Growth, Inflation And Employment Flashcards
Economic Growth
An increase in the capacity of the economy to produce goods and services over a period of time.
How to measure growth?
To measure growth we use the Gross Domestic Product (GDP) which is the total value of all final good and services produced in an economy during a given time.
GDP Formula
GDP = GDP2 - GDP1
————– x 100
GDP1
Important to measure the rate of change, how quickly the production the production possibility frontier shifts to the right.
Economic activity missed out of the GDP measure of economic growth all together
Informal Markets - activity is not recorded and payments are made in cash eg. Black markets
Non-Market Output - Output that people do for themselves that could have been done by someone else eg. Childcare, car services
Charity work and Volunteering - eg. Working in an op shop
The value of some economic activity is over-stated
Negative Externalities
Defensive Expenditure
‘Bads’
The value of some economic activity is under-stated
Positive Externalities
Service Sector Activity
BENEFITS of Economic Growth
- Higher material living standards - producing more goods and services
- Better quality goods and services and increased choices for consumers
- Greater employment opportunities
Headline Inflation
Is a measure of total inflation within an economy including commodities such as food and energy prices (eg. oil and gas), which tend to be much more volatile and prone to inflationary spikes - CPI (consumer price index)
Underlying Inflation
Measures the rate of inflation after removing the effect of market forces (supply and demand). This is a more accurate measure because it removes the seasonality from inflation.
‘The Goldilocks Effect’
The reserve bank of Australia’s target rate of inflation is between 2-3%
Inflation
- Rise in the average price level of goods and services
Disinflation
Slowdown in the rate of inflation. The price level is still increasing but at a slower rate.
Deflation
Fall in the average price level of goods and services
Hyper-inflation
Inflation is out of control (over 100% per year) eg. Nazi Germany - when they constantly made more money and costed a wheel barrow of money to buy a loaf of bread.
Costs of Declining Inflation
- Consumers put off purchases because they feel prices will be cheaper in the future (decreases demand)
- Tends to contribute to low cash rate (current situation) - investment is discouraged because low interest rates mean low return on investment
- Encourages the ‘mattress principle’ take money from banks and keep for themselves
- Austerity (cutting govt. spending) - leads to spending cuts on social programs
Costs of Inflation
- Money loses value therefore people lose faith in money savings which is also reduced.
- Inflation can get out of control (wage prices increase)
- Consumers fixed income lose out (pensioners)
- This favours borrowers at the expense of savers - inflation erodes the real value of existing debts.
- Discourages capital investment (planned investment)
- Rising inflation reduces economic growth
Benefits of Inflation (in the Goldilocks Zone)
- Industry wide price rises which enables revenues to grow
- Increased revenue = higher profits
- Inflation makes using debt as a source of finance cheaper in real terms
Factors Affecting Australia’s Inflation
- Growth in key partners (India, China and other Asian countries)
- Values of the exchange rate
- Wage rates
- Competition
- Government regulation (cause prices to rise)
- Indirect taxes (carbon tax) increase prices
Demand Pull Inflation
- Inflation occurring when there is no change in aggregate demand (given no change in the level of aggregate supply). Eg. Wage rates rise due to a shortage of skilled labourers
Cost Push Inflation
- When costs of production increase the willingness for producers to supply changes. Eg. Workers receive a pay rise above any increase in productivity
Why does inflation cause inefficiency?
Without inflation people would not have to waste their time or money continually making adjustments to, for example, their wages, savings portfolio, price catalogue and advertising and marketing.
Unemployment
- Occurs when people who are willing and able to work cannot find a job
Full employment
- In simple terms this means that people who want to work have jobs.
- 4% is full employment not 0% - This is due to changes in technology meaning they do more work for humans and skills and knowledge levels have risen so employability has become more selective and difficult as a result
- When cyclical and structural employment adds together and is fully employed because this is a more accurate gauge as these are year long jobs
Natural Rate of Unemployment
- Is determined by structural changes in an economy
Underemployment
- Can occur for example if someone has a Uni degree but is working at Macca’s and not getting the adequate money or using their skills efficiently. Also happens if someone is employed and willing to work full time but can only get part-time work.
Participation Rate
- Represents the proportion of Australian’s aged over 15 years who are members of the labour force (they are either employed or unemployed).
- Made up of people who completed at least 1 hour of paid work or 15 hours of unpaid work in a week.
- Made up of people who sought work and were willing and able to start work in the period of the survey period, but were unable to find employment.
Participation Rate Formula
PR = total number of people in the labour force
—————————————– x 100
working age population (15 and older)
Unemployment Rate Formula
UR = number of people unemployed
——————————- x 100
number of people in labour force
Employment Rate Formula
ER = number of people in employment
——————————— x 100
working age population
Rise in Participation Rate
- Causes labour force to grow, leads to an increased supply in labour resources
- If this occurs at same time as falling unemployment rates, this is a sign of a stronger labour market and good job prospects.
Structural Unemployment and Causes of Structural Unemployment
- occurs because of changes in the way good and services are produced. Eg. Technology changes and robots play a larger role
Causes: - Poor business profits and closures
- Business allocation
- New technology and a mismatch of skills
- The effect of globalisation and tariff cuts
- Govt. microeconomic policies
Frictional Unemployment
- exists when people are unemployed between finishing one job and starting another (not when they get fired, it has to be voluntary)
Seasonal Unemployment
- results from the termination of jobs at the same time each year due to the regular change in seasons. Eg. Fruit picking, theme park operators.
Cyclical Unemployment
- follows the ups and downs of the business cycle
- in periods of recession, when economic activity slows down - this type of unemployment will rise.
- just like when the economy is going strong and aggregate expenditure is high employment of this type will be strong
- Demand deficient unemployment
Economic Costs of Unemployment
- A waste of scarce resources - waste of labour
- Skills atrophy - lose skills if they don’t use them on a regular basis
- Costs to the Govt. - loss of tax revenue and an increase in spending on welfare and social security. Eg. Centrelink
Social Costs of Unemployment
- A less harmonious society - distribution of wealth and income is uneven as some people have jobs and others don’t which leads to increase crime and vandalism rate
- Immorality - morally and ethically unacceptable to deny the opportunity to participate in society
- A reduced self-worth - people without jobs for extended periods of time will think twice about themselves and their value
- A loss of income
- A loss of self-esteem
- Poorer physical and mental health
- Boredom and loss of purpose
- Loss of friends
- Poverty
GDP Meaning
Production of all final goods in a period of time, usually one year
Implications of full Employment for the economy
Opposite relationship between unemployment and inflation is caused by Aggregate Supply and Aggregate Demand.
Full employment is causes high inflation as more people are working and have money to spend which means prices will rise due to lack of supply
Phillips Curve
A line on a graph that shows the theoretical relationship between the rate of inflation and the rate of unemployment when the level of aggregate demand and other factors that affect inflation and unemployment stay the same.
