Economic Growth, Inflation, and Unemployment
Economic Growth
‘An increase in the production of economic goods and services over a given period of time’
GDP: the total market value of goods and services produced in Australia after deducting the cost of goods and services used up in the process of production.
GDP Formula: GDP = C + I + G + (X - M)
C = consumption, I = investment, G = gov spending, X = exports, M = imports
Consumption Expenditure: market value of all goods and services purchased by households (including durable and non-durable goods) - largest category of GDP (55%), and is relatively stable over time since large proportion is on essential goods and services.
Investment Expenditure: purchases of capital goods, mainly by businesses, but also includes new construction, and is split into 3 groups - business, residential, inventories
Gov. Purchases: split into 2 categories - current and capital expenditure
Current: gov. spending on goods and services including salaries of gov. employees
Capital: spending by the gov. on infrastructure and other capital goods (e.g. roads, schools, hospitals)
Net Exports: exports of goods and services (e.g. iron ore, coal, natural gas) are included in Australia’s GDP - spending on imports of goods and services (e.g. motor vehicles, computers) are excluded from Australia’s GDP.
Target: 3.5%
>4% = upward pressure on prices (inflation) - growth not sustainable
<2% = difficult to fully employ productive factors, especially labour (rising unemployment)
3% growth rate is determined by:
The growth rate of the labour force
The growth rate of labour productivity
E.G. if the labour force grows on average 2% each year and labour productivity grows by 1%, then the optimal growth rate for the economy is 3%
Nominal GDP: measured in today’s prices
Calculated by adding up the market value of total production in today’s prices
Useful in finding out the GDP right now based on the current prices
Real GDP: measured in constant prices
Calculated by adding up GDP as if no prices changed between this year and last year - taking out inflation
Excludes the effects of price changes
Isolates economic growth by focusing only on changes due to change in the quantity of output
Termed ‘Real GDP’ because it measures the real change in production rather than the changes in the price of each product
GDP % Change Formulae: GDP (NEW) - GDP (OLD) / GDP (OLD) x 100
OR
GDP (NEW) / GDP (OLD) - 1 × 100
GDP doesn’t measure:
Value of important activities in economy (e.g. volunteering)
The improved quality of many goods over time
Wellbeing (e.g. life expectancy, standard of living)
Aggregate Production Function (APF): demonstrates the relationship between economic growth, quantity of resources used, and the productivity of these resources
Economic Growth Three P’s:
Population
Rising population increases demand and the size of the labour force. Immigration impacts economic growth as they are often of working age, able to transfer skills and knowledge, and contribute to the fiscal policy (paying taxes).
Participation
Participation rate is the proportion of people who are in paid work or actively seeking work, above the age of 15.
Impacts Economic Growth because:
work provides financial security
participation reduces reliance on welfare
increases the skill level of the population
involves social and community connection
greater tax revenue due to fiscal impact
Productivity
The amount of output that can be produced from a given amount of inputs - if more output can be produced from the same quantity of inputs, then productivity has increased. Labour productivity is the most common resource of productivity; defined as “GDP per worker”
Increases GDP per Capita.
Causes: capital deepening and multifactor productivity
Capital Deepening: increasing the stock of capital equipment per worker.
Multifactor Productivity: improving labour skills and efficiency e.g. education and training, more infrastructure, better management
3 P’s Look At:
how fast the potential workforce is growing
how many of them are actually working
how much value they are generating from their work
GDP per Capita Formula: GDP per Capita = GDP / Population
True value of goods and services per person - better measure of economic growth as it considers productivity per person
Economic Growth Benefits:
Higher income and material welfare
Greater employment and business opportunities
Fiscal dividend results in greater social overhead capital (health, education, infrastructure)
Innovation
Economic Growth Costs:
Inflation - higher incomes = greater purchasing power —> increase in demand, meaning supply can’t keep up, creating shortages
Sustainability (impacts environment)
Negative externalities
Competition in the workforce
Inflation
‘A persistent and appreciable rise in the general level of prices’
Deflation: the opposite of inflation - the general price level falls from one period to the next and implies a negative inflation rate
Disinflation: there is a slowdown in the rate of inflation
Consumer Price Index (CPI) is the headline measurement of inflation
CPI is based on a large sample of the goods and services purchased by households —> ‘basket’
‘Basket’ includes 11 major groups of spending and items are weighted to indicate their importance in household spending patterns
Underlying measures of inflation: trimmed mean and weighted median
Trimmed Mean: the average inflation rate across all items in the CPI baskets, but with the most extreme price changes removed from both the highest and lowest end —> RBA takes off the first and last 15% of the set.
Weighted Median: looks at the middle inflation rate, where 50% of the spending (by weight) is on items with higher inflation rate, and 50% is on items with lower inflation —> avoids outliers to focus on middle price movement
Types of Inflation: cost-push and demand-pull
Cost-Push: explains why prices increase when rising input prices are passed through to consumer prices, occurring when rising input costs are passed onto buyers. E.g. higher oil prices and fuel costs, higher imports prices if currency depreciates
Demand-Pull: explains why prices can increase when there are higher level of aggregate demand —> ‘too much demand chasing too few goods’, often associated with a strong economy and the expansion phase of the business cycle
Indicators of potential demand pressures: increasing wages, consumer confidence, lower household savings, higher use of credit
Unemployment
Labour Force: the number of people in work, or actively seeking work at a point in time, above the age of 15
Participation Rate: the proportion of the working age population that is in the labour force
Participation Rate = Labour Force / Population aged 15+
Unemployment Rate: the proportion of people in the labour force who are willing and able to work, but have not held paid work for at least one hour per week
Unemployment Rate = Unemployed / Labour Force
Underemployed: people who hold a paid job, but would like to work more hours per week
Underutilisation: the sum of the unemployment rate and the underemployment rate
Underutilisation rate includes those who are in the labour force and are unable to find work and those who are employed but would like to work more hours
Types of Unemployment:
Frictional: voluntary unemployment since workers leave their jobs to search for a new job
Necessary for the labour market to function - each year many people leave a job to find one that could offer better pay/conditions
Includes new entrants into the workforce (e.g. university students)
Seasonal unemployment counts too
Structural: involuntary unemployment since workers lose their job due to structural factors
Necessary for a dynamic and growing economy
Simple/unskilled jobs are at high risk as the economy develops
Mostly impacts older workers or whole regions e.g. coal-mining regions
Also known as “technological unemployment” —> job losses due to changes in skill requirements and changes in consumer preferences
Creates many new job opportunities
Cyclical: involuntary unemployment since workers lose their job during a contraction in the economy
Follows the business cycle (slowdown/contraction)
Demand for labour is derived from the demand from the goods and services
Construction, retail, and hospitality jobs are harder to find during an economic downturn
Natural Rate of Unemployment: sum of frictional and structural unemployment
At Un, cyclical unemployment = 0
NAIRU: non-accelerating inflation rate of unemployment
Lowest unemployment rate that can be sustained without causing wages growth and inflation to rise
Difference between Un and NAIRU: NAIRU is more likely to be higher - as the economy approaches full employment, inflation will start to rise
Unemployment can NEVER be zero:
There is always some frictional unemployment
There is always some structural unemployment (pace of technological change, decline of some industries)
Weak economy = higher cyclical unemployment
Strong economy = frictional unemployment rises; cyclical unemployment low
Direct Costs:
Reduced income for individuals (lower living standards)
Lower production/output for economy (less production of goods and services)
Reduced tax revenue (less people earning income)
Increased government spending on welfare benefits
Social Costs:
Poverty
Mental health issues
No sense of community or connection to others
Decrease in work-related skills
Stress within the family
Data Trends
Economic Growth:
2020 (-0.1%):
COVID-19 recession
Lockdowns and international border closures
Supply chain disruptions
Less consumer spending
2021 (2.1%):
Rebound from COVID-19
Easing of COVID restrictions (built up demand released)
Strong household consumption
Gov and RBA stimulus
Mining sector benefitted from strong global demand
2022 (4.2%):
Continued recovery
Borders reopened - tourism and international education revitalised
High commodity prices increased export earnings (iron ore, coal, LNG)
Labour market tightened
Slight global supply issues (inflation pressure)
2023 (3.4%):
Growth slows
RBA increases cash rate to curb inflation - borrowing and spending slows
Household disposable income reduces due to rising mortgage repayments
Global economic uncertainty - China slowdown, Ukraine War
2024 (1.1%):
Weakest growth in years
High interest rates squeezed budgets and investment
Population growth outpaced GDP growth - decline in living standards (GDP per capita fell)
Consumer confidence remained low due to cost-of-living pressures
Public spending upheld the economy from stalling
2025 (1.3%):
Growth stalling
Ongoing higher interest rates and slow wage growth subdued household spending
Mixed exports performance - weaker Chinese demand
Cautious business investment
Slowly decreasing in growth
Inflation:
2020 (0.8%):
Extremely low inflation
COVID-19 triggered economic slowdown - household spending reduces
Travel restrictions killed demand in tourism, aviation, and hospitality
RBA cut the cash rate to 0.25% and then 0.10% (all time low)
Gov. support cushioned job losses
2021 (2.9%):
Inflation moved into sustainable range
Economic recovery post-lockdowns
Consumer spending rose
Supply chain disruptions continued
Fiscal stimulus and low interest rates encouraged borrowing and investment
2022 (6.6%):
Highest inflation rate in decades
Global energy crisis from Russia-Ukraine War —> fuel and electricity prices spiked
Supply constraints worsened - shipping delays and raw material shortages
Strong domestic demand met with limited supply (demand-pull inflation)
2023 (5.6%):
Inflation slowing
RBA implemented various interest rate rises to slow down consumer spending and borrowing
Global supply bottlenecks eased
Lower oil prices reduced transport cost pressures
Wage growth increased - but not enough to match inflation
2024 (3.6% to start, 2.4% at end):
Inflation closer to target range
Tight monetary policy continued to cool the housing market
Global freight costs became normalised
Price pressure was reduced due to slower economic growth
Rents still increased
2025 (2.1-2.4%):
Monetary policy stabilisation
Demand and supply rebalanced
Businesses adjusted pricing strategies following earlier volatility
Unemployment:
2020 (6.5-7%):
Spike during lockdowns
Pandemic restriction shut down major parts of the economy
Hospitality, tourism, and retail sectors hit hard
Workers were laid off or had hours reduced
2021 (5.1%):
Steady recovery
Borders gradually reopened and restrictions eased
Gov. stimulus and infrastructure spending boosted job creation
Strong demand for goods and services as households spent COVID savings
Online and flexible work created new employment opportunities
2022 (3.7%):
Post-pandemic boom - record job vacancies
Strong commodity exports supported mining and logistic jobs
Labour shortages due to closed international borders putting upward pressure on hiring
Participation rate largely increased due to businesses competing to employ
2023 (3.7%):
Low but stabilising
RBA interest rate increases began to slow consumer demand
Global economic uncertainty and weaker consumer spending reduced hiring appetite
Labour market still tight
2024 (4.0%):
Gradually slowing
Higher borrowing costs slowed investment and private sector hiring
Layoffs in construction and tech sectors due to reduced demand
Public employment remained strong
Migration returned to pre-pandemic levels - slightly increasing the labour supply
2025 (4.3%):
Modest increase
Economy growing slower - businesses cautious about expansion
Full-time job growth slowed - shift towards more part-time and casual positions
Participation rate remained high (67%)
Labour market still healthy