External Economics Flash Cards

Macroeconomic Objectives

The Australian Government pursues four primary objectives, chiefly through interest rates (monetary policy, set by the RBA) and the federal budget (fiscal policy).

Sustainable Economic Growth

A rise in real GDP over time achieved without significant inflationary pressure, environmental degradation or unsustainable external imbalances — growth the economy can maintain. No formal numerical target; assessed against Australia’s estimated long-run trend (potential) growth rate, historically around 3% per annum.

Internal Balance

Is achieved when the economy operates at full employment with stable prices.

Full Employment

Cyclical Unemployment is zero and only frictional, structural and seasonal unemployment (natural unemployment) remain (unemployment at the Non-Accelerating Inflation Rate of Unemployment) — not zero unemployment. NAIRU band of around 4-5%; unemployment rate participation rate labour force utilisation rate, job vacancy rate.

Price Stability

A low stable rate of inflation that preserves the purchasing power of money. RBA medium-term target of 2-3% average annual inflation; headline CPI, underling inflation ( trimmed mean/ weight median), inflation expectations

External Stability

A sustainable position in Australia’s transitions with the rest of the world, avoiding excessive current account deficits, foreign debt or exchange-rate volatility that could undermine confidence or growth. No formal target, Sustainability of the current account deficit (CAD) and net foreign liabilities relative to GDP over time. Current account balance as a % of GDP, net foreign debt, trade weighted exchange rate index.

Improved Living Standards

Rising material and non-material wellbeing for the population, covering both the quantity of goods/services availed and the quality-of-life factors such as health, education, equality and environment. No numerical target, Real GDP per capital; Human Development Index (HDI); income distribution (Gini coefficient); life expectancy and education levels; environmental quality measures.

Improved Living Standards

Rising material and non-material wellbeing for the population, covering both the quantity of goods/services availed and the quality-of-life factors such as health, education, equality and environment. No numerical target, Real GDP per capital; Human Development Index (HDI); income distribution (Gini coefficient); life expectancy and education levels; environmental quality measures.

The AD/AS Model: Price and output

The intersection of the AD and SRAS curves determine the equilibrium price level and the level of real output. A rightward shift in AD raisers both price level and output (demand-pull pressure); a left the shift in SRAS (e.g. rising input costs) raises the price level while lowering out output, a cost-push / stagflationary outcome.

Growth

Rises incomes, Unemployment and living standards, but can strain resources and the environment and widen inequality if benefits are unevenly distributed?

Structural Unemployment

Unemployment where the workers skills don’t match available jobs due to changes in industries, tech, or the economy.

Seasonal Unemployment

Occurs when jobs are only available at certain times of the year, such as tourism or agriculture.

Cyclical unemployment

When there is downturn in the economy, leading to reduced demand for goods and services and job losses.

Natural unemployment

Structural, seasonal and frictional.

Inflation

The rate at which goods and services increase over time

Headline Inflation

Overall change in price of all goods and services in the economy, including things with volatile prices such as food fuel.

Underlying Inflation

Inflation after reducing the effect of large or temporary price changes. It gives a clearer picture of the longer-term inflation trend.

Demand-pull Inflation

Inflation caused when demand for goods and services grow faster than economy can supply them.

Cost-push inflation

Inflation cause when businesses face high production cost such as wages, electricity, fuel or materials and pass those costs on through higher prices.

Imported inflation

Inflation caused by goods or input bought from overseas becoming more expensive often because overseas prices rise or the domestic currency falls in value.

Inflation expectations

Self reinforcing wage price behaviour, People expect prices to rise > workers ask for higher wages > businesses have higher wage cost > businesses raise their prices > workers see prices rising and ask for even higher wages > prices rise again.

Consumption Fuction

C = a + bY, C is consumption, a is autonomous consumption, b is marginal propensity to consume, bY is induced consumption.