Terminology & Core Concepts

Basis point

A unit of measure equal to $\frac{1}{100}\text{th}$ of one percentage point ($0.01\%$), where $100\text{ basis points} = 1\text{ percentage point}$.

Percentage point change vs. percentage change

A percentage point change is the simple arithmetic difference between two percentages, whereas a percentage change is the relative change expressed as a percentage.

Consumer Price Index (CPI)

Australia's key inflation measure, published quarterly by the ABS, which tracks the price change of a fixed basket of goods and services bought by households.

Deflation

A sustained fall in the general price level (negative inflation), distinct from disinflation, which refers to a slowing rate of positive inflation.

Labour force underutilisation

A measure combining both unemployed workers and underemployed workers, calculated as $\text{underutilisation rate} = \text{unemployment rate} + \text{underemployment rate}$.

Average Propensity to Consume (APC)

The proportion of total income spent on consumption ($\frac{C}{Y}$), satisfying the relationship $APC + APS = 1$.

NAIRU

Non-Accelerating Inflation Rate of Unemployment; the unemployment rate at which inflation remains stable, representing full employment.

Participation rate

The percentage of the working-age population that is either employed or actively looking for work ($\frac{\text{Labour force}}{\text{Working-age population}} \times 100$).

Stagflation

A combination of stagnant economic growth or recession alongside high inflation and high unemployment, typically caused by a negative supply shock.

Structural deficit

A budget deficit that persists even when the economy operates at full capacity, meaning it will not self-correct with economic growth.

Nominal GDP vs. Real GDP

Real GDP is adjusted for inflation using constant prices, whereas nominal GDP is measured in current prices and can rise purely due to price increases.

Real vs. nominal values for wages and interest rates

Real values equal nominal values minus inflation, showing actual purchasing power or the true cost of borrowing.

Multiplier effect

The phenomenon where an initial injection of spending leads to a larger final increase in national income as money circulates through the economy.

Formula for the simple Keynesian multiplier

$$k = \frac{1}{MPS} = \frac{1}{1 - MPC}$$

Multiplier calculation when $MPC = 0.8$

$k = 5$ (calculated as $\frac{1}{0.2}$), meaning a $\$100\text{m}$ injection raises national income by $\$500\text{m}$.

Phases of the economic business cycle (in order)

Expansion (boom) $\rightarrow$ Peak $\rightarrow$ Contraction (recession) $\rightarrow$ Trough.

Australia's macroeconomic objectives

Full employment, price stability, external stability, sustainable economic growth, and improved living standards.

Leakages in the circular flow of income

Savings, Taxation, and Imports ($S, T, M$), which represent withdrawals of income balanced by injections ($I, G, X$).

Components of Aggregate Demand (AD)

$AD = C + I + G + (X - M)$, representing Consumption, Investment, Government spending, and Net exports.

Factors shifting SRAS vs. LRAS

SRAS shifts due to temporary input cost and wage changes; LRAS shifts due to structural changes affecting economy-wide productive capacity.

Cyclical vs. structural shifts in Aggregate Demand

Cyclical factors are short-term changes in spending components, while structural factors are long-term shifts in underlying drivers like demographics.

Equilibrium determination in the AD/AS model

Equilibrium occurs at the intersection of AD and AS curves; rightward shifts in AD raise price level and output, while leftward shifts in AS raise price level and reduce output.

Factors shifting the Production Possibility Curve (PPC) outward

Increases in the quantity or quality of resources, technological advancements, and gains in human capital or productivity.

Interest rates as an economic policy tool

The RBA adjusts the cash rate to influence borrowing and spending, using lower rates to stimulate aggregate demand and higher rates to cool economic activity.

Federal budget decisions as an economic policy tool

The government uses expansionary deficits (increasing $G$ or cutting $T$) or contractionary surpluses to directly alter aggregate demand and economic activity.