Australia's Economy: Macroeconomics vs Microeconomics - Study Notes

Macroeconomics vs Microeconomics

  • Macroeconomics: The study of the national economy and impacts of aggregate demand.

  • Microeconomics: The study of individual people and businesses and the interaction of those decisions in the market.

Australia’s Economy

  • Australia is a mixed economy.

Market-Based Economy

  • Free to set prices and levels of activity based on supply & demand.

  • Criticised for causing inequality in social & economic circumstances.

Mixed Economy

  • Individuals & businesses make decisions, some government intervention.

  • All modern economies are mixed → means of production are shared.

Roles of Government

  • Producer of goods/services (hospitals, schools, roads).

  • Redistributes income (progressive tax, welfare).

  • Regulates economic activity (laws, regulations).

  • Controls commercial life.

Economic Spectrum

  • Left: Mixed with high government intervention.

  • Right: Mixed with low/no government intervention.

Competition

  • Leads to:

    • Lower prices

    • Innovation

    • More services

Environmental Policy

  • Household Rebate Scheme (increase affordability/demand).

  • Renewable Energy Target (23.5%23.5\% electricity from renewable sources).

  • International Agreements (Paris Agreement, Kyoto Protocol).

Economic Benefits

  • New industries

  • Job opportunities

  • Increased competition

  • Efficiency gains

Social Benefits

  • Cleaner environment

  • Improved non-material living standards

  • Reduced greenhouse gases

  • Sustainable resource use

Key connections and implications

  • Government intervention can be used to correct market failures while aiming to maintain efficiency.

  • Environmental policies address externalities (e.g., pollution) and can drive innovation and new industries.

  • Market-based aspects promote competition, which can reduce prices, spur innovation, and expand services, but may raise concerns about inequality without redistribution.

  • Renewable energy targets and international agreements shape the energy mix and cross-border cooperation on climate and sustainability.

  • The economic spectrum illustrates how different mixes of government involvement influence incentives, resource allocation, and equity.

  • Policies like progressive taxation and welfare play roles in income redistribution to counteract potential inequality in market outcomes.

Foundational context (connections to broader principles)

  • Mixed economies balance efficiency (market signals) with equity (government intervention).

  • Competition drives dynamic efficiency but may require safeguards (regulation, social safety nets).

  • Externalities (positive and negative) justify government action and policy design.

  • Economic growth can entail environmental and social trade-offs that policies attempt to manage for sustainable development.

Monetary Policy

RBA sets interest rates to influence savings, consumption, investment.

Every Month


Monetary Policy (8.8.25)

  • Implemented by Reserve Bank of Australia (RBA).

Aims of Monetary Policy

  • Stability of currency

  • Full employment (5–6% unemployment)

  • Inflation target (2–3%)

  • Economic prosperity and welfare of the Australian people

Other Responsibilities

  • Issues banknotes

  • Influences short-term money market

  • Manages payments & receipts for government

  • Manages gold & foreign exchange reserves

Process

  • Monitor the Australian economy and set the cash rate.

  • Meets on the second Tuesday of every month.

Cash Rate

  • Banks lend & borrow money overnight in the cash market.

  • Cash rate = cost of borrowing in this market.

  • Main tool of monetary policy.

  • Acts as the foundation for bank interest rates.

  • Banks set rates to remain profitable yet competitive.

  • Cash rate changs the interest rate

If Cash Rate ↑ → Borrowing ↓, Interest ↑, Consumption ↓, Saving ↑
If Cash Rate ↓ → Borrowing ↑, Interest ↓, Consumption ↑, Saving ↓


Impacts of Monetary Policy

Interest Rate Increases

Borrowers (e.g. mortgage holders):

  • Repayments increase

  • Household disposable income decreases

  • Consumption decreases

Lenders (e.g. savings accounts):

  • Higher returns on investments

  • Greater incentive to save



Interest Rate Decreases

Borrowers (e.g. mortgage holders):

  • Repayments decrease

  • Household disposable income increases

  • Consumption increases

Lenders (e.g. savings accounts):

  • Lower returns on investments

  • Less incentive to save


Impact 

  • Consumption vs savings

  • Business investment

Fiscal Policy

  • Government adjusts spending/taxes to expand or contract circular flow of income.

  • Government annual budget ( taking taxes and spending to influence the economic growth ) 

  • Once a year

  • Impacts:

    • Government spending

    • Disposable income levels

Fiscal Policy

  • Basis: interest rates for lending and saving

  • Means: controlling the money supply of a country.

  • Affects: Consumption (C), Savings (S), Investment (I).

Expansion

  • Government spending ↑, taxes ↓

  • Usually change government spending rather than tax.

Contraction

  • Government spending ↓, taxes ↑

Sources of Government Revenue (Tax)

  • ~50% from individuals.

  • ~20% from companies.

Direct Tax

  • Personal income tax

  • Capital gains tax

  • Medicare levy

  • Company tax (30%)

  • Fringe benefits tax (benefits from work, paid by employer)

Indirect Tax

  • Excise duty → tobacco, alcohol, petrol (3/4 goes to government), beer, spirits

  • Customs duties

  • Goods and Services Tax (GST) → most goods, but fruits & vegetables exempt

Government Spending

  • ~⅓ Social security & welfare

  • ~⅙ Health

  • ~¼ Other + all other functions





Fiscal Policy: Budget Outcomes

Budget Deficit

  • Spending > Revenue

  • Government borrows money to cover tax gap.

  • Used to stimulate economic growth.

  • Expansionary

Balanced Budget

  • Spending = Revenue

  • No borrowing or saving.

  • Maintains stability.

Budget Surplus

  • Spending < Revenue

  • Extra revenue saved or used to repay debt.

  • Used to cool down the economy or prepare for future.

  • Contractionary

How does Government Pay for Deficits?

Government Bonds

  • Issued to local investors (e.g., super funds, banks).

  • Investors repaid with interest.

  • Seen as low-risk investment.

Loans from Financial Institutions

  • Borrowed from domestic or foreign banks.

  • Adds to national debt.

  • Often used short-term or in emergencies.

    Types of Unemployment

    • Structural: Fundamental shift in operation of society.

    • Seasonal: Occurs between seasons.

    • Frictional: Working-age people between jobs.
      Unemployment

    Definition

    Not working but actively seeking work.

    Employed + Unemployed = Labour Force


    Unemployment Rate = Unemployed/Labour Force x 100 


    Participation Rate

    PR= Labour Force / Working Age population x 100


    Working age = 15–67 years.

    • ~66% of Australians participate.

    Types of Unemployment

    • Cyclical: From business cycle downturns.

    • Structural: Shift in economy.

    • Seasonal: Between seasons.

    • Frictional: Between jobs.

      Inflation

      • Definition: Increase in the general level of prices across the economy.

        • Occurs when demand exceeds supply.

      • Deflation: Triggered by <0% inflation (like quicksand).

      • Wages need to grow in line with inflation.

      • Australia’s target inflation: 2–3%.

      Measuring Inflation

      • CPI (Consumer Price Index)

        • Calculated quarterly.

        • Measures purchasing power and real income.

        • Compares change in prices of a basket of goods.

      • Regimen

        • Basket of goods used to measure CPI.

        • 80,000 items grouped in 11 categories.

        • Weighted differently by importance & frequency of purchase.

        • Examples: Housing 23%, Food & Beverages 16%, Recreation 13%, Transport 11%.

      Formula

      Inflation:        Price (year 2) - Price (year 1) 

                         —---------------------------------------------- x 100

                                           Price (year 1) 


      Real Income

      • Income × Inflation = Loss in purchasing power
         Example: 600×3.8=22.80

      600- 22.80 = $577.80 —> real income per week


      Impact of Inflation

      • Purchasing power decreases.

      • Local producers lose out to overseas competitors.

      • Economic growth undermined if inflation rises too fast.

      • Resource allocation:

        • Groceries +10% → $1000 → more affordable.

        • Housing +10% → $100,000 → less affordable.

        • Rich people benefit more.

      • Income distribution:

        • Lower income → spend more.

        • Higher income → gain on assets.

      Target inflation (2–3%)

      • Indicator of Monetary Policy effectiveness.

      • Stability builds business & consumer confidence.

      • High inflation → fluctuations in business cycle.


      Causes of Inflation

      Demand-Side Inflation

      • Occurs when demand exceeds supply.

      • Factors:

        • Consumer optimism (less saving).

        • Business confidence (investment, hiring).

        • Higher incomes (more spending).

        • Exports.

      Supply-Side Inflation

      • Occurs when supply is limited.

      • Factors:

        • Increased production costs.

        • Higher wages.

        • Interest rates (borrowing costs).

        • Government taxes.

        • Raw material costs.

        • Imports.

        • Exchange rate changes.

        • Import tariffs.

📌 Executive Summary

The presentation explains how the performance of the Australian economy is assessed, focusing on four key areas:

  1. Economic Growth – Measured mainly by GDP and aggregate demand. While GDP is a key indicator, it has limitations (e.g., it doesn’t capture standard of living, income distribution, or environmental impact).

  2. Standard of Living – GDP per capita is used, but it has flaws since it only shows averages and ignores inequality, environmental factors, and non-material wellbeing.

  3. Environmental Sustainability – Economic growth often conflicts with sustainability. Economists argue for a shift away from GDP obsession towards regenerative, distributive, and sustainable economic models.

  4. Income Distribution – Inequality stems from wages, property income, inheritance, and government transfers. Redistribution (taxes, welfare, superannuation, services) aims to improve equity.

The presentation also compares Australia’s economic performance with major economies (China, US, UK, NZ), using indicators like GDP growth, unemployment, and inflation. A case study contrasts Australia and China, highlighting trade links, growth patterns, and structural differences.

1. Introduction

  • Topic: Assessing economic performance of the Australian economy.

  • Focus areas: Economic growth, standard of living, environmental sustainability, income distribution.

2. Economic Growth

  • Defined as change in GDP over time.

  • GDP measured by expenditure (aggregate demand) → spending by households, businesses, governments, overseas.

  • Stable growth target: 3–4% per year.

  • GDP comparisons across countries.

  • Limitations: Data accuracy, ignores living standards, inequality, inflation, environmental impact.

3. Standard of Living

  • Indicators: housing, jobs, education, healthcare, environment, rights.

  • GDP per capita adjusts for population but is imperfect:

    • Unequal distribution.

    • Gains may come from longer hours or automation.

    • Doesn’t include environmental factors.

4. Environmental Sustainability

  • Economies grow to replace goods, meet population needs, and improve quality of life.

  • But growth risks:

    • Resource depletion.

    • Environmental degradation.

    • Impact on future generations.

  • New thinking:

    • Move from GDP obsession to wellbeing-based measures.

    • Kate Raworth’s Doughnut Economics: focus on regeneration + fair distribution.

    • Climate-focused strategies: ambition loops, exponential goals, shared action pathways.

5. Income Distribution

  • Types of income: wages, property income, government income, income-in-kind.

  • Inequality caused by inheritance, social networks, unemployment, inflation, technology, free markets.

  • Redistribution tools: welfare, progressive taxes, services, compulsory superannuation.

  • Australia is relatively egalitarian, but the top 20% hold most wealth.

6. Comparing Economies

  • Australia compared to China, US, UK, and NZ.

  • Key indicators: GDP growth, unemployment, inflation, wealth distribution.

  • RBA provides economic performance data snapshots.


Measuring GDP and Aggregate Demand

1. What is GDP?

  • Gross Domestic Product (GDP) is the total value of all goods and services produced within a country in one year.

  • It’s the main measure of economic growth.

2. How do we measure GDP?

There are three main approaches:

  1. Expenditure Approach (most common)

    • Adds up all spending on final goods and services.

    • Formula:
      GDP=C+I+G+(X−M)GDP = C + I + G + (X - M)GDP=C+I+G+(X−M)
      Where:


  1. Income Approach

    • Adds up all incomes earned (wages, profits, rents, interest).

  2. Production/Output Approach

    • Adds the value of goods and services produced (less the value of inputs).

3. What is Aggregate Demand (AD)?

  • Aggregate Demand is the total demand for all goods and services in an economy at a given time and price level.

  • It is essentially the expenditure approach to GDP.

Formula:

AD=C+I+G+(X−M)

4. Why use Aggregate Demand to measure GDP?

  • Instead of directly counting every item produced, economists track spending.

  • The logic: If something is produced, someone must have bought it.

  • So by adding up everyone’s expenditure (consumers, businesses, governments, overseas buyers), we get GDP.


Whose expenditure/demand do we need to measure?

  1. Consumer - who spend on goods and services

  2. Businesses - who pay for labour and equipment

  3. Governments - who pay for labour, goods and services

  4. Overseas Markets - who purchase goods and services from Australia


Economic Growth is measured by aggregate demand 


Different Approaches

  • Expenditure and Income Approach


Effects of Increased Equality

  • Living Standards (redistributing income ) 

Microeconomics 

Microeconomic Policies

  • Improve productivity & efficiency.

  • Support competition (cheaper, better, innovation).

  • Improve consumer outcomes.

  • Increase employment opportunities.

Wants

  • Private Wants: Car, technology, clothes.

  • Collective Wants: Roads, education, healthcare, travel.

Policies

  • Trade liberalisation

  • Labour market reforms

  • Market deregulation

  • National reform agenda

Removal of Government Control as more efficiency is free market




Trade Liberalisation & Labour Market Reform

Quotas

  • Quota: 1000 watches → reduces supply, increases price

  • Quota: 500 watches → stronger effect

Positive Impacts of Trade Liberalisation

  • Reduced prices for goods

  • More consumer choice

  • Improved living standards

  • Increased business competitiveness

  • Efficient resource allocation

Negative Impacts of Trade Liberalisation

  • Closure of uncompetitive industries

  • Unemployment in affected sectors

  • Decline in non-material living standards

  • Financial stress for workers



Labour Market Reform

Shifts from centralised wage systems to workplace-level determination


Market Deregulation

  • Removal of unnecessary government control, restrictions, and supervision.

Benefits

  • Lower cost inflation → lower prices.

  • Stronger competition.

  • Economic growth & increased spending.

  • Higher employment → new businesses.

  • External stability → more exports.

Negatives

  • Loss of important wants.

  • Reduced services provided.

  • Conflicts of interest (profit vs service).

Negative Impacts of Deregulation

  • Worse working conditions

  • Increased productivity = longer working hours

  • Vulnerable workers may be exploited under contracts


Centralised vs Decentralised

Centralised

  • The government sets wages

Decentralised (no government intervention)

  • Wages negotiated

  • Based on productivity

  • More flexibility

  • Risks: worse conditions, exploitation, longer hours





National Reform Agenda (ACCC)

  • Strengthens competition & efficiency.

  • Australian Competition & Consumer Commission (ACCC).

  • Prevents companies from artificially raising prices to exploit.

Anti-Competitive Practices (Illegal)

  1. Price Fixing – firms collude to stay competitive.

  2. Exclusive Dealing – refusal to supply products to certain firms.

  3. Collusive Bidding – firms secretly agree on tenders.

  4. Predatory Pricing – lowering prices to drive out rivals.

  5. Market Zoning – dividing areas to avoid competition.



Protection Policies

Tariffs

  • Tax on imports → raises price of imported goods.

  • Australia imposes very few tariffs.

Quotas

  • Limit on imported goods.

Subsidies

  • Government payments to local producers to help them compete with imports.

Tariff Effects

  • Encourage local spending.

  • Boost local employment.

  • Increase government tax revenue.

  • Reduce international competition.