The Last Dance

Economic problem

The problem of deciding or choosing how to satisfy unlimited wants with limited resources.

Nominal GDP

The total value of final output of an economy's goods and services produced over a specific period, measured using current prices. Reflects both changes in quantity and changes in price.

Real GDP

The value of final output of an economy's goods and services adjusted for the effects of inflation. Reflects only changes in quantity/output (volume), not prices.

Consumer Price Index (CPI)

A measure of the average change in the price of a selected range (basket) of consumer goods and services.

Full employment

Maintenance of a socially acceptable rate of unemployment (4-5%). It is impossible for an economy to operate at zero percent unemployment, but reducing unemployment as much as feasible increases income, spending, GDP, jobs and output.

Cyclical unemployment

Unemployment due to a downturn in the economic cycle.

Structural unemployment

Unemployment that occurs when economic needs change, causing jobs themselves to change or disappear.

Frictional unemployment

Unemployment related to time lags involved in the transition between jobs.

Natural unemployment

The rate of unemployment when the labour market is in equilibrium; includes frictional and structural unemployment.

Marginal propensity to consume

The proportion of an increase in income that is spent on consumption.

Marginal propensity to save

The proportion of an increase in income that is saved, rather than spent.

Keynesian multiplier

Measures how much total national income increases as a result of an initial injection of spending, due to successive rounds of consumption.

Fiscal Policy

Government decisions about taxation and spending that influence aggregate demand; can be discretionary or non-discretionary (automatic stabilisers).

Direct Tax

A tax paid directly by the individual or business it is levied on, such as income tax or company tax.

Indirect Tax

Any tax on aspects of economic activity other than income (e.g. GST, carbon tax, customs duty); can be passed on to others by the firm on which the tax is levied.

Proportional tax

The amount of tax paid is a constant % of income.

Progressive tax

The more you earn, the more tax you pay.

Regressive tax

Takes a decreasing proportion of a wage as the wage grows.

Bracket creep

When wage inflation causes a taxpayer to move into a higher tax bracket and pay higher taxation but reap no benefit to their increase in real purchasing power.

Current expenditure

Spending on goods and services for current use that directly satisfy individual or collective needs, including merit goods such as education and healthcare.

Capital expenditure

Spending on goods and services intended to create future benefits, including public infrastructure (transport, energy, water, communications) and research and development.

Transfer payments

Spending that does not involve transactions of goods and services, but transfers of money, such as social security payments, pensions and unemployment benefits.

Discretionary (structural) fiscal policy

When the government deliberately changes its spending or tax policies to influence the economy.

Non-Discretionary (cyclical) fiscal policy

When changes in government spending or tax revenue occur automatically in response to the economic cycle, without new government decisions.

Crowding Out Effect

The theory that increased government spending and borrowing can reduce private sector investment, through government provision of goods/services that private firms could supply, and through funding (e.g. bonds) that diverts money away from private investment.

Microeconomic reform

Changes made by the government to improve how industries, businesses, or markets work, aiming to make the economy more efficient and productive over the long term.

Automatic stabilisers

Non-discretionary features of fiscal policy that automatically slow or stimulate aggregate demand as economic conditions change.

Overheating

A situation where the economy is operating above sustainable capacity and inflationary pressures are occurring.

Inflation pressures

Forces that increase the general price level, often when demand is strong relative to the economy's productive capacity.

Fiscal policy effectiveness

The extent to which fiscal policy achieves economic objectives, considering benefits such as targeting the economy and limitations such as time lags, political constraints and competing objectives.

Time lags

Delays between recognising an economic issue, designing and implementing policy, and the policy's effect on the economy.

Inside lag

The delay involved in designing and implementing fiscal policy, including the time needed to pass legislation.

Outside lag

The delay between implementing a policy and seeing its full impact on the economy. Fiscal policy may have a shorter outside lag than monetary policy when it targets spending directly.

Supply-side management

Policies focused on improving the economy's productive potential by improving the quality and quantity of factors of production, productivity, efficiency and competitiveness.

Production

Total output produced.

Productivity

The speed or efficiency of production.

Efficiency

A measure of how well resources are used without waste.

Allocative efficiency

Producing the goods and services that consumers want, meaning resources are allocated according to demand.

Dynamic efficiency

The ability to respond to change over time, especially using innovation or new technology.

Intertemporal efficiency

Using resources sustainably over time so that future generations can also access them.

Technical/productive efficiency

Producing at the lowest average cost by avoiding waste of inputs, money and time.

Productive capacity

The maximum amount an economy can produce using its available resources. Microeconomic reform can increase productive capacity by shifting the PPC outward.

Labour productivity

The amount of output produced per worker or hour worked. Higher labour productivity allows workers to produce more goods and services.

Multifactor productivity (MFP)

A measure of how efficiently labour and capital are used together. Improvements in innovation, technology and work practices increase MFP.

Capital deepening

Occurs when workers have access to more or better capital, such as machinery, equipment and technology, enabling more output in the same time.

Human capital

The skills, knowledge and capabilities of workers that contribute to productivity.

Research and development (R&D)

Investment in creating or improving products, processes or technology to support innovation and productivity.

Innovation

The development or application of new ideas, methods or technology that improves productivity and efficiency.

Deregulation

Reducing or removing regulations for businesses to improve efficiency, competition or productivity.

Monetary policy

A demand-side macroeconomic policy conducted by the Reserve Bank of Australia to influence the economic cycle and promote objectives such as price stability.

Cash rate

The interest rate on overnight loans between banks. It influences other interest rates, economic activity, employment and inflation.

Interest rates

Rates charged by banks to customers for loans or offered as incentives for saving.

Overnight money market

The market where banks borrow short-term funds from each other to meet liquidity needs.

Inflation expectations

Expectations about future inflation that influence consumer and business behaviour.

Tightening of monetary policy

An increase in the cash rate, usually associated with a contractionary monetary policy stance.

Loosening / easing of monetary policy

A decrease in the cash rate, usually associated with an expansionary monetary policy stance.

Transmission mechanism

The mechanism by which monetary policy changes through the cash rate affect interest rates faced by households and businesses, then flow through to economic activity, employment and inflation.

Savings and investment channel

A transmission mechanism channel where interest rate changes affect incentives to save, borrowing costs, consumption and investment.

Variable interest loan

A loan where the interest rate can respond quickly to changes in market rates.

Fixed interest rate

A rate that does not immediately change when the cash rate changes.

Collateral

Security for a loan

Monetary policy independence

A strength of monetary policy where the RBA can pursue long-term objectives free from short-term political constraints.

Bank pass-through

The extent to which banks pass changes in the cash rate on to customers through lending and deposit rates. Limited pass-through can reduce monetary policy effectiveness.

Cash-flow channel

A transmission mechanism channel where interest rate changes affect disposable income, especially for households with loans.

Demand-pull inflation

Inflation caused by too much demand relative to supply, pushing prices higher.

Cost-push inflation

Inflation caused by rising production costs, which push prices higher.

Deposit rate

The interest rate paid by banks on deposits.