Macroecnomic Policies Essay Prep. Flashcards
Outline the major economic objectives of government
There are four main economic objectives of government. These include sustainable economic growth, price stability, full employment and external stability.
Sustainable economic growth
economic growth
- defined as the increasing capability of an economy to satisfy the needs and wants of its members
- desired rate is 3-4%
GDP
- gross domestic product
- value of all final goods and services produced in a year
Economic growth is usually measured by the rate of change in GDP
- country slower growth = resources, including labour are not fully employed
- growth is too fast = exposes bottlenecks in the economy and will place pressures on prices
- australia has experienced periods of rapid and slow growth. For example, 2002-2008 was the first mining boom and was a period of rapid growth. late 2008 was when the GFC occurred causing an economic slowdown
Price Stability
- occurs when there is little increase in the general price level
achieved by keeping inflation at 2-3%
inflation is the persistent increase in the general price level - measured using the formula cpi2-cpi1/cpi1
- CPI can be defined as the basket of goods and services that puts a weighting on the price of goods
. In a peak when inflation is high, both cost push and demand pull inflation is existent, however, in a trough when inflation is low, only cost push inflation is existent.
benefits of low inflation:
- maintaining the value of money,
- protecting the value of savings,
- keeping nominal and real interest rates low,
- promotion of productive investments,
- international competitiveness.
high inflation:
- erodes the values of savings
- increases interest rates,
- promotes speculative investment
- erodes international competitiveness
full employment
occurs when everyone who is willing to work is able to find a job.
- full employment is achieved when unemployment rate is 4-5% (4.75% to be exact) & no cyclical unemployment
- unemployment occurs when a person is willing to work but can not find suitable employment for at least 1 hour per week.
In a peak, cyclical unemployment is equal to 0 while frictional unemployment increases between 1 and 1.5%.
In a trough, structural unemployment is between 3 and 4% and unemployment overall is at a minimum.
full employment can be caused:
- if confidence increases due to higher income. means production will increase leading to demand for labour to increase.
- can also be achieved when economic growth in other countries increase.
- causes greater demand for australia’s exports. as production increases, so will demand for labour
BENEFITS:
- can lead to many benefits
- increase in real income => increase in consumer confidence
- increase in standard of living
COSTS:
- F.I. can come at a cost to the economy
- Increase in confidence = imports increase therefore CAD will increase
- Production of G.S will reach constraints and cost + demand pull inflation
External Stability
Refers to BOP.
- Record of all economic transactions that occur in the economy. From these, an idea can be formed of the state of the economy
- Australia runs CAD
- CAD = imports > exports
- Not a bad thing, as imports are related to its countries economic growth and lvl of income.
- Aus. has grown profoundly in past decade relative to other countries
- causes an increase demand for capital, intermediate and consumer goods
- recent resource boom has caused for increase in demand for capital goods meaning more importing
- Aus. also has high standard of living, resulting in consumers importing goods from overseas
- All contribute to the CAD but not a bad thing
gov. has little control over external balances due to it being a free market with a free exchange rate
therefore trying to reach a certain level of the CA is meaningless and ineffectual.
current econ. growth rate
- 1%
- aus is achieving sustainable econ. growth
- however, bank of Australia expects growth will be below trend for next several quarters
current inflation rate
2.3%
RBA has been successful in targeting inflation
- inflation is expected to be consistent with 2-3% target over next two years
unemployment rate
- 1%
- labour market currently has a degree of spare capacity and it will probably be some time before unemployment declines consistently
