Economic Growth, Inflation, and Unemployment

What is economic growth?

An increase in the production of economic goods and services over a given period of time.

List the direct costs of unemployment

Reduced income for individuals (lower living standards)

Increased government spending on welfare

Reduced tax revenue

Less output for the economy

How is GDP defined?

The total market value of goods and services produced in Australia after deducting the cost of goods and services used up in the process of production.

What is the GDP formula?

GDP = C + I + G + (X - M), where C is consumption, I is investment, G is government spending, X is exports, and M is imports.

What percentage of GDP does consumption expenditure represent?

Consumption expenditure represents the largest category of GDP at 55%.

What are the two categories of government purchases?

Current and capital expenditure.

What does net exports refer to in GDP?

Net exports includes exports of goods and services added to GDP, whereas imports are deducted.

What is the target economic growth rate in Australia?

3.5%.

What is nominal GDP?

Measured in today's prices, it calculates the market value of total production at current prices.

What is real GDP?

Measured in constant prices, it adjusts for inflation and focuses on changes in the quantity of output.

What is the GDP change formula?

GDP % Change = (GDP (NEW) - GDP (OLD)) / GDP (OLD) x 100.

What are the three P's of economic growth?

Population, Participation, and Productivity.

What are the benefits of economic growth?

Higher income and material welfare

Greater employment and business opportunities

Innovation.

What are the costs associated with economic growth?

Inflation

Environmental sustainability issues

Negative externalities

Competition in the workforce.

What is the definition of inflation?

A persistent and appreciable rise in the general level of prices.

What is the Consumer Price Index (CPI)?

The headline measurement of inflation based on a sample of goods and services purchased by households.

Define and describe cyclical unemployment

“Involuntary unemployment as workers lose their job during an economic downturn”

Follows the business cycle, as the demand for labour is derived from the demand for goods and services

Construction, retail, and hospitality jobs are difficult to get during a downturn

What is NAIRU?

Non-accelerating inflation rate of unemployment, the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise.

List the social costs of unemployment

Poverty

Mental health issues

Stress within the family

Lack of community/connection with others

Define and describe frictional unemployment

"Voluntary employment that sees workers leave one job to seek another that can offer better pay or conditions”

Includes university students and seasonal unemployment

Define and describe structural unemployment

“Involuntary unemployment where workers lose their job due to structural factors in the economy or industry”

Simple/unskilled jobs, and older workers at risk

Creates many new job opportunities

Natural Rate of Unemployment

Sum of frictional unemployment and structural unemployment

Labour Force

The amount of people who are currently hold paid work, or actively seeking work at a certain point in time, above the age of 15

Participation Rate

The proportion of the people of working age who are in the labour force

PR = Labour Force / Pop aged 15+

Unemployment Rate

The proportion of people in the labour force that willing and able to work, but have been unsuccessful in holding paid work for at least one hour per week.

UR = Unemployed / Labour Force

Underemployment

The proportion of people who hold paid work, but would be willing to work more hours per week

Underutilisation Rate

The sum of the unemployment rate and the underemployment rate

Why does inflation and unemployment have a negative relationship?

When unemployment is low, more people are working and consuming, boosting demand and pushing prices up, leading to inflation.

When unemployment is high, less people are working and consuming, decreasing demand, hence slowing down inflation

Describe trimmed mean

The lowest and highest 15% of the data is removed, focusing on the core price changes - removing extreme price changes

Describe weighted median

Focuses on the middle price movement - 50% is spent on higher inflation items, and 50% is spent on lower inflation items - removing outliers

Describe cost-push inflation

If the cost of production increases due to a supply chain disruption or higher price for resources, the price increase is pushed onto the consumers. For example, if the oil prices increase, the price for petrol will increase for consumers

Describe demand pull inflation

Occurs when there is too much demand chasing too few goods - the supply is unable to keep up with demand, which usually occurs in a strong economy or expansion phase

What doesn’t GDP measure?

Wellbeing

The improved quality of goods over time

Important activities in the economy e.g. volunteeering

Outline “population”

An increase in population increases demand and the size of the labour force. Immigration offers the translation of worker skills, who are often of working age, and contribute to the fiscal policy

Outline “participation”

A higher participation rate contributes to economic growth by:

Work provides financial security

Greater tax revenue

Skill level increases

Reduced reliance on welfare

Outline “productivity”

Productivity is the amount of output produced from a given amount of input. It is increased if there can be more output produced by the same amount of input. This can occur due to capital deepening (increasing capital stock per worker) and multifactor productivity (improving worker skills)