labour force participation rate

the Australian Council of Social Service has estimated ___ people are classified as hidden UE

1.3M

underemployment statistics for June 2023

6.4% of workforce

long term UE

people who have been out of work for 12 months or longer

what is the age group in which underemployment is highest

15-24

concept of nairu

Some level of UE is inevitable and efforts to reduce UE below this "natural" level will be counterproductive

what types of UE is nairu made up of

frictional, seasonal, structural, hard core

when UE is above NAIRU, there is ________ in the labour market

spare capacity

when UE is at or below NAIRU, an increase in EG will

increase wage pressures

real gdp formula with cpi and nominal gdp

(NOMINAL GDP / CPI) x 100

what happens when you try to lower UE below NAIRU

inflation

the demand for labour is a

derived demand

give a reason for the decline in AD

economic downturn with lower consumption

when growth is over _% the level of UE is likely to fall

3

RB research in _____ estimates that the peak impact of a change in econ activity on UE occurs after ____________

2023, two years

when EG is ______% UE is relatively stable

2-3

macroecon policies influence level of cyclical UE in __________ term

short to medium

expansionary macroecon policy effect

increases EG and job creation

what is the short term effect of contractionary macroecon policies

lower growth and higher UE

an increase in the labour force participation rate will _______ rate of UE in short term

increase

structural change involves significant

short term costs

high productivity growth will ________ UE in short term because

increase, fewer employees are required per unit of output

how does increased labour costs impact UE

labour or the FWC can price themselves out of a job and make it too expensive for employers to keep workers

examples of labour on costs

payroll tax, superannuation, sick leave, holiday pay and workers’ compensation

what mainly controls labour on costs

government policy decisions

how does inflexibility in the labour market affect UE

Australia’s high minimum wages make it less attractive for employers to hire less skilled workers

how to increase flexibility in the labour market

deregulation of labour market

three economic costs of UE

opportunity cost, lower living standards, lower wage growth

an economic cost of UE is a decline in labour market ______ for the _________ UE

skills, long-term

hysteresis

unemployment turning into long term, reducing the employability of workers

excess of labour supply in economy means a ____ in the __________ level of wages

fall, equilibrium

two social costs of UE

increased inequality, increased levels of debt

in the youngest group (__ - __) , UE is up to _ times the rate of the general population

15-19, 3

Young workers are often employed in ______ and ____-____ positions and in sectors like ___________ so they were heavily impacted by COVID

casual, part-time, hospitality

what type of policy is used for cyclical UE

macroeconomic

JobKeeper wage subsidy during COVID provided a $____ per fortnight payment to about ___ million workers. Other measures included support for ________, free _________ and increased UE benefits

1500, 3.5, businesses, child care

microeconomic reform aims to ____________ and ____________ over long term

increase EG, job creation

examples of microeconomic reform

tariff reduction, deregulation and privatisation