Topic 21: Economic performance and living standards — Comprehensive study notes

21.5 Sustainability indices indicate Australia’s economic performance

  • Learning intention: By the end of this lesson, identify how sustainability indices and other indicators measure Australia’s economic performance.

  • Quantitative vs qualitative measures:

    • Quantitative measures: unemployment rate, inflation rate, GDP growth, etc. These are dollar/percentage changes.

    • Qualitative measures: assess quality of life and welfare, not just monetary values.

  • Qualitative measures examined in this section:

    • Genuine Progress Indicator (GPI)

    • Human Development Index (HDI)

Genuine Progress Indicator (GPI)

  • Developed in the late 1980s to measure overall progress toward improved living standards.

  • How it works: starts with GDP, then makes negative and positive adjustments to reflect effects on society’s welfare.

  • Deductions reflecting costs (negative adjustments):

    • environmental damage due to pollution

    • depletion of non-renewable energy resources (e.g., coal, petrol)

    • reduced leisure time due to longer work hours or longer travel times

    • income inequality

    • increased crime rates

  • Additions reflecting benefits (positive adjustments):

    • ongoing services provided by public infrastructure

    • contributions from socially productive time (volunteer work, housework)

Human Development Index (HDI)

  • Developed by the United Nations to compare wellbeing across countries.

  • Combines positive indicators (long life expectancy, educational attainment, average income per head) with negative indicators (infant mortality, prevalence of child labour).

  • A rising HDI indicates progress and higher living standards.

  • Main weaknesses:

    • subjective nature of indicators used

    • unreliable statistical data for some countries

21.5.2 Other indicators of economic performance

  • Use both quantitative and qualitative indicators to gain a clearer picture of the economy.

  • Examples covered in this section:

    • Business Confidence Index (BCI)

    • Liveability Ranking

    • World Happiness Report

Business Confidence Index (NAB)

  • NAB conducts a monthly survey of more than 500 businesses to gauge confidence about the economy.

  • Data collected include expectations for trading levels, profitability and employment.

  • The NAB index can vary significantly over time and is influenced by both domestic and global events.

  • Domestic factors affecting confidence include changes in government, new laws, or changes to interest rates.

  • Confidence can differ across industries (e.g., mining vs. other sectors).

  • Example: April 2020 NAB survey showed negative confidence across all sectors due to the COVID-19 pandemic.

Liveability Ranking

  • Assesses a broad range of factors to determine which cities are most desirable to live in.

  • The 2022 Global Liveability Index surveyed 173 cities and identified several contributing factors.

  • Major contributing factors (weights shown in the Liveability framework):

    • Stability: 25%

    • Health care: 20%

    • Education: 10%

    • Infrastructure: 20%

    • Culture and environment: 25%

  • Australia’s major cities have ranked well historically; 2022: Melbourne shared 10th with Osaka, Japan.

  • Liveability relevance: economic strength is important, but living conditions and stability matter for overall welfare.

World Happiness Report

  • Measures happiness across more than 150 countries and examines how economy performance translates into wellbeing.

  • Major considerations include: GDP per capita, social support, healthy life expectancy, freedom of life choices, generosity, and perceptions of corruption.

  • Governments use happiness data to assess how economic performance translates to actual welfare beyond traditional GDP metrics.

World Happiness Report data example (table excerpt)

  • Top/bottom rankings (from World Happiness Report, 2022) show country standings and illustrate geographic patterns of happiness.

  • Example table provided includes top 12 and bottom 12 countries for 2022.

  • Data sources and tables referenced: HDR UNDP (for HDI data) and World Happiness Report tables.

21.5 SKILL ACTIVITY: Interpreting and analysing

  • Most recent data tasks available (HDI, GNI per capita, GDP, GDP per capita, GPI, quality-of-life index, GGDP, HPI).

  • Tasks involve listing top rankings, analyzing whether high GNI implies top HDI, identifying lowest HDI ranking countries and geographic regions, and brainstorming explanations for regional patterns.

  • Data sources referenced: UNDP HDR; World Happiness Report tables; Quality-of-life index (private sector measure).

21.6.1 Living standards and economic growth

  • Definitions:

    • Living standards refer to how well off a nation is overall, including material and non-material aspects.

    • Material living standards: level of economic wellbeing, influenced by GDP, income, and consumption of goods/services.

    • Non-material living standards: value-based elements of wellbeing not tied to material possessions (e.g., happiness, crime rates, pollution absence, political freedom).

  • Two ways to measure living standards related to growth:

    • GDP per capita = GDP ÷ population, used to approximate changes in living standards per person:
      GDP per capita=GDPPopulation\text{GDP per capita} = \frac{\text{GDP}}{\text{Population}}

  • Strong and sustainable economic growth expectations:

    • Strong growth target: roughly between 3%3\% and 4%4\% on average per year:
      g∈[3%,4%]g \in [3\%, 4\%]

    • Growth around 5%5\% per year is typically unsustainable because it may exceed productive capacity, causing shortages and inflation, and raising imports.

    • Growth below 2%2\% per year risks rising unemployment and falling living standards.

  • Sustainable growth concept:

    • Growth that can be maintained without depleting non-renewable resources or harming future generations.

    • Key environmental concerns include pollution, climate change, resource depletion, biodiversity loss.

    • Trade-off may exist between current living standards and long-term sustainability.

21.6.2 Living standards and economic growth: implications

  • Policies must balance material and non-material living standards.

  • Examples of trade-offs:

    • Economic policies that raise material living standards could reduce non-material living standards (e.g., increased work hours, pollution concerns).

    • Policies improving non-material living standards might constrain some material growth.

  • Discussion prompts: consider tighter restrictions on non-renewable resource use and potential impacts on growth.

21.6.3 The weaknesses of GDP per capita as a measure of living standards

  • GDP per capita is an average and assumes even distribution of income and goods, which is often not the case.

  • Increases in GDP per capita do not guarantee better living standards due to distribution issues and the nature of economic activity.

  • GDP may include negative externalities (pollution, crime, environmental damage) and may count costs like crime-related spending as GDP, masking negative welfare effects.

  • GDP does not account for non-material living standards (happiness, security, political freedom) and may misrepresent overall wellbeing.

21.6.4 Alternative measures of living standards

  • Genuine Progress Indicator (GPI): adjusts GDP by adding positive activities (volunteer work, housework) and subtracting negative externalities.

  • Human Development Index (HDI): composite index of life expectancy, education, and income per capita; scaled to reflect overall wellbeing.

  • Other indicators:

    • Quality-of-life index (private sector): includes material wellbeing (GDP per capita), life expectancy, family life quality, political freedom, etc., to provide a broader view of living standards

    • Green GDP (GGDP): GDP adjusted for environmental costs; subtracts net natural capital consumption from GDP

    • Happy Planet Index (HPI): measures wellbeing with ecological footprint as a key factor; components include experienced wellbeing, life expectancy, and ecological footprint

21.6.5 HDI and Australia context

  • In 2021, Australia was ranked 5th in the HDI with an index around 0.951 (value stable since 2013).

  • Weaknesses of HDI: subjective indicators and data reliability concerns for certain countries.

  • Quality-of-life and other indexes indicate Australia’s relative standing on non-material dimensions and environmental considerations.

21.6.6 Other indicators

  • Green Gross Domestic Product (GGDP): GDP minus net natural capital consumption (resource depletion, environmental degradation, climate costs).

  • Happy Planet Index (HPI): ranks countries by experienced wellbeing, life expectancy, and ecological footprint; aims to reward lower ecological footprints.

  • Australia’s rankings in these indexes can differ from GDP-based measures, highlighting sustainability and wellbeing aspects.

21.6 SKILL ACTIVITY: Questioning and researching / Interpreting and analysing

  • Tasks involve collecting, comparing, and interpreting data for Australia and another country across multiple living standards measures.

21.6 Exercise (summary)

  • A series of multiple-choice and short-answer questions assesses understanding of GDP per capita, HDI, GPI, quality-of-life, and related concepts, plus critical thinking about limitations of traditional measures and why alternative measures are needed.

21.7 What are the different macroeconomic policy options?

21.7.1 The bigger picture

  • Macroeconomics studies expenditure/aggregate demand, national output, income, employment, and overall material living standards.

  • Government aims involve some degree of intervention to manage aggregate demand.

  • Two main policy areas:

    • Budgetary/fiscal policy

    • Monetary policy

21.7.2 Budgetary/fiscal policy

  • Definition: government alters spending levels and receipts (taxation) to influence the economy.

  • Budget basics:

    • Receipts: government income (taxes, non-tax revenue)

    • Expenditure: government spending

    • Budget outcome = Receipts − Expenditure

  • Outcomes:

    • Budget deficit: receipts < expenditure

    • Budget surplus: receipts > expenditure

    • Balanced budget: receipts ≈ expenditure; generally rare

    • Fiscal balance over a business-cycle period (e.g., seven years)

  • Components of the budget:

    • Budget receipts: mainly income tax, company tax, other taxes, non-tax revenue (asset sales, interest, HECS repayments, profits from government enterprises)

    • Budget spending: social security and welfare, health, defence, education, transport/communications, housing and community amenities, debt interest, net payments to other governments, etc.

  • Direct taxes (examples):

    • Personal income tax, capital gains tax (CGT), Medicare levy, withholding tax, company tax, fringe benefits tax (FBT), superannuation fund tax, petroleum resource rent tax (PRRT)

  • Indirect taxes (examples):

    • Excise duty, customs duties, goods and services tax (GST)

  • Government revenue sources (illustrative figures 2021–22)

    • Income tax on individuals: major source; GST etc. also significant

  • Budget spending priorities (illustrative data for 2021–22): social security and welfare, health, education, defence, housing, transport, and more

21.7.3 Monetary policy

  • Definition: policy implemented by the Reserve Bank of Australia (RBA) to manage the level of spending by controlling money in the economy.

  • Primary instrument: manipulation of the cash rate (official price of borrowing money in the short-term money market).

  • RBA’s three means of influencing money flow:

    • Changing interest rates (market operations, buying/selling government bonds)

    • Influencing the exchange rate (foreign exchange operations)

    • Persuasion (public statements to influence expectations)

  • Effects of changing cash rate:

    • Lower cash rate: lowers borrowing costs, encourages spending and investment, stimulates economic growth, can raise inflation if excessive

    • Higher cash rate: increases borrowing costs, reduces spending, slows growth, can help reduce inflation

  • Illustrative mechanisms:

    • When RBA buys government bonds, banks gain liquidity and may lend more at lower rates

    • When RBA sells government bonds, banks have less liquidity and may raise rates or reduce lending

  • Mortgage and consumer impact examples:

    • Lower rates reduce monthly payments, easing financial stress; higher rates can lead to defaults and lower living standards

  • Exchange rate influence (less frequently used): a weaker AUD makes imports more expensive and can shift demand to domestic goods

  • Persuasion: RBA communications can influence consumer and business confidence

21.7 SKILL ACTIVITY: Questioning and researching

  • Activity asks students to simulate budget revenue allocations, justify priorities, and discuss trade-offs.

21.7 Exercise (summary)

  • Multiple-choice and short-answer questions test understanding of budget concepts, cash rate, monetary policy signaling, taxes, deficits/surpluses, and policy effects.

21.8 What are the different microeconomic policy options?

21.8.1 The smaller picture

  • Microeconomics studies the operation of smaller parts of the economy (industries/markets) and microeconomic reform aims to improve productivity, competitiveness, and living standards.

  • Four main reform areas: trade liberalisation, labour market reforms, market deregulation, and the national reform agenda.

  • Additional micro reforms can target smaller areas like immigration and the environment.

21.8.2 Trade liberalisation

  • Reduces protectionist measures (tariffs, quotas, subsidies) to improve efficiency and price competitiveness of domestic producers.

  • Mechanisms:

    • Cutting tariffs

    • Reducing subsidies

    • Abolishing import quotas

    • Increasing bilateral free-trade agreements

  • Potential negatives: certain industries (e.g., motor vehicle manufacturing) may shrink, causing unemployment and negative effects on non-material living standards (stress, family strain, etc.).

21.8.3 Labour market reforms

  • Shifts from centralized wage setting to enterprise bargaining/individual contracts, linking wages to productivity.

  • Result: higher productivity can enable wage increases without hurting competitiveness; potential non-material costs due to longer work hours or job stress.

  • Data: since 2010, over 85% of workers covered by enterprise bargaining or similar arrangements.

21.8.4 Market deregulation

  • Removal of unnecessary controls to foster competition, lower prices, and greater choice.

  • Rationale: markets efficiently allocate resources, promoting lower costs and higher growth.

  • Expected outcomes: lower prices, higher demand, more employment, external stability; improved material and non-material living standards over time.

21.8.5 National reform agenda

  • National Competition Policy (NCP) (1995–2005) aimed to strengthen competition and efficiency.

  • The Australian Competition and Consumer Commission (ACCC) established to enforce competition law (e.g., prohibiting price fixing, exclusive dealing, collusive bidding, predatory pricing, market zoning).

  • 2006 national reform agenda continued competition and regulatory reform via intergovernmental cooperation.

21.8.6 Immigration policy

  • Uses immigration to manage the number and composition of migrants; prioritises skilled migrants to fill labour gaps and boost productivity.

  • Potential trade-off: within-country training could also fill skills gaps; immigration can enhance non-material living standards through cultural diversity.

21.8 SKILL ACTIVITY: Evaluating, concluding and decision-making

  • Tasks compare sole providers of services in the 1980s with today; assess competition, infrastructure implications, and potential benefits/negatives.

21.8 Exercise (summary)

  • Focus on microeconomic reform focus areas, subsidies, deregulation, and the effects of competition on consumers and providers.

21.9 What is direct government intervention in the market?

21.9.1 Reasons for government intervention

  • Governments intervene to stabilize the economy, reallocate resources, and distribute income.

  • In a market economy, decisions are driven by profit and incentives, which may not always align with social welfare.

  • Trade-offs and opportunity costs are central to understanding intervention.

21.9.2 Stabilisation of the economy

  • Intervention aims to smooth the business cycle and prevent excessive inflation or unemployment.

  • Stabilisation is achieved through coordinated fiscal, monetary, and microeconomic reforms.

21.9.3 Reallocation of resources

  • Markets may under-provide socially desirable goods (healthcare, education, public housing, public transport) or fail to supply goods the private sector won’t supply (defense, street lighting).

  • Government reallocates resources to ensure accessibility and equity.

  • It may also shift resources away from undesirable products (e.g., certain weapons) for social welfare.

21.9.4 Distribution of income

  • Involves welfare payments, progressive taxation, provision of essential services, and compulsory superannuation to reduce poverty and support vulnerable groups.

  • Examples include unemployment benefits, age pensions, disability payments, housing assistance, and family benefits.

  • Discussion on income inequality and policy responses.

21.9 SKILL ACTIVITY: Interpreting and analysing

  • Investigates solar subsidies and insulation rebates, examining short-term vs long-term benefits and the rationale for such environmental policies.

21.9 Exercise (summary)

  • Includes questions on the purposes of government intervention, redistribution, and mechanisms to achieve these goals, plus analysis of welfare and environmental subsidies.

21.10 INQUIRY: How does Australia measure up?

  • Inquiry aims to compare Australia with other countries using both traditional economic indicators (inflation, unemployment, GDP growth) and broader measures (HDI, quality-of-life index, GPI).

  • Steps:
    1) Questioning and researching: identify stats for Australia and another country beyond the four commonly compared ones (China, NZ, UK, US).
    2) Interpreting and analysing: organize data for comparison.
    3) Evaluating, concluding and decision-making: justify conclusions about relative performance.
    4) Communicating: present findings in PowerPoint; self-assess using the provided rubric.

21.11 Review

21.11.1 Key knowledge summary (highlights)

  • Economic performance measures include unemployment, inflation, and economic growth; living standards are impacted by these indicators.

  • HDI, GPI, and World Happiness Report provide qualitative/alternative measures of performance and welfare.

  • Living standards include material (GDP, GDP per capita, incomes) and non-material (happiness, security, freedom) dimensions.

  • GDP per capita is limited and may misrepresent welfare due to distribution, externalities, and non-material factors.

  • Alternative measures (GPI, HDI, Quality-of-life index, GGDP, HPI) offer broader assessments of welfare and sustainability.

  • Macroeconomic policy options include fiscal (budgetary) policy and monetary policy, aimed at stabilising growth, controlling inflation, and improving living standards.

  • Microeconomic policy focuses on trade liberalisation, labour market reforms, market deregulation, and immigration/environment policies to improve productivity and living standards.

  • Direct government intervention can stabilise, reallocate resources, and redistribute income; welfare systems and progressive taxation are central tools.

21.11.2 Key terms (selected)

  • budget, budgetary policy, cash rate, deregulation, GDP per capita, GDP, HDI, GPI, GGDP, HPI, liveability, macroeconomics, microeconomics, monetary policy, non-material living standards, qualitative indicators, qualitative indicators, quantitative indicators, tariff, subsidy, welfare benefits, progressive taxes, compulsory superannuation, unemployment, inflation, sustainable growth.

21.11.3 Reflection

  • Guiding questions prompt students to reflect on how purchases and happiness relate to the health of the economy, considering how learning may have shifted their view.

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