HSC ECONOMICS TOPIC 3: ECONOMIC ISSUES

Economic growth:

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

- creates jobs, allows individuals to increase their consumption and raises living standards

- measured by the annual rate of change in real GDP

How to Calc Eco growth:

Real GDP(current year) - Real GDP(previous year

_____________________________________________________________________

Real GDP(previous year)

x100

Real GDP

the value of a country's total output of G&S adjusted for inflation

Nominal GDP

the value of a country's total output of goods and services without accounting for inflation

Quarterly Rate of Eco Growth:

calculated every three months by the ABS

Quarterly national account figures:

(less volatile measure) are calculated year on year which measures the change in GDP from one quarter of a year to the same quarter of a previous year. (e.g. June quarter of 2020 compared to June quarter of 2019).

Annual Eco Growth rate:

calculated each year using GDP stats for the financial year(1 July to 30 June).

Economic Growth as a change of GDP: PEIA

Production

Expenditure

Income

Averages

GDP (P)

a production measure which calculates the value added by each stage of production in the production of G&S

GDP (E)

an expenditure measure which calculates GDP according to the total expenditure by consumers, businesses and governments on final output

GDP (I)

the total value of incomes received by the owners of productive resources who contribute to resources to the production of those goods and services Eg: wages, salaries and gross operating surplus

GDP (A)

an average of the P, E and I measures of GDP and is used to achieve a standard average measure of the rate of economic growth.

Sources of Eco Growth: CIGX

Consumption Spending by households

Investment Spending

Government Spending

Net Exports

Consumption spending by households (C)

influenced by the level of household disposable income and consumer confidence, in turn influenced by tax, wages and interest rates.

Lower tax, higher wages and lower interest rates all increase disposable income within the econony which boost consumer spending and thus increases economic growth.

Investment spending (I)

influenced by business profits, interest rates, tax and business expectations about the state of the economy.

Increased business profits, lower interest rates and tax burdens and favourable expectations all lead to higher investment which boost economic growth

Government spending (G)

influenced by the amount of tax revenue collected, the government's budget priorities and the state of the economy.

Net exports (X-M)

if net exports are negative they will detract from economic growth.

Influenced by the rate of technological change and the 3Ps - labour and capital productivity, labour force participation and population growth.

John Maynard Keynes Theory:

suggested that governments need to intervene in an economy to increase demand as just the increase in supply will not automatically cause an increase in demand. He advocated for the use of macroeconomics to influence spending to drive economic output when demand is too low.

Aggregate demand (AD)

the total level of expenditure in an economy over a given period of time. Includes consumption (C), investment (I), government spending (G) and net exports (X-M).

AD Function

AD = C + I + G + (X - M)

Aggregate supply (Y)

the total level of income and the total volume of goods and services produced in an economy over a given period of time. Part of national income is collected by the government through taxation (T), and the rest is either spent on consumption (C) or saved (S).

Y function

Y = C + S + T

Influences on Consumption and Spending: CID

Consumer expectations - consumers will spend more and save less in the short term if they expect a rise in their incomes or in inflation, or if they anticipate future shortages of goods.

Interest rates - an increase in interest rates encourages saving.

Distribution of income - the more equitable the distribution of income, the higher the rate of overall spending. Government policies that reduce differences in income levels would reduce savings and increase spending in the economy.

Influences on Investment: CB

Cost of Capital equipment

Business Expectations

Influences on Investment: Cost of Capital Equipment

If low then more investment, if high then less investment

influenced by:

Interest rates = a fall in interest rates makes it cheaper to borrow for the purchase of capital equipment

Government policies relating to investment allowances and tax concessions on capital goods

The price or productivity of labour = being a substitute for capital

Influences on Investment: Business Expectations

Business expectations regarding demand for their products and the economy can determine how much businesses invest

influenced by:

Expected demand for their products = if a future increase in demand is expected then businesses would purchase new capital now to boost production

General economic outlook = strong economic growth reduces the risk of business expansion

Inflation = uncertainty about future prices and future costs of production so leads to reduced investment

Influences on Government Spending and Taxation:

The government aims to maintain a sustainable rate of economic growth to help achieve low unemployment and inflation.

Gov can increase spending and reduce tax to increase aggregate demand and boost growth

These decisions on tax and spending will be influenced by policy objectives for external stability and sustainability of government debt

Influences on Exports and Imports:

Level of overseas and domestic income - when overseas incomes rise, Australia's exports tend to rise. When Australian incomes rise, Australia's imports tend to rise.

When Australia has a weaker exchange rate, domestic industries are more competitive as the relative cost to foreign purchasers decreases, often resulting in increased sales, increased net exports, aggregate demand and economic activity.

Protectionist policies of other countries - tariffs, quotas, subsidies

Consumer tastes and preferences

Multiplier theory:

An initial investment into the economy, boosts the level of aggregate demand and as the initial injection moves around the economy multiple times it increases the overall national income.

- However, the increase in investment will not continue to increase income forever. Each time the injection moves around the economy, its impact on expenditure gets smaller because some of the income is not consumed but saved (a leakage that reduces the effect of the higher investment on national income).

- The number of times the final increase in national income exceeds the initial increase in expenditure that caused it is the multiplier.

Multiplier Effect:

the mechanism by which changes in aggregate demand results in changes in GDP

K = 1/MPS or 1/(1 - MPC)

K gives you the value that you multiply the initial increase in investment by to give you the total increase in national income

Eg: If MPS = 0.2, and initial investment equals 10 000

K = 1/0.2 = 5 and then 5 x 10 000 = 50 000. Therefore, national income increased by 50 000 due to the initial 10 000 increase in investment.

Income - Expenditure Diagram:

x axis - income

y axis - expenditure

Has the line Y = E which shows where AD = AS and the economy is in equilibrium

Also has the AD line consisting of C+I+G+(X-M)

Basically shows how a change in income effects expenditure(increases) but it also depends on the MPC which affects how steep the graph is

Effects of Economic Growth: LEIEIE

Living standards

Employment

Inflation

External stability

Income distribution

Environmental Impacts

Effects of Economic Growth: Living standards

faster economic growth results in an increase in real GDP per capita = real wages rise and households enjoy higher disposable incomes and therefore higher material living standards.

Effects of Economic Growth: Employment

economic growth creates jobs. Over the longer term, higher rates of economic growth are usually associated with the development of new and more advanced industries, resulting in the creation of more highly paid and highly skilled jobs.

Effects of Economic Growth: Inflation

higher levels of economic growth can result in price increases and larger wage claims, contributing to a rise in the level of inflation.

Effects of Economic Growth: External Stability

economic growth is often accompanied by higher disposable incomes, leading to increased consumer and business spending, resulting in a higher level of imports. When an economy is growing faster than its trading partners, unless exports keep pace with growth in imports, the BOGS (Balance on goods and services) can worsen and the CAD (Current account deficit) can increase.

Effects of Economic Growth: Income Distribution

Increased economic growth leads to increased inequality in income distribution. This is because higher levels of growth does lead to a rise in disposable incomes but the increase in incomes is greater for higher skilled workers, entrepreneurs and owners of factors of production, thus increasing the level of inequality.

Absolute poverty falls but relative poverty increases during strong periods of growth

Effects of Economic Growth: Environmental Impacts

if growth is pursued with little regard to its impact on the environment, it can result in pollution, depletion of non-renewable energy sources and damage to the local environment. However, an economy with a higher level of growth may have greater capacity to invest in environmentally friendly technologies and stronger environmental protections.

Aggregate Supply:

the total quantity of goods and services that all producers in an economy are willing and able to supply at various price levels over a specific period

- determined by the quantity and quality of the factors of production.

- When aggregate supply increases an economy can grow faster

An increase in aggregate supply can lead to an increase in total output(eco growth) and a reduction in the general price level(deflation)

Aggregate supply can be increased when a higher level of output can be produced for the same cost.

How can Aggregate Supply be increased?

Population growth - through increased immigration or birth rates.

Discovery of new resources

Workers acquiring new skills

Increased capital

Adoption of new technology

Measures to improve efficiency

Government policies

Trends in The business cycle:

Trough

Recovery/Upswing

Peak/Boom

Downswing

Trough:

- output + employment reach lowest levels and income levels at their lowest

1990/91 recession

2008/9 GFC - but not technically a recession

Covid 2020

Recovery/Upswing:

Expansion of economies level of output + employment, heading towards full employment

2009/10 - real GDP up by 23 percent, unemployment down from 5.8 - 5.1

2020/21 after covid

Peak/Boom:

Economy grown to capacity + output, income, employment at max. AD > AS and inflation MAY arise because resources are scarce + prices bid up by competing users

2003/4 - GDP = 4%, unemployment rate below 5% but inflation rose to 3.2% in 2005

2006 - 8 - strong domestic demand

2010 - 12 - LGE up, mining investment + resource exports went up

Downswing:

Falling output + employment and emergence excess capacity spending falls in a downswing + unemployment rises as AD is insufficient to generate full employment

2014/15 - lowest

2015/16 - decline in mining investment

2022/23 - inflation: 7.8% in dec 2022 but then 7% in march 2023

Policies to sustain Economic Growth:

Macroeconomics (fiscal and monetary) influence the level of aggregate demand in the short term, while microeconomic policies influence the level of aggregate supply in the long term.

Unemployment:

the situation where individuals who are able and willing to work cannot find a paid job

- a major cost to an economy, because it results in the opportunity cost of lost production, as well as slower economic growth, increased social welfare payments and a loss of taxation revenue.

- Unemployment leads to long-term social costs including increased inequality, poverty, family problems, crime and social division.

Labour Force:

population aged 15+ who are either working or actively seeking work, i.e. employed + unemployed.

Included

Aged 15 and over

Employed at least one hour per week

OR

On paid leave, strike or workers’ compensation

OR

Unemployed – actively seeking work and available to start work.

Not Included

Retired from the workforce

Aged under 15

Performing full-time domestic duties

Full-time, non-working students 15+

Without a job but not available for work or not actively seeking work (e.g. due to illness)

Labour force participation rate:

percentage of the working age population (15+) in the labour force (employed or unemployed).

The participation rate in Australia fell to as low as 62% in May 2020, a fall of 2% over the year, as people stopped looking for work during the COVID-19 pandemic.

Australia's participation rate sits at 66.9% in September 2025

Summary of Unemployment Trends:

- Unemployment spiked in the early 1990s due to a major recession and structural changes in industries.

- Gradual decline in unemployment from the mid-1990s to late-2000s, supported by economic growth and the mining boom.

- The GFC caused a brief rise in unemployment, but the recovery was relatively quick compared to other countries.

- During the 2010s, unemployment remained fairly stable at a moderate level.

- Growth in part-time and casual work led to higher underemployment and workforce casualisation.

- Both unemployment and underemployment rose sharply during the COVID-19 pandemic but recovered strongly afterward.

- The labour market became extremely tight post-COVID, though it has begun to soften as the RBA tightens policy to curb inflation.

- Productivity growth affects unemployment trends — in the short term, higher productivity can raise unemployment, but in the long term, it supports job creation.

- Labour force participation is expected to gradually decline over coming decades due to an aging population.

- Cyclical factors like weak demand and low wage growth may discourage jobseekers from participating in the labour market.

Types of Unemployment: SLUSHH FC

Structual

Cyclical

Frictional

Seasonal

Hidden

Underemployment

Long term unemployment

Hard core unemployment

Structual unemployment

caused by changes in technology or the pattern of demand for goods and services workers find that the skills previously useful in declining industries do not match the job opportunities opening up in emerging industries → can be improved by investing in education + retraining programs

Cyclical Unemployment

caused by a downturn in the level of economic activity → falling demand means fewer employment opportunities - can be improved through macro policy

Frictional Unemployment

people who are temporarily unemployed as they change jobs or circumstances (e.g., school leavers, people seeking a change in careers) → can be improved by more efficient job matching services.

Seasonal unemployment

occurs at predictable and regular times throughout the year due to the seasonal nature of some kinds of work (e.g. fruit pickers) → official unemployment figures are seasonally adjusted to take these fluctuations into account.

Hidden Unemployment

Workers who have given up looking for employment

- shows a decline in the labour force participation rate but NOT included in unemployment stats because they do not fit the ABS definition of unemployment

Underemployment

people who work less than full-time (38 hours per week) but would like to work longer hours. NOT counted in the unemployment figure.

Long Term Unemployment

people who have been out of work for 12+ months, usually as a result of prolonged structural unemployment. These people find it hard to get a job, even when the economy picks up.

Hardcore Unemployment

people who are out of work for so long that employers consider them unemployable because of their personal circumstances (e.g. disability, drug abuse, anti-social behaviour).

Causes of Unemployment: DIM CRIST PI

Deficiency in aggregate demand

Macroeconomic policy stance

Constraints on economic growth

Rising participation rates

Structural Change

Technological Change

Productivity

Inadequate levels of training and investment

Increased labour costs

Inflexibility in the labour market

Deficiency in aggregate demand:

since the demand for labour is a derived demand, when demand for goods is low, businesses reduce supply and thus need less workers = cyclical unemployment.

Macroeconomic policy stance:

influences cyclical unemployment → expansionary stance aims to increase economic growth and job creation.

Contraints on economic growth:

inflation and CAD. timelags, political and pressure groups → reduces confidence in the economy and reduces the level of AD causing higher unemployment

Rising participation rates:

increase short term unemployment (common during an economic recovery).

Structural Change:

causes job losses in inefficient industries (e.g. automotive industry in 2017) or job creation in emerging industries (e.g. mining in mid-2000s).

Currently: higher-skill level jobs, shift towards services, growing use of automation, renewable energy

Technological change:

can result in the substitution of capital for labour and redundancy of some workers due to change in work skills required or the creation of new jobs

Productivity:

high productivity growth increases short-term unemployment but reduces long-term unemployment.

Inadequate levels of training and investment:

skills shortages especially due to the dramatic fall in the number of people in traineeships or apprenticeships makes Australia reliant on skilled migrants to fill job vacancies.

Increased labour costs(wages):

due to a shortage of skilled labour, rise in minimum wage, rise in labour on-costs (e.g. superannuation and leave entitlements) or a wages breakout caused by excessive wage demands however, more recently, low wage growth has been a problem instead of excessive wage growth.

Inflexibility in the labour market:

If employees lack the skills, mobility, or willingness to adapt to new roles or industries, firms cannot fill vacancies—even when jobs exist—creating structural unemployment. Combined with high minimum wage rates it makes it less attractive for employers to hire less skilled workers.

NAIRU:

Non accelerating inflation rate of unemployment - the level of unemployment at which there is no cyclical unemployment - means there is full employment

See notes for this

What does the GOV do at different levels of the NAIRU if they want to reduce unemployment?

If the economy is AT NAIRU, the economy is operating at full employment as there is no cyclical unemployment. Therefore any policy that increases aggregate demand will only result in increased inflation and thus, the gov should use microeconomic policies such as labour market reforms to improve the flexibility, mobility and skills in the labour market in order to reduce structural or frictional unemployment.

If the economy is ABOVE the NAIRU, the gov should utilise macroeconomic policies such as fiscal and monetary in order to increase the demand for labour and reduce cyclical unemployment

If the economy is BELOW the NAIRU, the level of unemployment is too low where in there is increased upward pressure on inflation, therefore the economy should implement contractionary macro policies in order to reduce the level of demand

Main groups affected by Unemployment: YIOSPP

Youth - employers seek employees with skills and experience

Indigenous Australians - low literacy and high rates of welfare dependency

Older Australians - age based discrimination

Specific regions suffer higher unemployment rates than others - lower access to things in rural areas compare to metropolitan areas

People born outside Australia - language barriers

People with low levels of educational attainment - no skills or expertise

Economic Costs of Unemployment: Triple L OC

Opportunity cost of lost output and income

Lower living standards

Loss of human capital

Costs to the government

Lower wage growth

Opportunity cost of lost output and income:

as the economy is operating below its PPF lower total output means lower household incomes and expenditure, which may lower sales and profits and lead to reduced business investment, production and economic growth.

Lower living standards:

people out of work will have lower incomes (reliant on social welfare payments) and people in employment will need to pay higher taxes to cover the cost of the welfare payments. Production of both consumer and capital goods will be lower, resulting in lower living standards

Loss of human capital: Hysteresis

Hysteresis - the process whereby unemployment in the current period results in the persistence of unemployment in future periods as unemployed people can lose their skills, job contacts and motivation to work.

Costs to the government:

falling incomes associated with unemployment will generate less tax revenue, and at the same time, the government will be burdened with increased transfer payments to the unemployed as well as the cost of retraining and labour market programs deterioration of budget balance and less equal distribution of income.

Lower Wage growth:

higher levels of unemployment mean that there is an excess of labour supply, meaning there are more workers competing for fewer jobs, so business do not need to offer higher wages to attract staff. Wages also do not get reduced because they are set through enterprise agreements or industrial awards and since workers have low bargaining power , firms can keep wages at a minimum without risking losing employees, reducing wage growth across the economy. Therefore, higher unemployment leads to slow wage growth rather than wage reductions.

Social Cost of Unemployment: Inequality

unemployment tends to occur more frequently among lower-income earners in the economy, such as the young and unskilled → these people become relatively worse off compared to higher-income earners → poverty and inequality in the income distribution → poverty trap.

Can lead to:

Financial hardship and poverty

Increased debt levels

Homelessness

Family tensions and breakdown

Loss of work skills

Increased social isolation

Increased levels of crime

Erosion of confidence and self-esteem

Poor health, mental illness and higher risk of suicide

Inflation

a sustained increase in the general level of prices in an economy. The most widely used measure of inflation in Australia is the CPI.

Consumer Price Index(CPI)

summarises the movement in the prices of a basket of goods and services weighted according to their significance in the average Australian household.

- Gives a good indicator of overall movement in prices in the economy and reflects the general changes in the cost of living

- Excludes certain household spending such as existing property prices, mortgage interest rates and consumer credit charges.

Headline inflation rate

Official rate of inflation(headline) is calculated using the CPI but it can be a misleading indicator of ongoing price pressures in the economy because it includes some goods and services whose prices may be highly volatile or may be affected by one-off factors such as fruit or petrol prices

Underlying inflation(core)

removes the effects of one-off or volatile price movements measures of underlying inflation tend to be less variable than headline inflation.

To calculate: RBA averages the trimmed mean + the weighted median

Trimmed Mean

an expenditure weighted average of the middle 70% of CPI price changes. Excludes the top 15% and bottom 15% of volatile goods

Weighted Median

the price change in the middle of the ordered CPI distribution, also taking expenditure weights into account. The median of the CPI

TRENDS of inflation:

SEE NOTES

Causes of Inflation: DIIC

Demand Pull inflation

Cost Push inflation

Imported Inflation

Inflationary expectations

Demand Pull Inflation:

occurs when aggregate demand or spending is rising while the economy is reaching its supply capacity. Therefore, the increase in demand leads to higher prices instead of an increase in supply thus resulting in inflation.

Cost Push Inflation:

occurs when an increase in production costs causes producers to pass on those expenses in the form of higher prices to consumers, thus raising the rate of inflation.

Imported Inflation:

Inflation transferred to Australia through international transactions, primarily through rising import prices.

- occurs when the prices of goods and services bought internationally increase, making it more expensive to produce and thus resulting in higher prices for consumers.

- Can also occur if the AUD depreciates and it costs more to buy the same goods. Therefore, imports become more expensive and production costs increase = higher prices for consumers

Inflationary Expectations:

The expectation for inflation to occur in the future causes consumers to increase spending in the short term in order to purchase products before prices increase, yet this leads to demand pull inflation.

If firms expect that demand will increase they may raise prices in order to maximise profits which can also lead to inflation

If employees expect inflation to increase, they will negotiate for higher wages which leads to increased expenses which businesses pass down to consumers = cost push inflation

Positive Effects of Inflation:

Reduces the likelihood of deflation and is beneficial for speculators who purchase assets and sell them at higher prices before the inevitable collapse of the speculative boom

Deflation

a general decrease in the prices of goods and services, leading to an increase in the purchasing power of money. It is typically caused by a decrease in demand, an increase in supply, or a contraction in the money supply.

Why is Deflation bad for the economy?

- Causes consumers to delay purchases which reduces consumer spending and results in an economic downturn

- Makes borrowing less attractive because the value of money increases over time = debt repayments become more expensive as people are repaying loans with money that's worth more than when it was borrowed. This increases the real value of debt and discourages borrowing - lowers economic growth.

- It makes hiring more workers less attractive because businesses experience lower profits due to lower prices so they cut costs. If nominal wage rates stay the same and real wages increase(workers are paid the same amount but the purchasing power of that money is higher as prices have fallen.) = higher rates of unemployment

Negative Effects of Inflation: EU WILD

Economic growth and uncertainty

Wages

Income Distribution

Unemployment

Loss of international competitiveness

Deterioration in government budget outcomes:

Inflation: Economic growth and uncertainty

High inflation makes producers uncertain about future prices and costs which discourages business investment and spending in order to minimise the effect of inflation on themselves

- high inflation encourages purchases of non-productive assets, while low inflation restores incentives to invest in long-term productive assets.

Higher inflation distorts consumers' decision to spend or save disposable income as they suffer a loss in purchasing power and real wages, adversely affecting consumption growth.

Nominal Wages

the dollar amount an employee is paid not adjusted to inflation

Inflation: Wages

During periods of higher inflation, employees will seek larger wage increases in order to be compensated for the erosion in the purchasing power of their nominal wages. = wage price spiral

if inflation goes up but pay doesn't increase you technically experience a pay cut

Wage price spiral

if wages increase, people spend more which raises inflation which leads to increased demands for wages creating a constant loop