Inflation, Unemployment, Business Cycle Flashcards
Inflation
-inflation is a persistent and appreciable rise in the general level of prices
-price rises noticeably across a range of goods and services
-to some economies inflation is normal and a important indicator (1/3) of the economic ‘health’
-measured by CPI
Compiling CPI
-not all price changes are measured-> only based on a sample of goods and services purchased by typical households called a basket
-basket is weighted to indicate importance
-HIGH weighting: fuel, food, rent, alcohol+tobacco
-LOW weighting: subscriptions, luxury clothes
Headline / underlying
-CPI is a broad all groups measure -> headline
-CPI manipulated to be more accurate -> underlying
Underlying measures CPI
-trimmed mean and weighted median
-reduces impact of items with volatile prices
Demand pull inflation
Explains why prices can increase when there are higher levels of demand ‘too much demand chasing too few goods.’
-often associated with a strong economy during the late expansion phase of the business cycle
-indicators: High wages, consumer confidence + use of credit
Cost push inflation
Explains why prices can increase when rising input prices are passed through to consumer prices
-occurs all phases of business cycle, depends on global markets
-e.g rising fuel and oil prices
Effects of inflation
-real interest rates
-depreciation
-hyper inflation
Labour force
People within working age who are working / looking for work
-unemployment rate based on how many in labour force are unemployed
Participation rate
The proportion of the working age population that is in the labour force
-labour force/population aged 15+
Unemployment rate
The proportion of the labour force that is willing and able to work but had not held paid work for at least one hour per week
-unemployed / labour force
Underemployment
Refers to workers who have a paid job but would like to work more hours or are significantly over qualified for their field of work
Frictional unemployment
-voluntary
-people ;eating for better pay, for a different location, due to a changed family circumstance etc.
Structural unemployment
-changes in economy
-involuntary
-changed demand for knowledge and skills e.g many people being qualified auto workers however that job is no longer relevant to todays society
Cyclical unemployment
-involuntary
-follows business cycle
-grows and shrinks because demand o labour is derived from demand of goods and services
-building, retailing, hospitality
Unemployment social costs
-self esteem
-connections to community through work
-costs centre on personal and families life
Relationship between inflation and unemployment
-negative relationship (Phillips curve)
-as econ activity rises, lower cyclical unemployment puts upward pressure and wages, passed on to cosumer prices
-more people with jobs means more spending power so prices get bud upwards
The business cycle
Shows the fluctuation in economic activity that an economy experiences over a period of time
-refers to the fluctuations of real GDP around the long term growth rate.
Upswing/expansion features
-high consumption expenditure
-general confidence amongst investors
-business firms are working toward full capacity
-cyclical unemployment relatively low
-inflationary pressures
-imports increase low saving levels
-increasing levels of borrowing
-living standards increasing
Downswing/ contraction features
-low levels consumption expenditure
-low confidence amongst investors
-business firms working at lower capacity
-cyclical unemployment high and increasing
-deflationary pressure
-imports low
-low levels of borrowing
Peak features
-weakening confidence amongst investors
-business firms are working at full capacity
-unemployment is lower than natural rate
-unsustainably high levels of econ activity
Trough features
-growing confidence amongst investors
-business firms working at lowest capacity
-unemployment at its highest
-prices likely to stabilise/begin rising
Leading indicators
-share prices
-building approvals
-business + consumer confidence
-consumer expectations
Coincident indicators
-GDP
-retail sales
-job advertisements
Lagging indicators
-interest rates
-unemployment
-bankruptcies
-inflation
Counter cyclical
-government spending is counter cyclical (aims to smooth economic cycle)
Negative shocks that spark a recession
-imternational supply chain disruptions (COVID)
-natural disasters (floods QLD)
-political events (Ukraine v Russia)
-health crises (COVID)
Positive shocks that spark a recovery
-large gov stimulus (job keeper/seeker payments)
-unexpected growth in a major trade partner (Aus signs ECTA 2022)
End of mining boom 2019
-strong GDP growth last 10+ years
-high levels investment into mining sector, growing exports if commodities (iron ore, coal, liquified natural gas (LNG)
-decreased investment levels
-decreased exports as China growth slowed
-weather events (floods/fires) decreased supply
End of mining boom 2019
-strong GDP growth last 10+ years
-high levels investment into mining sector, growing exports if commodities (iron ore, coal, liquified natural gas (LNG)
-decreased investment levels
-decreased exports as China growth slowed
-weather events (floods/fires) decreased supply
Covid-19 recession 2020
-GDP decreased 7% in the June quarter of 2020, largest decline in Aus history
-businesses unable to operate, consumers unable to spend, large decrease in investments, large decrease in net exports
Covid-19 rapid recovery 2021-2024
-significant + rapid increase in GDP growth
-large injections of gov spending, high consumer expenditure, increased exports
-jobseeker + keeper programs injected 89 billion into economy
-supply issues, high input prices + high spending levels causing extremely high inflation
Current trends in the business cycle
-currently in an expansion, potentially a peak as GDP is below the target level (1.1 % in March 2024)
-GDP growth mainly from gov spending which also indicates a peak phase
Current indicators
Leading =
-share prices down (0.5 %)
-building approvals decreasing (-7.0%)
Coincidental =
-GDP slowing (1.1%)
-CPI increasing (4%)
Lagging =
-unemployment is constant
Trends in Aus unemployment (last 5 years)
-since COVID-19 recession recovery, inflation has been to high meaning gov wants to slow economy to slow inflation by increasing inflation rates
-becomes more expensive to borrow money so business costs increase, people mortgages etc. increase in cost so spending is low, leading to people being laid off work
-increasing trend in overall participation rate (despite big decrease during COVID)
-increased participation leads to econ growth
-GDP increasing but the maximum potential output also increased so there will still be a GDP gap
-decreasing trend in underutilisation
-econ growth
-GDP gap will narrow because we are using more of our labour resources but total labour hasn’t changed
