Comprehensive Study Guide on Global Happiness and Australian Economic Performance and Management

Definition of Tariff: A tax imposed on imported goods. Tariffs make foreign goods more expensive, encouraging consumers to purchase local goods.

Recent Policy Implementation:

• • Canada and Mexico: A $25\%$ tariff consists of taxes on non-energy goods.

  • China: A $10\%$ tariff imposed on Chinese goods.

• Summary Table of Effects:

  • U.S. Consumers: Face higher prices, fewer product choices, and increased inflation risk.

  • U.S. Businesses: Experience input cost hikes and export retaliation, though some industries may see short-term wins.

  • Foreign Businesses: Suffer from lost sales, trade friction, and required supply chain shifts.

  • U.S. Government: Gains revenue but risks political and economic blowback.

The Circular Flow of the Economy

• Concept: The circular flow model illustrates how money, goods, and services move between different economic sectors in a continuous loop, similar to a water cycle.

• How Resources Flow:

  • Households Provide Factors of Production:

    1. Labour: Working at jobs.

    2. Land: Property and natural resources.

    3. Capital: Money intended for investment.

    4. Enterprise: Business ideas and the willingness to take risks.

  • Businesses Receive Resources: Businesses use these ingredients to produce goods (smartphones, sandwiches) and services (haircuts, healthcare).

• The Flow of Funds:

  • Financial Sector Receives: Deposits from households (savings, current accounts), loan repayments, interest payments, business investments for growth, and government deposits.

  • Government Receives: Income tax (household earnings), Corporate tax (business profits), GST/Sales tax (consumption), Payroll tax (wages paid), and fees/licenses.

• The Flow of Money (Opposite Directions):

  • Businesses pay Households Income (wages, rent, interest, profit).

  • Households pay Businesses Spending/Expenditure (buying goods and services).

  • This spending becomes Revenue for businesses, which is used to purchase more resources, continuing the cycle.

Core Concepts and Branches of Economics

• Microeconomics: Examines small components of the economy, such as individuals, households, firms, and specific industries.

• Macroeconomics: Concerned with large-scale economic factors, including interest rates, national prices, national output, and unemployment levels.

• The Economic Cycle (Business Cycle): The economy regularly fluctuates through four phases:

  1. Expansion: Characterized by noticeable growth, increased employment, rising incomes, production, sales, steady money supply, and increasing investment.

  2. Peak: The highest level of economic activity and prosperity. New businesses open, production is high, many jobs are available, and unemployment is low.

  3. Contraction (Slowdown/Downturn): A noticeable drop in activity. Spending slows, consumer confidence drops, and businesses face harder competition.

  4. Trough: The lowest level of economic activity. Businesses may close, production slows, and jobs become scarce with high unemployment.

• Specific Cycle Patterns:

  • Recession: A severe decline lasting at least six months.

  • Depression: A very severe recession lasting two or more years.

  • Recovery: Growth following a recession or depression.

  • Boom: When economic growth reaches its peak.

Measuring Economic Performance: GDP, Inflation, and Unemployment

• Gross Domestic Product (GDP): The total market value of all goods and services produced within a country in a specific time period.

  • Growth Standards: Annual growth of $3 - 4\%$ is the acceptable standard for population growth and replacement of goods. Growth over $4\%$ is considered unsustainable.

  • Importance: Higher production leads to higher employment and wages, increasing living standards.

  • Limitations: GDP does not measure environmental impact, social distribution of wealth, unpaid work, or quality of goods. Disasters can artificially inflate GDP due to rebuilding efforts.

• Inflation: The increase in the general level of prices for goods and services over a specific period.

  • Measurement: The Consumer Price Index (CPI) measures price changes in a "basket" of goods/services for Australian households.

  • RBA Target: The Reserve Bank of Australia aims for $2 - 3\%$ inflation to maintain price stability.

  • Impact of High Inflation: Reduces purchasing power (money buys less), increases the cost of living, and decreases standards of living if income does not keep pace. It undermines growth as business confidence falls and local producers lose out to overseas competitors.

  • Reasons for Inflation:

    1. Demand-side factors: Increased consumer/business confidence, rising incomes, or increased exports.

    2. Supply-side factors: Increased production costs (higher wages, raw material prices, taxes, or energy/oil costs passed to consumers).

  • Inflation Winners vs. Losers:

    • Winners: High-income earners (incomes rising with or faster than inflation), Borrowers (fixed interest rates), and Importers (foreign goods become cheaper relative to local ones).

    • Losers: Low-to-middle income earners (pensioners, unemployed), Bank savers (value of money diminishes), and Exporters (goods become too expensive for overseas consumers).

• Unemployment: Individuals actively seeking jobs who remain unhired.

  • Calculation: $\text{Unemployment Rate} = \frac{\text{Number of Unemployed People}}{\text{Total Labour Force}} \times 100$

  • Types of Unemployment:

    • Cyclical: Linked to the ups and downs of the business cycle.

    • Structural: Caused by a mismatch between worker skills and available jobs.

    • Seasonal: Occurs when demand for labor changes with the time of year.

    • Frictional: Temporary unemployment when searching for a new job.

  • Effects: Deteriorating living standards, decreased national production, and a changed government budget position.

Managing the Economy: Fiscal and Monetary Policy

• Fiscal Policy: Economic management through the government budget (receipts vs. expenditure).

  • Budget Receipts: Incoming money, primarily from taxation (Direct taxes like personal income/company tax, and Indirect taxes like GST/excise duty) and non-tax revenue (asset sales, Australia Post profits).

  • Budget Expenditure: How the government spends to provide goods/services.

  • Outcome States:

    1. Budget Deficit: \text{Receipts} < \text{Expenditure}. Used to support a weak economy via reduced taxes/increased benefits to result in expansion.

    2. Budget Surplus: \text{Receipts} > \text{Expenditure}. Used to curb spending in a rapidly growing economy to reduce inflation (contraction).

    3. Balanced Budget: $\text{Receipts} = \text{Expenditure}$. Rare.

• Monetary Policy: Managed by the Reserve Bank of Australia (RBA) by controlling the "cash rate" (interest rate on overnight loans).

  • RBA Statutory Objectives: Stability of currency, full employment, and economic prosperity/welfare.

  • Lowering the Cash Rate: Occurs when growth is slow and inflation is low. It makes borrowing cheaper and saving less attractive, encouraging spending and reducing unemployment.

  • Raising the Cash Rate: Occurs when the economy expands too quickly and inflation exceeds $2 - 3\%$. It makes borrowing more expensive and saving more attractive, causing households to spend less and decreasing economic growth/inflation.

Historical Australian Economic Data (Select Indicators)

Questions & Discussion

• Happiness Reflection: How do you measure if one country is better to live in than another? What makes a country less ideal? What similarities do highly ranked countries share?

• Feasibility of Measures: Are the six factors of the World Happiness Report feasible measures of people's happiness?

• Task 4 (Unemployment): Who is considered unemployed? (Cynthia: works 0.5 hours = employed; Babette: works 4 hours = employed; Jane: no job, seeking and ready = unemployed).

• The RBA "Balancing Act": Discussion on how the RBA must balance inflation control without causing excessive unemployment or stifling growth.