HSC Economics Topic 3 - Economic Issues

*without environmental sustainability

Economic Growth

An increase in the volume of goods and services (real GDP) that an economy produces over a period of time (or the increase in productive capacity)

Aggregate Demand

Total level of expenditure (total demand) in an economy over a period of time

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

Aggregate Demand = Consumption + Investment + Government Expenditure + Net exports

AD - Consumption

The spending by households: Autonomous - consumption from necessities, Induced/Dependant - chnages depending on level of disposable income (largest contributor to AD)

AD - Consumption: Influences

Income, consumer expectations, interest rates, distribtution of income

AD - Investment

Spending by firms to increase productive capacity

AD - Investment: Influences

Changes in Interest Rates in Australia: fall in interest rates makes purchasing capital equipment cheaper while a rise would raise borrowing costs, changes in government policy (e.g. small business claims), price or productivity of labour, expected demand for their products, general economic outlook, inflation

AD - Government Spending and Taxation

The total expenditure made by the government, used to stimulate areas of the economy, main goal of taxation and spending is used to maintain a sustainable level of economic growth

AD - Government Spending and Taxation: Influences

Economic Conditions - governments may increase their level of spending or reduce the level of taxation dependent on low levels of economic growth.

AD - Exports and Imports

X = expenditure or autonomous spending by foreigners in the Aus economy, M = Expenditure or autonomous spending by Australians on foreign goods/services. When exports are higher than imports, AD increases

AD - Exports and Imports: Influences

Domestic income, overseas income, and exchange rates

Aggregate Supply

Total level of income (productive capacity) when all factors of production are utilised in an economy over a given period of time

Y = C + S + T

Aggregate Supply (Income) = Consumption + Savings +Taxation

Equilibrium

When Aggregate Demand = Aggregate Supply

Equilibrium Equation

S + T + M = I + G + X (consumption cancels out)

The Multiplier

Extent to which an initial change in expendituure (components of AD) is multiplied to result in a proportional increase in national income

Multiplier formula

k = 1/MPS, k = 1/(1-MPC)

Relationship between MPC, MPS and Multiplier

As we save more (Large MPS), we have less impact on the multiplier

As we spend more (Large MPC), we have a larger impact on the multiplier

Measurement of Economic Growth

Measured by the annual rate of change in real GDP

Real GDP

Quantatative measurement of an increase in productive capacity over a period of time, adjusted for the rate of inflation

Calculations for Economic Growth

real GDP (current) - real GDP (previous)/ real GDP x 100

Calculation for real GDP

Nominal GDP x (Base CPI/Current CPI) assume base is 100

Real GDP per capita

Real GDP/Population

Factors of Production as a source for EG - Resources/Natural production

An increase in the quatity of resources causes an increase in supply, factories, mines, and service industries are recquired to be at full capacity in order to better achieve economic growth, productivity of production also increases economic growth

Factors of Production as a source for EG - Labour

Labour shortages or a decrease in the quality of labour can restrict economic growth, productivity of labour also increase economic growth.

Factors of Production as a source for EG - Capital

If there is an increase in capital stock, quality and technolgy it improves prduction methods, high investments supports the use of innovative technolgies, allowing for economic growth, adequate infrastucture, facilitates higher economic growth

Factors of Production as a source for EG - CAD

When CAD grows faster than GDm means more money is flowing out of the NPY component to overseas due to higher net foreign liabilities

Factors of Production as a source for EG - Inflation

Inflation caused by already strong economic growth or supply issues will result in contractionary monetary policy by RBA, reducing economic growth

Government policy options as a source - Macroeconomic Policies

Affect the whole economy and are used to influence the level of Aggregate demand which influences EG in short term

Government policy options as a source - Macroeconomic Policies: Fiscal Policy

Federal spending and taxation powers in federal budget to achieve economic objectives - to increase EG they will increase expenditure, decrease taxation or both, to reduce AG they will decrease expenditure, increase taxation or both

Government policy options as a source - Macroeconomic Policies: Monetary Policy

RBA changes cash cash rate to influence economic growth - to increase EG the cash rate is reduced, to decrease economic growth the cash rate is increased

Government policy options as a source - Microeconomic Policies

Target specific areas of the economy to improve efficiency, influencing AS, so that it can keep up the AD

Government policy options as a source - Microeconomic Policies: improving the level of economic growth an economy can sustain in the long term

Increase in AS leads to increase in outputs and lower prices, lessening inflationary pressures from increases in AD and done through reading the inflationary and CAD problems cause by EG

Government policy options as a source - Microeconomic Policies: Removing Protection

Tariff, subsidies and quote reduction, better resource allocation and export promotion

Government policy options as a source - Microeconomic Policies: Infrastructure reform

Communications, electricity transport

Government policy options as a source - Microeconomic Policies: Labour Reform

Productivity, fair work

Positive Effects of Economic Growth

Improves living standards for individuals and economic development, increased employment oppurtunities fro individuals, increased productivity and technology advancements for firms, increase in taxation revenue for the Gov, increased export revenue for the nation, improvement in the environemnt for the nation

Negative Effects of Economic Growth

Widens income inequality, short term structural unemployment can occur, increased levels of inflation, worsens CAD (pitchford thesis says it’s ok), environmental degradation

Conflicts between economic growth and other economic issues

Economic growth and: price stability, external stability, environmental sustainability, equitable distribution of income

Economic growth and price stability

Strong economic growth could mean AS may not rise as quickly as AD creating demand inflation

Economic growth and external stability

Economic growth raises incomes meaning consumers and firms buy more imports worsening the CAD

Economic growth and environmental sustainability

Higher rates of economic growth are achieved through increased consumption of resources

Economic growth and equitable distribution of income

benefits of growth are uneven and skewed t skilled workers

Positive Output Gap

When actual GDP is temporarily above the long term productive potential of an economy - achieved by hiring structurally unemployed, or overtime but unsustainable in the long run as it leads to higher wage costs, prices, and inflation

Negative Output Gap

When actual GDP is below the economy’s productive potential - indicates cyclical unemployment, and lower inflationary pressures

Increases in AS

AS can be increased when a higher level of output can be produced for the same cost

Graphing an increase in AS

An increase in AS (shift to the right) can lead to an increase in total output (EG) an a reduction in the general price level

Economic changes that increase AS - Population Growth

Increase in the population means more workers will be able to produce more goods and services

Economic changes that increase AS - Discovery of new resources

Can be exploited to increase exports and therefore economic growth

Economic changes that increase AS - workers acquiring new skills

More highly trained workers or proffesionals, may be able to perform more or better quality services for an economy increasing GDP and lvigin standards

Economic changes that increase AS - Increased capital

Investment in capital equipment, such as machinery that efficiently replaces labour will increase the capacity of the business to produce goods in the long run

Adoption of new technology

Technology and other measures that assists with the improving efficiency of the production process

Trends in the Business Cycle

1991-2019: consecutive positive growth

2020: first recession occurred as a result of the COVID-19 pandemic

Other economies have stronger growth (Australia’s GDP grew 0.8% while the US grew 3.1% and EU grew 1%)

Lower consumption in recent years, due to low wage growth

Reasons behind the business cycle - Global economic conditions

Mostly favourable for Australia in recent decades, strong demand for Australia’s resource exports, causes a boom in mining investment and a surge in export revenue

Reasons behind the business cycle - Terms of Trade boom (2005-2011)

Driven by a large increase in the price of Australia’s commodity exports (iron ore, coal and natural gas), resulting in a growth in export revenues, improving BOGS and CAS

Reasons behind the business cycle - Macroeconomic policy

Largely maintained a sustainable rate of economic growth - generates employment growth and maintains external balance without pushing inflation above its target range (2-3%)

Reasons behind the business cycle - Role of RBA

Acted quickly to reduce interest rates to support AD, in order to stimulate or contract EG

Reasons behind the business cycle - Population Growth Levels

Nation has the highest sustained population growth rates among advanced economies (high immigration), however during COVID net overseas migration was negative

Reasons behind the business cycle - Productivity Growth

Slowdown has contributed to lower rates of growth in recent years, other advanced economies have also experienced slower productivity growth in recent years

Reasons behind the business cycle - Impacts of COVID 19 recession

Ended Australia’s 28 years of consecutive EG, 2.4% annual fall in growth in 2020, largest budget deficit of $132 billion in 2021-22, cut in the cash rate to record low of 0.1%

Unemployment

Occurs when the total demand for labour is less than the total supply of labour

Labour Force Calculation

Labour Force = Employed + Unemployed

Included in the Labour Force

People 15 and above employed for at least one hour per week of paid work, self employed persons working at least one hour per week in own business, unemployed person aged 15 and over, who are currently available for work and are actively seeking work

Not included in the Labour Force

Children under 15, full time non-working students over 15, people performing full-time domestic duties, unemployed who are not willing to actively apply, attend job interviews, adn not available to start work, retired individuals

Factor affecting size of labour force

Populations size - limits how much the workforce can grow, migration plays a role in increasing population size

Working Age Population Calculation

WAP = Labour Force + Working age bracket (15-64) that aren’t actively seeking work

Factor affecting working age population

Age Distribution - more people between 15-65, then the larger the WAP

Negative Impacts of Ageing Population

Reduces productive capacity of economy as WAP decreases in size, fiscal policy burden (falling tax revenue), ineffectiveness of monetary policy (older people’s spending patterns do not change as much as young people), reduction in skills of the workforce

Positive Impacts of ageing population

More demand for labour, due to smaller supply of workers/WAP

Labour force participation rate calculation

Lbaour force/WAP x 100

Factors affecting participation rate

Economic Activity (during booms more jobs are available and vice versa) and migration levels (government targets skills needed in the labour force, that domestic workers lack)

Unemployment Rate calculation

Number of people unemployed/total labour force x 100

Supply of Labour

Wages and Incentives, working conditions and non-financial incentives, education and qualifications, geographic and occupational mobility

Trends in Unemployment

Australia wants to keep unemployment at full employment (NAIRU), now at 4.1%

Trends in Unemployment - High unemployment with low levels of economic growth

GFC caused a high of 5.8% and COVID brought highest level seen in 20 years, peaking at 7.5% due to closure of economy

Trends in Unemployment - Structural Change

From 1970s high microeconomic reforms and structural change, involving restructuring and closing mnay industries as Australia focused on its comparative advantage to achieve efficiency, combined with a recession

Trends in Unemployment - Strong levels of economic growth

Due to resource boom, driven by high high demand for minerals, Australia’s economic growth increased

Current Trends in Unemployment

Labour force participation rate climbing, age distribution, casualisation of work trend, no migration during 2021-22

Government Policies - Macroeconomic policies

Used to reduce cyclical unemployment, during fluctuations in the business

Tightening FP - lower taxes/increased Gov spending to stimulate EG

Loosening MP - involves lowering interest rates, to stimulate consumer spending and business investment

E.g. Jobkeeper

Government Policies - Labour Market Policies

Policies in order to increase the supply of labour by targeting a skills shortage - helping structural unemployment.

Short term: importing skilled labour

Long Term: improving the skills of the unemployed, inclduing education programs

Cyclical Unemployment

Caused by a downturn in the level of economic activity and aggregate demand

Structural Unemployment

Caused by a mismatch between the skills of the workforce and the skills needed by employers for production, occurring due to (long term) structural changes in the economy, making workers and their skills redundant

Frictional unemployment

Individuals who are temporarily unemployed as they change jobs and move to another or economic circumstances

Seasonal Unemployment

Caused by the seasonal nature of some kinds of work, as they are only recquired for one season

Underemployment

Refers to people who work for less than full-time (35 hrs per week) but would like to work longer hours than they are currently offered, adn work to their full potential

Hidden Unemployment

Includes those people who can be considered unemployed (includes women with young children who would work if they had the right child care facilities)

Long term unemployment

People who have been out of work for 12 months or longer, usually as a result of structural unemployment

Hardcore Unemployment

People who experience long periods of unemployment that employers consider them unemployable because of personal circumstances

Causes of Unemployment - Level of EG

Downturn in the level of AD, may cause less demand for labour, increasing unemployment

Underemployment decrease when economic growth occurs

Okun’s Law

Economic growth must exceed productivity growth and growth of labour force for unemployment to fall

Causes of Unemployment - Stance of Macroeconomic policies

Influences on the business cycle (specifically AD), influence the level of cyclical unemployment in short to medium term.

If expansionary FP and MP aims to increase growth then that reduces unemployment and vice versa with contractionary policy

Causes of Unemployment - Constraints on EG

Longer term unemployment is influenced by the level of sustained economic growth, if EG is constrained it will struggle to produce jobs in economy increasing unemployment

Causes of Unemployment - Rising participation rates

Increase in the labour force participation rate will cause an increase in the rate of une mployment in the short term

Causes of Unemployment - Structural Change

Structural change often results in short term changes in employment which causes structural unemployment

Causes of Unemployment - Technological Advancements

Technological advancements can cause short term unemployment (causes structural unemployment)

Causes of Unemployment - Productivity

Affects the decisions of employers to increase or reduce employment, higher productivity growth tends to increase unemployment in the short term and vice versa

Causes of Unemployment - Inadequate training and shortages

Large cause of structural unemployment, significant skill shortages that persist alongside numbers of people being out of work suggests gaps in Australia’s education systems

Causes of Unemployment - Increased Labour Costs

Unemployment may rise due to increased labour costs (wages)

Natural Rate of Unemployment

Level of unemployment where there is no cyclical unemployment, economy has reached full employment and the supply of labour = the demand of labour

Cost Push Inflation

When demand begins to exceed full employment, both a reduction in unemployment and cost push inflation occurs and increased costs are passed onto the consumer and cause inflation.