Economic Objectives

Economic Growth - GDP (3-4%)

Gross Domestic Product (GDP) the value used to determine the economic growth. It is a measure of the total value of all goods and services Australia produces over a year, and so if GDP increases, the economy is growing.

Economic growth is important because if more goods and services are being produced, that means that more people are being employed with paid wages. People are then able to spend their wages on a wider variety and overall improve the standard of living.

How Is GDP Measured?

A measure of the total value (in dollars) of all goods and services produced in Australia over a specific period of time - usually annually. Only final goods are calculated in GDP and tax and other deductions are not included.

Recession And Depression

Recessions - Where economic growth falls for two or more quarters in a row.

Depressions - A more severe, extreme recession that lasts for two or more years.

In recessions/depressions, economic growth falls, there is a decrease in available credit, a significant increase in unemployment, and there is little consumer confidence.

Limitations of GDP Growth

GDP Alone does not accurately assess the true performance of the economy. Producing more goods and services may have some undesirable consequences - mainly environmental or social. Some factors that are not considered are enough leisure time, spending time with family and friends, contributing to the community, a job that is rewarding, enjoying nature, good health, a pollution-free environment, and income and wealth are distributed fairly in society.

Price Stability - Inflation (2-3%)

Price stability is a concept in which there is a gradual and sustainable rise in the general price of goods and services.

Inflation and deflation are terms that measure the rate of the change of prices over a certain period of time. An increase in price is referred to as inflation and a decrease is referred to as deflation.  Australia’s goals are to ^^maintain a Low and stable 2-3% growth of inflation. ^^

Rising prices mean the consumer must pay more for goods and services if they want to continue to consume the same amount and maintain their standard of living.

Measuring Inflation

Inflation is measured using the Consumer Price Index (CPI). The CPI measured the price change of a typical basket of goods and services purchased by Australian households every financial quarter. The change (%) from one quarter to another is the measurement of inflation or deflation.

Causes Of Inflation

The main reason for inflation is a stronger demand in the economy for goods and services. Stronger demand can lead to shortages and companies won't be able to keep up with the demand for their products and therefore prices increase.

Demand (Governments and increased demand) - Pull

• Fiscal Policies

• Government spending

• Interest Rates Lowered

Cost (External or human) - Push

• Increase in input prices

• Wage Growth

• Wars - Ukraine and Russia (Increase in prices for Oil, Grains and Wheat)

• Natural Disasters

Increased Spending

• consumers feeling confident about income and future employment

• businesses feeling confident about future - expansion of operations higher employment of staff and investments

• increase in performance for trading partners (China)

• Relatively low interest rates that encourage consumers and business to borrow more in order to spend

• lower taxes and increased government spending - increased demand and expenditure

Effects of Inflation

• Less purchasing power

• Less goods and services

• Less investments

• Less consumption

• Economic growth decrease

• Decrease in confidence

• Interest rates flow and effect

• Unemployment increase

Sustaining Price Stability

• Fiscal Policies - Government spending

• Lowering Taxes

• Monetary Policies - Interest rates

Unemployment - below (5%)

The percentage of people in the labor force who are unemployed (only needs to be employed for one hour per week). The labor force is the total number of people in Australia willing and able to work. Unemployed people are the people ready to start work and taking active steps to find a job.

When the total unemployment rate is high governments collect less revenue from taxes and must inject more money into the economy in order to assist the unemployed. This can be in the form of social benefits, or welfare programs.

Cyclical Unemployment - Economic Activity

During an economic downturn, it’s likely that there will be a fall in demand for goods and services. Because of this, there will be a lack of jobs available for those who want to work. Businesses experiencing weaker demand may lay off existing workers or employ less due to their lower budget.

An increase in cyclical unemployment might suggest the economy is operating below its potential. In order to counteract its impacts, policies that stimulate aggregate demand (expansionary monetary policies) can help reduce this type of unemployment.

Structural Unemployment - Inefficient Skills

When there is a mismatch between the jobs that are available and the people looking for work. This can be caused by the lack of individuals who have sufficient skills for the available jobs, or because the available jobs are a long way from the jobseekers and they cannot move closer.

It is a long-lasting and severe type of unemployment that is caused by a force other than the business cycle meaning that it cannot be remedied by fiscal and monetary policies. Structural unemployment is generally triggered by technological changes/advancements that marginalize people with skills that may become redundant. Other causes are changes in demand, changes in factors of production, poor training, lack of education, competition, and globalization.

Frictional Unemployment - Changing Jobs

When people move between jobs in the labor market, as well as when people transition into and out of the labor force. This is usually temporary unemployment where individuals are investing time in searching for the right job or businesses are spending time in searching for a suitable candidate.

Frictional unemployment can be seen as a good thing as the movement of workers is necessary to achieve an efficient allocation of labor across an economy. This type of unemployment usually lasts less than one month and has minimal influence to wages or inflation. It can also happen at any point of the business cycle.

Effects of The Different Types of Unemployment

• Fall in demand for goods and services, fall in revenues and profits

• Wastage of human resources, not maximising labor efficiency and lower productivity

• Higher reliance on welfare services

• Increased homelessness, poverty, and debt

• Less demand, decreased standard of living

• Social cohesion decrease

• Crime Rates increase

Sustaining Employment

• Government regulation in labor market\direct public sector job creation

• Policies

• Infrastructure

  • Job creation

  • education

  • building confidence

External Factors That can Cause

• Pandemics - COVID-19

  • Went down then got hiked up

• Wars and Natural disasters

  • Ukraine and Russia

• Pandemic COVID-19

• Self-employment

• Online platforms

• Border closure - employment levels

• Education

Australia in the Present vs Future

What Phase is Australia currently in?

Currently at a peak. Inflation is going down due to government policies (monetary). Unemployment is at 3% probably a good utilisation of resources including labour. GDP is starting to curve and nearly decreasing

How Does Australia Maintain Equitable Income Distribution?

How Efficient is Australia’s Allocation of Resources

Practice Questions

• Where are we in the business trade cycle

• Refer to the chart pack at the reserve banks. Describe how GDP has changed since 2015.

• How increased GDP can lead to increased employment and a better standard of living.

• Why does inflation reduce oru ability to purchase as much as before with the same amount of money.

• How does consuemr confidence, business confiduence, interest rates and increase/decrease in income tax affect inflation.

• Economic Indicators

• Contraction - Low economic growth

  • Business confidence low - aren’t producing a lot

  • People are getting laid off

  • Less demand and less growth

• Expansion and Recovery

  • Low interest rates

  • Cash rates and housing prices

  • Buying big ticket items