Economic Issues statistics and examples

Measuring the unemployment rate

Persons unemployed (seeking work, can’t find it)/Labour force (15+, actively seeking)

Labour force underutilisation rate

10.1% (ABS)

Underemployment trends

Underemployment at 10.6% in 2024, down from over 20% in 2020 (COVID-19)

Unemployment trends

Structural change and microeconomic reform led to the loss of jobs in the 1970s-90s (The Recession we had to have in 90s- Keeting). Downward trend from 1993 to 2008 (4%). GFC caused increase by 2% but fell back to 5% the following year. 2010- Mostly 5-6% (slightly below average for most advanced economies) however rose to 7.4% during COVID-19. Currently at 4.1%

NAIRU

Non-accelerating rate of inflation, the ‘natural level’. Below NAIRU = increase in EG will increase inflationary pressures. Above NAIRU = Spare capacity in labour market, stimulate EG. Generally between 4.5 and 5%

Policies to reduce unemployment

Cyclical measures → Increase in output ( Increase. gov spending, reduced taxation, lower interest rates). Expansionary fiscal policy
Structural measures → Microeconomic reform (Free-trade, education and training, welfare to work, immigration
Frictional → Jobseeker, short-term prevention of rising unemployment

Inflation

General increase in prices and fall in purchasing power

Measurements of inflation

CPI → basket of goods and services

Underlying inflation rate → Preferred by RBA, removes volatile or one-off price movements

Trends in inflation

Both headline and underlying inflation have been low. Moved in opposite directions in 2010s, where underlying was down from over 4% to be in the target band of 2-3% whereas headline bounced from 3% to almost 1% then up to 2%. Current headline inflation is at 2.4%, whereas underlying is 2.9%. Intro of GST in 2000 caused temporary increase in headline inflation.

Main causes of inflation

Demand-pull, cost-push, inflationary expectations, imported inflation, gov. policies, increase in money supply.

Effects of inflation

Low inflation → Benefits EG, encourages inventive to invest in long-term assets by removing distortion to investment and savings decisions. Improves IC.
High inflation → Constraint on EG and distortion to consumers decisions to spend/save. More likely to spend during high inflation because purchasing power erodes. Neg. impact on distribution of income (higher interest on borrowings, incomes don’t rise so fast, erodes value of existing savings).
Wage price inflationary spiral

Impact of inflation on Exchange Rates

Purchasing Power Parity → Exchange rates will change to reflect the real purchasing power of currencies. (High Inflation → Lower Demand for AUD → Depreciated currency → Increased competitiveness → Restored purchasing power parity).

Inflation causes the currency to depreciate over time. Sustained low inflation may foster greater international confidence in the Aus. economy, strengthening the value of the dollar.

Benefits of inflation

Limited. Sustained low positive inflation reduces the likelihood of the economy experiencing deflation (also bad consequences). Deflation gives incentive to hold off purchases (economic downturn lack of consumption). Makes borrowing money less attractive as the amount to be repaid is rising in real terms. Hiring workers less attractive.

Policies to Sustain Low Inflation

Monetary policy has been the main tool, but monetary and fiscal is used to reduce inflationary pressures.

Importance of Economic Growth

Creates jobs, allows individuals to increase their consumption, raises living standards, generally considered to be the single most important measure of an economy’s performance, however when inflation was crazy high they didn’t mind if the economic growth was lower due to the cost-of-living crisis

Definition of Economic Growth

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

Keynesian Economics

Aggregate demand is the main driver of economic growth.

Inflation goal

2-3% (RBA goal, targeted since 1996

The Multiplier

The greater than proportional increase in national income resulting from an increase in aggregate demand

Effects of Economic Growth

Real GDP per capita = Better living standards. Employment = Creates jobs. Inflation = High rates of EG result in price increases and larger wage claims when aggregate supply cannot keep up with aggregate demand. (The sustainable rate of economic growth)

Trends for economic growth

Relatively stable and sustained since 1991. Recession in 2020 due to COVID, recovered post-pandemic. Currently growing at 1.3% (annual measurement) , below goal of 2-3%

External Stability

The ability for government policy to service its foreign liabilities in the medium to long run and avoid currency volatility

Trends with the CAD

Persistent deficit on the NPY of 3-6% of GDP. In 2019-2024, surplus. Deficit expected to reach 2% of GDP by 2025/26. CAD averages around 4.5-5% of GDP. Beyond 5% would be unsustainable.

Trends with the ToT

6 years leading up to 2021/22, ToT rose to 60%. Peaked in 2022, then fell 12% in the following 2 years. Expected to further fall 15% in 2024/25 Budget.

Australia’s Foreign Debt

Net foreign debt increased, at 2024 was approx. 47% of GDP. $4.7 trillion of foreign investment in Australia 2024.

Exchange Rate Stats

COVID-19 fell to US $0.60, recovery brought to US$0.80 in 2021, now US %0.65 in 2023/24

Explanations of Aus CAD

• Cyclical

  • Domestic economic growth

  • Economic growth of trading partners

  • Exchange Rate

• Structural

  • Terms of Trade

  • Australia’s IC

  • Global value chains

  • Income deficit associated with foreign liabilities

Dutch Disease

Adverse effect when specific sector (mining) grows so fast it has an adverse affect on other sectors (everything else). Seen in Australia in 2000s → High commodity prices brought AUD up but made non-commodity resources less competitive

Pitchford Thesis

‘Consenting Adults’ → CAD and foreign liabilities not a major concern as it is private sector debt.

How has australia avoided a debt sustainability problem?

Sustained long periods of low global interest rates since the 90s, and rising export revenue as a result of resources boom after 2003.

Debt servicing ratio

Peaked in 1990 at just over 20% (The lower the ratio, the less the concern)(export revenue must be spent on interest payments on foreign debt). Fell to 3.4% in 2021/22, rose to 6% in 2023-24. Rising interest rates offset by strong export earnings.

Net foreign liabilities

NFL declined from peak of 60% in 2010s to below 30% in 2023/24 (improvement) = CAS, higher savings, lower exchange rates. Low AUD increased AUD value of foreign assets

Okun’s Law

Economic growth is related to unemployment. The annual rate of economic growth must exceed the sum of percentage growth in productivity plus the increase in the size of the labour force. A fall in employment will cause a fall in economic growth