Economics U3Aos2

Macroeconomics

material living stanards

Household consumer ability to access goods and services

Measured/impacted by:

1.      Real GDP,

2.      Disposable incomes

3.      Distribution of goods services and incomes – an uneven distribution may mean that some individuals gain most of the benefits of GDP growth, while others gain little or no benefit. The result would be greater inequality in society.

4.      Rapid price rises for goods and services – inflation can erode the purchasing power of consumers.

5.      Jobless or unemployment rate – loss of employment results in loss of income, reducing material living standards

Non material living standards

factors other than purchasing power, that affect a person’s wellbeing, ---- impacted by environmental quality, physical and mental health, life expectancy, crime rates and literacy rates

1. Nonmaterial living standards (quality of life) – factors other than purchasing power, that affect a person’s wellbeing, ---- impacted by environmental quality, physical and mental health, life expectancy, crime rates and literacy rates

2. Environmental quality – to what extent resources are available for sustaining life and negative externalities exist in the natural environment

3. Physical and mental health - health outcome affect the ability of a person to access goods and services

4. Crime rates - crime imposes a material cost on all citizens of a county

5. Literacy rates – a literate person is more capable of participating in and contributing to the market economy

Relationships between material vs non-material living standards

Conflicting relationships occur where there is a trade-off, and progress in one area of wellbeing undermines the other.- (Health and social trade off. Decreased leisure time has been eroded for many as work hours have increased.)

Compatible relationships exist where progress in one area of wellbeing helps to promote the other areas- (Longer life expectancy – higher incomes can be used to extend life expectancy and reduce daily suffering from pain and curable ailments)

Economic activity

Economic activity is the total spending, production and employment in the economy

The level of economic activity and economic activity

Pace or speed at which productive activity is occurring in the economy.The level of economic activity in the Australian economy is unstable because it fluctuates over a period of time, following a cyclical pattern

Impact of economic activity on living standards (material and non material)

material living standards:

1.       The volume and quality of goods and services produced and available to the population in order to help satisfy its needs and wants may increase or decrease.

2.      The level of employment opportunities, the number of jobs and the unemployment rate can improve or deteriorate.

3.      The level of average incomes, prices, purchasing power and consumption. levels per person can move up or down.

Non- material living standards

The level of economic activity can affect non-material living standards by impacting upon ecological sustainability, urban congestion, leisure time and family relationships

GDP and real GDP

GDP - Final market value of all goods and services produced in the Australian economy over a given period. More goods and services mean national income and expenditure will be higher.

Real GDP -GDP adjusted for inflation. Removes the impact of price changes to give the current value of production. Economic activity is normally measured by chain volume gross domestic product (or real GDP). This measure accounts for variations in and between the production approach, the expenditure approach and the incomes approach

The business cycle

The cyclical pattern of ups and downs in the level of economic activity is referred to as the business cycle

The phases:

1. The peak:

   • strong economic growth, high confidence, reduced savings and confidence to increase debt

   • Expanded production and increased derived demand for labour mean that unemployment is low

   • inflationary pressure increases as the economy is stretched beyond its productive capacity, and shortages develop

   • Tight labour markets lead to increased wages that feed into inflation, whilst interest rates and other assets such as shares and property increase

2. The contraction phase

   • As asset bubbles develop, Inflation and growth become unsustainable

   • falls in confidence and consumption has households save and leakages begin to grow relative to injections

   • An economic growth shows some resources become unemployed and inflation begins to fall

3. The trough

   • Inflation is low due to correction, unemployment is high, GDP is very low or even negative

   • lowest point of the business cycle of economic activity.

   • If national output actually falls, indicates recession, leading to increased levels on unemployment and reduced rates of inflation and spare capacity across the economy

4. The expansion phase

   • An expansion in economic activity or production, starting slowly first then speeding up

   • The ideal level of economic activity is called domestic economic stability. Here strong and sustainable rates of economic growth of around 3 per cent per year, low unemployment of 4.0-4.5 percent, and a low annual inflation of between 2 and 3 percent, are achieved simultaneously

Stagflation

Economic simultaneously experiences a low level of production, combined with both high-cost inflation and structural unemployment. This occurred during 1970-77 when, although there was a very slow rate of GDP growth and a high unemployment rate of 6 percent, there was also high inflation averaging 15 percent a year

Happens due to:

1. Supply Shocks – A major event (like the 1970s oil crisis) reduces available resources, making production expensive.

2. Poor Economic Policies – If governments or central banks mismanage interest rates, spending, or wages, it can create stagnation and inflation simultaneously.

3. Wage-Price Spiral – If prices rise, workers demand higher wages, which pushes costs even higher, fueling inflation while jobs decline.

Aggregate demand

Total annual spending on new final australian goods and services

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

Changes in the general level of prices (inflation as measured by the CPI) can have a negative impact on AD by reducing purchasing power (lower quantity of goods and services as real income falls) and international competitiveness (reduced demand for exports, increased demand for imports as relative prices increase).  

Factors influencing Aggregate demand

IEO DBC RC- interest rates, exchange rates, rate of economic growth overseas, disposable income, business and consumer confidence, inflation

Aggregate supply

Total volume of goods and services that all suppliers have produced over time. The measure of an economy’s ability to meet current demands of society by making available goods and services.

Factors influencing the level of aggregate supply

TPG ECC QQP

Technological changes, productivity growth, government regulations, exchange rate, climate conditions, quantity and quality of factors of production and costs of production

Inflation

Inflation is the sustained increase in the general or average price level over time. As a result, money gradually loses its purchasing power. Inflation is therefore seen as being undesirable

Goal of low and stable inflation (price stability)

The government’s goal of low inflation (stability of the Australian currency) is achieved when general prices for goods and services are increasing fairly slowly and at a rate less than that of our trading competitors. If the goal of low inflation is achieved, other economic goals and, ultimately, improved living standards, are more likely to be achieved.

The RBA “seeks to keep consumer prices inflation of the economy to 2-3 percent, on average, over the business cycle

Inflation, disinflation and deflation

Deflation is a decrease in the average price level over time (opposite of inflation). Deflation causes consumers to delay purchases causing card production to fall negatively impacting employment, income and living standard

Disinflation refers to a fall in the rate of inflation (eg 2.2% to 1.1%).

Measurement on inflation, CPI

The ABS measures the inflation rate with the most common indicator being the consumer price index (CPI)

The CPI measures quarterly changes in the retail prices of locally made and foreign made goods and services(100000 items) that represent a high proportion of the expenditure of metropolitan households living in the capital cities.

Headline vs underlying(core) inflation

Headline rate of inflation- the rate of inflation as captured by all goods and services contained in the CPI

Underlying (core) rates of inflation – the attempt to remove irregular or temporary price changes that give a misleading view of inflationary pressure. Removing the most volatile items through the use of the trimmed mean and weighted mean.

Causes of inflation- (cost and demand inflation)

Demand inflation is caused by excessively strong spending or AD in an economy, leading to widespread shortages or boom conditions. Here, strong aggregate demand factors are pushing up spending in the economy when there is little spare productive capacity available, preventing firms from collectively lifting output, lifting prices instead

Cost inflation represents inflation that has been caused by ‘supply side’ pressures in the economy. This form of inflation occurs when the costs of production increase, leading to higher prices for consumers. Factors such as rising wages, increased raw material costs, and supply chain disruptions can contribute to cost inflation.

Economic growth

A growing economy is desirable, as it is associated with more jobs, higher incomes and improving living standards. The rate of economic growth is measured by the annual percentage rise in gross domestic product (GDP).

The goal of strong and sustainable economic growth

Strong and sustainable economic growth can also be seen in light of the natural environment. We should aim for a rate of economic growth that allows us to 'look after' the planet and protect the living standards of future generations.  Generally considered to be within the range of 3 - 3.5% pa.

 

Measurement of the rate of economic g

Economic growth also creates job opportunities, helping to the lower the unemployment rate. As businesses grow and expand, derived demand for labour increases.

Economic growth will lead to an increased ability of government to provide essential services (e.g. hospitals, education, defence, etc.) as greater taxation revenue (e.g. income and company tax) will allow for these additional services to be funded.  Low growth means services are reduced or increased deficits, higher borrowing and interest payments – reducing living standard

Consequences of not achieving the goal of strong and sustainable economic growth and its effects on living standards

environmental degradation, external pressures, high inflation if growth is too high, and high unemployment if growth is too low

If growth is too low unemployment tends to increase (inverse relationship) and as the population increases the would require increased need economic growth to ensure real GDP per capita, and therefore material living standards, are decrease.

If growth is too high (i.e. not achieve "sustainable") risk environmental degradation, current account deficits and increasing debt as well as unacceptable levels of inflation

Employment

High levels of employment:  

• seen as a beneficial

• labour resources are being used productively to life national output.

• allows individuals to gain income and enjoy better material living standards

The unemployed are prevented from contributing to national production, are a burden on taxpayers and usually cause an inequitable distribution of income

The goal of full employment- NAIRU(natural-state-of-unemployed)

The goal of full employment refers to the lowest rate of unemployment that exists (with no cyclical unemployment) without inflationary and external pressures. This is known as the non accelerating inflation rate of unemployment (NAIRU). This is said to be the largest rate of approx 4.25% unemployment(or natural unemployment). Will be some structural or hardcore unemployment at this level

Unemployement rate

Number of unemployed workers expressed as a percentage of the labour force (emp + u/e)

Participation rate

The percentage of the population that is over 15 years of age and who are a part of the labour force (i.e those who are prepared to work and seek employment)- Labour force divided by working age population.

Hidden unemployment

People who would like to work but who are discouraged from seeking employment, possibly because of the repeated rejection of job application. These people leave the labour force and are no longer counted in the unemployment figure because they are no longer actively looking for work

Disguised(under) unemployment

Individuals have jobs but are not working to capacity. Typically, this refers to people in part time jobs with limited hours

Labour force underutilisation rate

measure of the labour force that is not working to its capacity. It is calculated by adding the number of unemployment and under employed and dividing by the labour force

Long term unemployment

unemployed for more than one year

Cyclical unemployment

AD is low and the economy is operating below capacity. Lower derived demand for labour due to lower levels of production of goods and services

Structural unemployment

occurs because of the changing composition and structure of industry with an economy. This change may arise because of the introduction of new technology, cost cutting by firms or changing fashions. Essentially, a mismatch between the skills demanded and the skills possessed by the unemployed.

Frictional unemployment

Occurs when people become temporarily unemployed between leaving one job and consuming another

Seasonal unemployment

occurs for workers whose skills are only required at certain times of the year e.g. Ski instructors.

Hardcore unemployment

occurs due to the individual characteristics of the individual e.g. criminal records, drug addictions, etc

Consequences of unemployment

Loss of GDP- higher unemployment will result in lower demand (as a result of lower incomes) and therefore lowers production, bringing about lower GDP. Also, those who are unemployed are wasted resources and will therefore limit the amount of goods and services that an economy can produce

Loss of tax revenue- the higher the unemployment, the more tax revenue that government forego… people who don’t work play little (if any) income tax

Reduction in living standards- unemployed people will have lower material living standards as their lower incomes will reduce their ability to purchase goods and services. Nonmaterial living standards who also fall as their level of self-worth and social connectedness will suffer

Greater income inequality- as unemployment rises, more people will be existing on lower incomes and receiving a reduced share of the national income / wealth. “The gap between high- and low-income earners will widen”

Low unemployment and inflation- as unemployment falls, tight labour markets will led to higher wages as employers compete for labour. Growth in wages will put excessive upward pressure on prices especially where unemployment falls below NAIRU