Australia's economic performance

the business cycle

The Business cycle refers to the recurring fluctuations, up and down, in the level of economic activity over time

economic activity

the actions of individuals, businesses or governments which generate production, employment, income and spending in the economy.

boom (peak)

short period of rapid growth

Recession (contraction)

economic growth falls for 2 or more consecutive quarters (6+months)

Trough

trough is a low turning point or a local minimum of a business cycle.

upswing (expansion)

strong growth in GDP and employment.

Depression

extreme recession lasting 2 or more years.

effects of rapid economic growth

• High level of business confidence

• Low unemployment

• Consumer confidence

• high inflation

• damage to the envionment

effects of recessions

• Consumer confidence falls

• Business reduce output

• Unemployment/underemployment increases.

• Lower level of income in the economy - less spending

• Less demand for imports

• Less inflation

Gross Domestric Product (GDP)

GDP is a measure of the total values of all goods and services produced in an economy over a year.

* Gross means the total figure ($) before deductions such as tax.
* Domestic means within a country eg Australia
* Product means the final goods and services.

target GDP rate

2% or higher, and the current rate is 2-3%

who measures the GDP

Australian Bureau of Statistics (ABS)

GDP importance

The GDP is measured every quarter by the ABS, and shows increases and decreasing in the business cycle

Economic growth

A significant increase in the total production of goods and services in an economy over a period of time. the target rate if between 2-3%

benefits of increasing economic growth

· Improves living standard.

· More employment

· Higher wages

· More spending on goods and services

· Tax revenue and government spending increase

disadvantages of declining economic growth

· Economic recession

· Economic depression

limitations of GDP as a measure

Factors such as leisure time and good health are not considered, which some people may consider important when measuring their countries economic performance.

Real GDP

GDP that allows for inflation.

CAPITA GDP

is GDP per head of population.

Factors of production with GDP

The GDP depends upon the quantity and quality of the factors of production.

Inflation

Inflation is an increase in the general level of prices paid for goods and services over a certain period of time.

inflation rate

the target rate is 2-3%, the current rate is 5.4%

Types/causes of inflation

Demand Pull inflation, Cost push inflation and Government printing money

Demand pull inflation

there is an increase in demand and the supply remains the same or decreases. This happens when there is consumer and business confidence, demand for exports, low interest rates and low taxation

Cost push inflation

when overall prices increase due to increases in the cost of wages and raw materials. This happens when wages, tax, interest rates, import prices and resource prices increase.

Consumer Price Index (CPI)

CPI measures quarterly changes in the price of a 'basket’ of goods and services which account for high proportion of expenditure. The 'basket' changes based on goods and services of the time

4 Inflation impact on the economy

uncertainty, non-productive decisions, international competitiveness, purchasing power

Uncertainty caused by inflation

business decisions become more uncertain when inflation makes it difficult to determine the costs of production. this increases the risk associated with investment and may lead to reduced output and employment opportunities in the longer term

non-productive decisions

As the inflation rate climbs, people are more likely to stockpile goods and let emotions drive financial decisions, which can drive up prices even more. This has a negative impact on the potential economy as no one is making investments

international competitiveness

A country's exports are at a disadvantage in relation to overseas competitors when domestic inflation is greater than overseas. The price of the Australian product would be higher than their competitors and this may reduce the volume of exports.

Purchasing power

Inflation reduces purchasing power or real income. that is the amount of goods and services which can be bought with a set amount of income which can impact the standard of living.

Winners of inflation

High income earners who income raises at the same rate if not more than inflation, borrowers and importers because the price of imported goods may be cheaper than those in Australia

Losers of inflation

low to middle income earners who income does not increase as fast as inflation, bank savers and exporters because as goods become more expensive so demand will fall.

the labour market

employed + unemployed \= the labour force

Employed

working at least one hour a week, this includes anyone over 15

Unemployed

ready to start work and actively taking steps to find a job

Underemployed

measure of the total number of people in an economy who are unwillingly working in low-skill and low-paying jobs or only part-time because they cannot get full-time jobs that use their skills.

The labour force

total number of people in Australia willing and able to work. Excludes those who have retired, are not looking for a job and those who are permanently unable to work

Full employemnt

definitions changes based on economic circumstances. the traditional definition is an unemployment rate of 5%

technical full employment

around 4.5% unemployment rate anything below this is said to cause an increase in inflation

Broader aspiration full employment

good, secure, well paid jobs for all who want one

how the unemployment rate measured

the percentage of people in the labour force who are unemployed

6 types of unemployment

frictional, cyclical, seasonal, hardcore, technological, structural unemployment

frictional unemployment

when people move between jobs, so they are voluntarily unemployed for a small amount of time

Cyclical unemployment

results from a downturn in business activity such as consumers buying fewer goods. As a result businesses reduce output and hire fewer people so employees are made redundant

technological unemployment

occurs where either new inventions or new ways of doing things result in a reduced need for labour.

structural unemployment

can refer to a number of situations such as a lack of employment in a particular district, a shortage of jobs in an industry which is in decline, unemployed people lacking suitable qualifications for available work

seasonal unemployment

arises because some jobs are only available during part of the year for example fruit picking

hardcore/permanent unemployment

unemployment causes by age, physical or mental disabilities or personal characteristics that make it hard for a person to get and keep a job.

Hidden unemployment

occurs when people are not counted as unemployed in the formal ABS labour market statistics, but would probably work if they had the chance.

Economic effects of high unemployment

output declines because fewer are working, incomes go down, consumption goes down, government spending on welfare goes up, investment goes down

so collective wants aren’t met and the eocnomy will shrink and contract

political effects on high unemployment

Government has to come up with policies such as education, training and international relations to try and fix the issue

social effects of high unemployment

People go into debt, stress and low self esteem, lower standard of living, more crime, family breakdowns

Key indicators used to measure economic performance

sustainable economic growth, price stability, full employment, efficient allocation of resources, equatibale of income distribution

Sustainable economic growth

a rate of growth that can be maintained without creating significant problems now in the future.

price stability

maintaining low inflation over the course of the business cycle.

Full employment

the natural rate of unemployment - that is no cyclical unemployment in the economy.

efficient allocation of resources

the government uses its powers to allocate resources in a way that achieves social objectives. Eg promote the sustainable use of resources.

equality of income distribution

to increase equity of equality of opportunity in the community and enable all members of society to achieve an acceptable standard of living.

productivity

measures what can be produced (output) from a given number of resources (input)

Efficiency

Improving productivity so you can have optimal use of resources

labour productivity

measures the amount of goods and services that a worker produces in a given amount of time

5 ways to increase labour productivity

management, training, workplace culture, performance feedback and employee incentive schemes

Management

managers are responsible for coordinating employees and using capital resources to optimise profit, productivity depends on the quality of manager

training

employees who develop better skills and knowledge are likely to improve labour productivity. This can be done though job rotation, mentoring, secondment

workplace culture

If an organisation is considered to be a good place to work, labour productivity will tend to be higher. To have better workplace culture businesses should give support to employees and have a vision.

appraisal and feedback

This provides important feedback to the employee and make them accountable to the business which may assist in improving job performance. This should be regular.

employee incentive schemes

Employees may be offered a financial incentive over and above their normal wage for meeting agreed performance targets. Incentives can be cash bonuses, shared in the business, vacation days and additional paid leave. This is linked to performance and therefore can improve productivity.

Capital productivity

Capital is used in the production of goods and services and includes such things as machinery, computers, mines, tools, and buildings. Capital productivity measures the amount of goods and services they can be produced using a fixed amount of capital in a given time.

2 ways to increase capital productivity

technological and processes

technology

Businesses can increase their productivity by using equipment that uses the most advanced technology available in order to save time and cost.

Processes

all businesses use a number of processes to produce a product eg a waiter taking an order. If consumers provide feedback the owner must improve business processes. Processes are also used to produce goods, some manufacturing businesses use just in time inventory systems so that materials arrive at the right time without the need to hold vast amounts of stock.

living standards

A living standard is what it's like to live in a country in terms of the material and non-material wellbeing of its citizens. The living standard of a population is measured in two ways: material living standards and non-material living standards

Material living standards

* Material living standards refers to our access to physical goods and services eg cars, houses, food.
* Many people agree that if goods and services to satisfy their needs and wants, life is generally better. Producing goods and services provides citizens with employment and therefore ab income to buy goods and services that improve their lives.

how is material living standards measured

The material living standard is measured by GDP

non material living standards

Non-material living standards cannot be measured is dollar terms and are intangible but affect our enjoyment of life.

The following factors affect are non-material living standards:

· Freedom of speech

· Free elections

· Low levels of crime and discrimination

· Preservation of the environment

· Adequate leisure time

OECD better life index

GDP is an indicator of economic well being that does not take into consideration the environmental costs of producing goods and services. The OECD better life index seeks to provide a more holistic picture of true living standards by measuring progress based on 11 criteria.

Adam smith ideas on why living standards varies

He concluded that the economies of countries that gave people the freedom to work and benefit directly from their labour were more likely to be wealth.He thought the motivation of each citizen to generate profit would create prosperity for the population as a whole

Other factors that affect living standards

* Natural resources
* Trade
* Political stability
* Labour productivity
* Employment
* Health
* Education

Roughly where does Australia rank economically

around the middle 12-13

Interest/cash rate

4.35%

what does Jim Chalmers believe the government should do

Government should align economic goals with social goals

What we want to do is track our progress on a whole lot of indicators, not just the ones on the infographic on the reserve bank

Need to do a better job collectively to track our progress

factors that influence major consumer and financial decisions

price, availability of credit, marketing, age, gender, convenience, ethical and environmental considerations

why do government make policies

Improving living standards is key economic goal of many countries. This is because a higher living standard leads to stronger and more prosperous nation. When citizens are employed, they are buying more goods and services so Governments earns more revenue which in turn can be used on services such as education and health which improve living standard. Governments use policies to improve their economy

macroeconomic policy

An economic policy that affects the whole nation such as Fiscal and Monetary policy

how are macroeconomic policy used

the government uses macroeconomic policy to manage the rate of growth in the economy to promote the economic prosperity and welfare of the Australian people through sustainable economic growth.

fiscal/budgetary policy

The government manages the budget (revenue and expenditure) for the whole of Australia and therefore sets the budgetary policy. The fiscal policy is used to prevent problems that occur when there are changes in the level of economic activity such as high levels of inflation. To prevent these problems the governments has to manage their revenue and expenditure better known as Australia’s Federal budget to stimulate the economy to create more employment, spending and growth.

3 types of government policies

o   Balanced budget – government revenue and expenditure are equal

o   Deficit budget – government revenue is less than expenditure

o   Surplus budget – government revenue is greater than government expenditure

*we currently have a 19 billion surplus but are expecting a 13.9billion deficit

structural deficit budget

the combined cost of healthcare, aged care, the NDIS, paying down debt and funding the defence force takes up one-third of the federal budget. This causes a structural deficit, which means the amount of money the government raises in taxes does not cover the cost of the services it delivers.

monetary policy

the RBA uses the official interest rate as a lever to stimulate (expansionary) our economy when there is low levels economic activity or cool off (contractionary) our economy when there is high levels of economic activity. To achieve low inflation the RBA sets a target range of 2-3% over the course of the business cycle. When this target range is not met the RBA will change the interest rate to stabilise the economy.

microeconomic policy

a policy that affects a particular company, an industry, or a market. it often focuses on promoting competition productivity and efficiency

Deregulation

a microeconomic policy that is the removal of government regulation (rules) in a certain area of the economy. Another example is the deregulation of the telecommunications industry which saw Optus, Vodafone, AAPT and other small providers enter the market in the 1990s, resulting in price decreases and growth in mobile phone and Internet markets.

trade liberalisation

micro economic policy used to open up markets for free trade so that countries can trade without restrictions. Trade restrictions include tariffs (a tax on an imported goods), subsidies (payment by the government to producers to support their business) and import quotas (restriction on the quantity of imported items). It is thought that the removal of these trade restrictions will promote efficiency, as Australian producers must find ways to compete on the world market by cutting costs and becoming more innovative

labour market reform

a microeconomic policy about movement away from government institutions determining wages and working conditions to a system were waged and working conditions are determined directly at the enterprise level.

productivity policy

Productivity can be increased by firms at an individual level. The government can also influence productivity by providing an environment where businesses can thrive. Government policy that can influence productivity in Australia includes:

·      Privatisation of government owned business such as telstra

·      Government policy committed to education, research, and development

·      Innovation policy. For example, the ‘national innovation and science agenda’, or, put simply, an ‘ideas boom’, is a set of federal government policies targeting new businesses and entrepreneurs to secure funding to make their business ideas a reality.

·    Labour market reform, trade liberalisation and deregulation.

training and workforce development policy

Workforce development focuses on improving the workforce so that more can be produced. This may include focus on helping low skilled workers access training programs or it could focus on solutions to address shortage of workers in a particular industry. These policies aim to provide necessary labour resources to produce more goods and services to increase economic growth and the standard of living. One Western Australian workforce development initiative is called Future Skills WA.

Migration policy

The governments migration policy deals with people who apply to the Australian Government to enter the country as well as those who flee their country seeking asylum in Australia. The Australian Government decides who is eligible to come to Australia each year based on criteria. In recent years, the focus of Australia’s migration program has been in migrants to provide skilled labour in areas of need.

Many economists believe immigration boost economic growth, with emphasis on skilled immigrants. Others believe that more migrants will lead to higher unemployment to those at home