topic 3 eco issues Flashcards
eco growth
^ in volume of g&s eco produces/real GDP over PIT
- measured by annual rate of change in real GDP (%^ in value of g&s produced in an eco over PIT usually 1 yr adjusted for inflation rate aka GDP at constant prices)
- real GDP: nominal GDP x (previous CPI/CPI)
- EG/rate ^ real GDP: (current GDP-previous GDP)/previous GDP x100
- (aso in ch3) quantitative –> measure ^GDP, income, emp, LS
- by ^AD/AS (usually both)
- ^AS expands eco’s productive capacity by 1. ^use resources (quantity) eg. unutilised land, LF^, adopt new tech & 2. ^productive use existing resources (quality) eg. capital ^productivity land & labour, edu & training programs ^ labour, capital productivity
- ^AS –> outward shift eco’s PPF (when producting at capacity, EG only if mroe resources available/tech adv/efficient use existing resources) –> current & future LS ^
limitation of using EG/output to measure LS
GDP is gross measure & doesnt account what’s being produced/depreciation of c’s existing capital stock & consumer goods
to measure GDP, ABS uses
info abt HH &bus incomes, expenditure on g&s and firms production
- when equilibrium, all expenditure (HH consumption/bus investment funded by HH savings) returned for produced g&s
3 diff time periods used to measure AUS’ rate eco growth
-
quarterly eco growth
* every 3 months by ABS
* eg. March quarter is % increase in GDP since previous December quarter (final 3 months of 2021) -
year-on-year growth
* less volatile measure
* measure % change in GDP between 1 quarter & corresponding quarter of previous year -
annual eco grwoth
* calculated using GDP statistics for whole financial year 1 July - 30 June
* when June quarter national accs released (usualyl early Sep), annual growth calcualated s % increase in GDP since last financial year
why are there a variety of measures of eco grwoth
eco policymakers use growth statistics, each measure useful for diff ones purposes
- RBA needs to know what lvl eco activity in coming 12-18 months to forecast inflation trends & determine appropriate changes in the cash rate, look at most up to date indicators of EG
- Productivity Commission interested in hwo structural policies affect eco growth in LT even over decades (LT growth trends, not volatile quarterly growth stats heavily influenced by ST factors)
aggregate demand
total lvl expenditure in an eco over given PIT
- consumption,+ investment, +gvt spending,+ net export spending (export spending - import spending)
- total demand for g&S within eco
aggregate supply (Y)
total lvl income in eco over given PIT (period) (national income since all production generates income for owners of FOP)
- part of national income collected by gvt through taxation, rest consumption/saved
- consumer spending by HHs + saving by HHs + taxation by gvt
- total productive capacity of an eco, potentia output when all FOP fully utilised
when the economy is in equilibrium/equilibrium income
- will tend to be stable hwen lvl output AD & AS (national income) equal (lvl income in eco with no tendency to change bc eco operates below productive capacity if low demand for output, total expenditure)
- S + T + M = I + G + X (leakages = injections)
- changes in leakages & injections influence lvl eco activity
- injections > leakages eco will grow
- leakages > injections (eco growth decrease, may contract)
how to achieve EG with diff AS & AD lvls
- if eco operating below productive capacity, ^ AD promote EG by encouraging firms to ^output
- if operating close to productive capcity, EG only by ^ AS, needs ^ quantity &/quality of productive resources
- when AD insufficient to generate full employment of productive resources, macroeco policies to stimulate growth S-MT by boosting demand
- eco approaching full emp (most FOP utilised & producing lvl close to full potential), sustain growth LT need microeco policies (^ efficiency of resource use) to address structural issues on supply side that may limit future growth
changes in lvl eco growth in short-medium term driven largely by
changes in lvl AD
- understand components to know influence ind components, what will cause eco expand & contract over time –> gvt policies to ^ growth
influences on consumption (influences consumption & saving)
consumption by HHs ~55-60% expenditure/AD in eco
- anything boosts consumption –> boost expenditure (demand) –>** eco activity (income/output/AS**)
- most important factor influencing consumption is income (market eco)
- higher incomes consumer more, consumer more as income rises (but consumption drives output)
- how consumption influence eco activity (& income), look what influences consumption for a given lvl of income (all factors other than income)
-
prop total income spent on consimption APC AND PROP TOTAL INCOME SAVED APS
( most HH consumption, gvt spending, bus investment in order)
3 greatest influences on APC (thus lvl consumption at given lvl income)
- consumer expectations (confidence)
- expectations abt eco prospects (ind & general), future price ^ & availability goods influence decisions to spend/save income
- expect rise incomes/inflation/anticipate future shortage goods –> ^ spend & save less ST
- lvl IRs
- discourage inds from spending money (cost borrowing money higher) & encouraged save (return on savings deposited higher)
- but high lvls HH debt can reduce effectiveness of IR cuts in promoting consumption over time (AUS)
- rising property prices ^ consumption of existing property owners bc more confident own financial situations since major asset appreciated value)
- distribution of income
- more equitable (even), higher overall consumer spending
- low incomes spend prop more income than higher (low incoem HH higgher APC)
- policy changes that ^ disposable income of lower & mid income earners (^ rate social welfare payments eg. base rate JobSeeker payments) likely boost consumption & ^EG > policies ^disposable income HI earners eg. reducing top marginal income tax rate
- redistributing income from higher to lower income earners –> ^EG since lower income earners higher MPC
APC & APS
APC prop total income spent on consumption
- higher APC (hence lower APS) promote ^EG by ^ consumer spending
APS prop of total income not spent bus saved for future consumption
- ^ APS –> lower output & growth due to weaker demand
what is one of most volatile componenets of demand/aggregate exoenditure
business investment 10-15%
cost/relative cost of capital equiment influences by 3 factors (which influences invesment)
- changes in IRs
- fall, cheaper to borrow funds & purchase capital equip
- IRs opp cost for firms who own capital
- firms w cash reserves compare returns for saving money (lending to others eg. buying bonds) / funding to acquire capital/ shares to investors through ^ dividends
- if higher IRs make * returns from saving > returns from investing capital –> save>invest (& less attractive for firms borrow funds for capital investment)
- however firms unlikely invest capital if dont forecast strong demand for output
- change in gvt policies relating to investment allowances & tax concessions on capital goods
- investment allowances, tax concessions on capital goods
- if allowed bus to claim full cost of cpaital equip immediatly > claiming depreciation over many yrs –> reduce tax liability & make cpaital cheaper than wouldve
- change in price/productivity of labour/tech innovation
- labour subsitute for capital in PP / tech innovations affect relative cost of capital compared w/ labour
- if cost of labour increased/more adv labour-saving tech avialable at same cost –> relative cost of cpaital compared w/ labour decrease –> more attractive
ALSO: bus expectations abt future prospects influence investment lvl, confidence affected by
- change in expected demand for their products (if entrepreneurs expect future ^ demand, inclined purchase new capital equip to boost production & satisfy demand)
- change general eco outlook (if EG expect ^, entrepreneurs inclined invest capital equip bc ^lvl eco activity ^ ROI)
- inflation (volatile prices ^ uncertainty abt future $ & future prod costs, –> reduce investment in capital equip, investment higher when inflation low, positive, stable)
3 factors affect bus expectations/confidence (influencing investment)
bus expectaitons abt future prospects aka entrepreneurial influence lvl investment
1. change in expected DEMAND for THEIR PRODUCTS
- if entrepreneurs expected future ^ demand, more inclined to purchase new capital equip to boost production & satisfy the demand
- change in general ECO OUTLOOK
- expect ^EG, entrepreneurs mroe inclined to invest in capital equip bc higher lvl eco activity should improve ROI
- INFLATION leads to uncertainty abt future prices & production costs –> reduced investment in capital equip
- changes in IRs
- fall, cheaper to borrow funds & purchase capital equip
- IRs opp cost for firms who own capital
- firms w cash reserves compare returns for saving money (lending to others eg. buying bonds) / funding to acquire capital/ shares to investors through ^ dividends
- if higher IRs make * returns from saving > returns from investing capital –> save>invest (& less attractive for firms borrow funds for capital investment)
- however firms unlikely invest capital if dont forecast strong demand for output
- change in gvt policies relating to investment allowances & tax concessions on capital goods
- investment allowances, tax concessions on capital goods
- if allowed bus to claim full cost of cpaital equip immediatly > claiming depreciation over many yrs –> reduce tax liability & make cpaital cheaper than wouldve
- change in price/productivity of labour/tech innovation
- labour subsitute for capital in PP / tech innovations affect relative cost of capital compared w/ labour
- if cost of labour increased/more adv labour-saving tech avialable at same cost –> relative cost of cpaital compared w/ labour decrease –> more attractive
ALSO: bus expectations abt future prospects influence investment lvl, confidence affected by
- change in expected demand for their products (if entrepreneurs expect future ^ demand, inclined purchase new capital equip to boost production & satisfy demand)
- change general eco outlook (if EG expect ^, entrepreneurs inclined invest capital equip bc ^lvl eco activity ^ ROI)
- inflation (volatile prices ^ uncertainty abt future $ & future prod costs, –> reduce investment in capital equip, investment higher when inflation low, positive, stable)
influences on gvt spending & taxation & what it’s used for
total gvt spending (ocal, state, fed) ~20-25% AD/expenditure while taxation ~20-25% of AS/income
- fiscal policy one of main goals of gvt spending & taxation policies to maintain sustainable rate of eco grwoth & help achieve goals of low u/e & inflation
- gvts may ^ lvl spending and/or reduce lvl taxation to ^ ^ lvl spending and/or reduce lvl taxation to ^AD & boost growth during downturns (^ spending more effective bc only hope lower taxes boost HH &bus spending)
- also can reduce lvl spending and/or ^ lvl taxation to reduce AD & growth (boom)
- decisions influenced by policy objectives for external stability & sustainability of gvt debt
influences on exports & imports
changes in export sales & demand for imports sig impact on AD & dom eco activity, hence trade balance policy obj
- X & I 1/2 & 1/4 of AD
- if X rev = M spending, trade balance doesnt add/subtract from AD
- volume of X&I influenced by lvl of overseas & domestic growth/income
- when overseas income & growth lvls rise, AUS exports also rise, AUS incoem lvls rise, AUS’ imports also rise
- RELATIVE rates of overseas & dom growth determines net X (higher overseas growth improve BOGS, higher dom growth deteriorates)
- net exports also infleucned by ER, inflation, lvls int competitiveness (itself influenced by ER, relative inflation, labour productivity, wage lvls, gvt policies affect bus costs), protectionsit policieso f other ocuntries, consumer tastes & preferences
EXCHANGE RATE:
- when AUS weaker ER, domestic industries more competitive as relative cost to foreign consumers decreases –> ^ sales (net exports higher, add to AD &boost eco activity)
- AUS stronger ER, domestic industries less competitive & products more expnesive for foreign consumers (net exports lower, detract from AD, reduce eco grwoth)
how changes in lvl AD influence lvl eco activity
simplify eco to individuals, firms, FIs (exclude gvt/international sectors)
- income not spent on Consumption must be Saved
- AD (expenditure) made up of C&I
- S & I donest have to be equal all time even if Consumption from income = Consumption from AD
- when S not equal to I, eco disrupted from state of equilibrium –> CFOI says eco mvoe towards state of equilibrium at higher lvl eco activity when Injection of I > leakage of S, lower lvl eco activity when injection of I < leakage of S
the multiplier process
- any ^ C, I, G, NC generate larger ^ eco activity > new injection of spending into eco
- MULTIPLIER EFFECT: greater than prop ^ national income(GDP) from ^ AD,
- simple multipler determined using HH, bus, FIs (not gvt/int sectors)
- during eco shock eg. change in consumer/bus expectations, IRs, gvt policies –> change injections/leakages
- eg. improved bus expectations for eco recovery –> ^ bus investment & expenditure (Demand) –> ^ income for inds –> consumer more –> further ^ expenditure & income
- inital ^ investment has multiplied impacto n national income
- BUT ^ investment doesnt continue ^ incoem foreover. each time injection moves, its impact on expenditure smaller bc some incoem not consumed but saved
- savings is leakage reducing effect of higher investment on national income
- no. times final increase in national income > initial ^ expenditure that caused it is multiplier
to caclulate how a changei n injections / leakages has a multiplied impact on income, consider 2 more conectps
- MPC prop of each extra dollar income spent on consumer products (change consumption/change income)
- MPS prop of each extra dollar income saved (change savings/change income)
MPC + MPS = 1 since each extra dollar income must be spent/saved
what 3 points should be considered before the total increase in incoem generated by mutipler process is calculated?
- MPS causes amt incoem generated by each successive wave of spending to decrease
- sum of each successive wave of income generated adds up to total amt which national income increases.
- the final increase in national income = initial increase AD multiplied by ‘the multiplier’
the simple multiplier formula (k)
k = 1/MPS or k = 1/1-MPC
the larger the MPs & the smaller the MPS effect on value of the multiplier
larger MPS = smaller value of multipler
- if inds save prop more of extra income, spend less –> generate less additional income
- factor which multiply initial increase in AD must also be less
smaller MPS = larger value of multiplier
- multiplier prcess occurs bc initial injections causes new waves of spending as all sectors of the eco interconnected
- if gvt ^ spending (build new roads,) firms receive payments to purchase FOP & workers recieve wages they can consume/save
the multiplier process also works for inc/dec in AD
decreases
any change in lvl of __ __ (from changes in investment, gvt, consumer, net export spending) will have multiplied effect on lvl of __ __. gvts use the multiplier process bc
planned expenditure, national income
bc an initial ^ in gvt spending can result in a much larger ^ in eco activity as all sectors eco interconnected (gvt must estimate size of k (hence MPC & MPS) to determine amt gvt spending to coutneract anticipated downturn
while shiftsi n AD play main role determining lvl eco growth in long/short term, AS plays an important short/long term role in influencing lvls eco grwoth
AD shoerter term, AS long term
an eco’s AS is determined by
THE quantity & quality of FOP (natural resources ,labour, capita, ability entrepreneurs to combine them efficiently to produce g&s
- ecos w/ more/higher quality FOPs able produce more g&s
- is eco’s potential: when AS ^, eco can grow faster, ^ total output (EG) & reduce in general price lvl (inflation)
- ^ AS –> ^ total output (EG) & reduce general $ (inflation) –> ^GDP & price stability (reduce upward pressureprices created by ^AD), make faster rates EG more sustainable
- ST, ^AS = ^ output produced same cost
- Short Run AS curves = total output in eco over various price lvls, firms ^ quantity output supplied as price lvl rises (move along AS curve/extension in supply)
- AS ^ (rightward shift) when ^ qnatity and/quality eco’s FOP
AS can be increased when..which can be achieved through 7 changes:
a higher lvl of output can be produced for same cost (when there’s ^ quantity/improve quality of FOP)
- population grwoth
- esp population in prime working ages
- labour is main input into PP so if ^ through immigration/birth rates, mroe workers available, eco able produce mroe g&s
- for several decades, AUS’ relatively high pop growth (immigration) major contributor to growth rates ahaead msot adv ecos
- also higher AD bc more consumers
- discover new resources
- eg. new mineral & metal deposits can be exploited to ^ exports & ^ EG
- ^ skill lvl of workforce
- improve edu & training for school students & existing workforce boost productive capacity by ^ efficiency of labour resources
- increased capital
- investment in capital equip ^ productive capacity (of ind firms & eco) by boosting productivity of labour (ind workers produce more using new tech) & often replaced labour (capital-labour substitution frees up labour resources to work elsewhere in eco)
- adoption of new tech (??)
- bus providing customers w/ mobile app to place orders & receive online custoemr service saves cost of sales agents visiting customers/speaking on phone –> reduce labour costs
- measures to improve efficiency
- ind firms adopt management & work practices of leading int bus’ to use existing resources more efficiently –> boost productive capacity of eco
- gvt policies
- ^ competitive pressures within industries (manuf firms reduced protection trade, telecomms via privatisation & comp policy) boost efficiency of resources use –> productive capacity
- cheaper & easier for bus operating in highly regulated sectors
if AD ^ over time w/o corresponding ^ AS, eco will eventually
- run out of spare capacity (unutilised productive resources) & reach capacity cnstraints
- CAPACITY CONSTRAINTS: limitations on eco’s ability achieve furtherEG bc productive resources fully utilised (when eco approach full employment)
- whne eco close full emp/oprating new productive capacity, ^ AD cant continue drive EG –> ^ inflation, firms outbid each otehr for ^ scarce productive resources, pass higher prod costs to consumers as higher prices
- (why microeco policy important bc focuses on supply side of eco for LT growth)
2 things
microeco policy/reforms
- structural change in eco –> productive, efficient, competitive
- longer transmission lag than macroeco policies (many yrs to see impacts)
- macroeco management successful if manage AD in way that encourages EG S-MT while giving micropolicies sufficient time to achieve ^ AS needed to avoid capacity constraints
- by improving human capital since more skilled workforce has greater labour productivity & higher lvls owrkforce participation
- policies enhance eco infrastructure can ^ AS eg. faster broadband networks & ^ investment in road, rail infrastructure
- ^ AS shifts eco’s production possibility curve right
- eg. reduce protective trade barriers, change structure & rates of tax (influence resource allocation through dis/incentives), change income taxes (influence AD, macro policy), comp policy reforms, reforms certain markets (financial, labour, product),
- changes tech & markets unrelated to gvt reforms
recession
eco contracts 2 consecutive quarters neg EG/falling real GDP
how (real) GDP pc indicates EG
- changes in LS > change real GDP
- EG ^ LS but if rate of pop growth > rate EG, GDP pc & LS fall even if ^EG
- real wages can rise, HHs can enjoy higher disposable income –> higher material LS
- key factor in slower growth in AUS LS rcent yrs w/ real disposable income falling some yrs is long period of below-avg wages growth
- labour productivity impo influence on both AS & changes in GDPpc, influenced by tech adv, improved labour skills, quality of management & work arrangements (R&D for innovation, internet, edu & training)
how EG affects LS
faster EG –> ^ real GDPpc
- real wages ^, HH ^ disposable incomes –> ^ material LS
- EG and LS link weakenged bc wage growth slow
eco growth effects on employment
eco growth creates jobs
- an eco that sustains strong EG –> everyone willing & able to work able to find employment
- LT, higher rates EG associated w/ development of new, more adv industries
- c’s w/ higher lvls eco growth –> create more highly paid & highly skilled jobs
eco growths effect on inflation
higher lvls eco growth –> price increases & larger wage claims –> inflation rises (esp if **spending is growing **when eco close to full capacity & growth in AS cant keep pace w/ growth in AD
- inflation side effect of eco growth
- major aim of macroeco policy is keep growth at lvl not so high that prompts surge inflation (sustainable rate of eco grwoth)\
- macropolicy obj as ‘sustainable rate of EG’
- high inflation early 22 to mid 2024 partially due to surge AD (build up HH savings during pandemic & massive fiscal & monetary stimuls gvts provided) when supply side contraints (labour shortages, disrupted GSCs, soaring energy prices) limited AUS growth
eco growth effects on external stability
EG often accompanied by higher disposable incomes –> ^ consumer & bus spending –> higher lvl imports
- when eco growing faster than trading partners (unless exports keep pace w/ growht in imports), can make BOGS worsen& ^ CAD
- excessive CAD can undermine confidence in eco so BOP constraint limit growth
- when country faces BOP constraint, policymakers can deliberately reduce lvl EG to improve external stability (ensure ext imbalances eg. high CAD don’t result in loss investor confidence harming dom eco)
- achieving sustained EG crucial to maintain ext stability
- keep foreign liabilities at sustainable lvl (% of GDP) eco must generate enough output growth & income to meet servicing costs of liabilities –> maintain rate EG matches/exceeds ^ foreign liaibilities (also maintain confidence of int investors, ensure ongoing availability of foreign capital –> sustain strong EG)
how eco grwoth affects income distribution
sometimes benefits flow disproportionately to higher income earners/owners of capital than flowing broadly throughout eco through wage increases/lower prices
- increasingly benefits EG disprop flow to HI earners & wealther LCE owners than braod via general wage ^/lower prices
- should reduce inequal income distribution by reducing u/e, with inequality ^ during weak growth due to ^ u/e but can ^ if benefits not widely shared
- absolute poverty should fall as eco grows but relative poverty likely rise as income distributions more unequal during periods strong growth
- beenfits of strong growth often skewed towards skilled workers > unskilled so gap betw rich & poor widens
eco growth environmetnal impacts
if growth pursued w/ little regard to enviro –> pollution, depletion non renewable energy sources, dmage local enviro 9Higher demand & output –> ^ resource use –> pollution, depletenatural resources, enviro degradation)
- ecologically sustainable development accounts impact of EG on enviro :gvts pursue growth strats avoid irreparable enviro damage
- avoid catastrophic social, enviro, eco consequences –> break link betw ^ EG & ^GH gas emissions
- in LT, EG must be ecologically sustainable, avoid neg outcomes of resource depletion & climate change, ^ financial resources & ^ capacity to invest enviro freindly techs & stronger enviro protection –> less dependent on job creation & X income from epxloiting natural resources
- shift to environmentally sustianable EG strats can also create new industries & jobs eg. via renewable energies(more labour intensive than fossil fuels) & low-carbon techs
(check textbook) 8 factors that influenced AUS’ growth cycle recent years (recent trends in EG) including global & domestic influences & policy decisions. AUS msotly benefited from global eco trends but also from successful policy management:
- global eco conditions mostly favourable
- TOT boom 2005-11, 2017-22
- pre-emptive MP: macroeco management (quickly reduce IR to support AD) to maintain sustainable rate EG
- RBA’s monetary policy on maintaining low inflation & sustainable growth rate
- gvt used fiscal policy during eco downturns to stabilise EG
- higher lvl sustained population growth than most adv ecos
- large increases in asset prices
- slowdown in productivity growth
global eco conditions influencing AUS’ growth cycle recent years (recent trends EG)
mostly favourable for AUS recent decades
- strong demand for AUS’ resource exports underpinned boom in mining & construction investment & surge in export revenues –> ^national income and rebound quickly from ext shocks (covid, gfc)
- rising inflation due to supply chain disruptions & global surge inflation impacted growth since recovering covid and russia invasion 2022
AUS terms of trade boom influencing AUS’ growth cycle recent years
- 2005- 2011, 2017-22
- driven by very large increases in prices of AUS’ commodity exports (iron ore, coal, natural gas) –> export revenues ^substantially, improve BOGS –> consecutive CAS –> concerns BOP constraint
- 2024 Budget forecast 15% decline TOT 2025-26, expect stabilise to avg
AUS macroeco management reasonably successful maintaining Sustainable rate of eco grwoth prior to COVID recession influencing AUS’ growth cycle recent years
- lvl generates employment growth & maintains external balance w/o pushing inflation above target range 2-3%
- AUS Treasury estimates AUS’ LT sustainable rate EG ~2.5% of GDP
RBAS pre-emptive use of monetary policy & focus on maintaining low inflation influencing AUS’ growth cycle recent years
- PRE-EMPTIVE: IRs adjusted ANTICIPATING change growth & inflation’
- during eco downturns, RBA quickly reduce IRs to support AD
- also maintain low inflation & sustainable growth rate
AUS higher lvl population growth than most adv ecos influencing AUS’ growth cycle recent years (check textbook)
mainly due to its immigration intake
- net overseas migration negative 1st time since ww2 in 2020-21 –> labour shortages constrain growth in 2022-23
large increases in asset prices influencing AUS’ growth cycle recent years (honestly not that important)
eg. real estate & shares since early 2000s ^ wealth of HHs –> encourage greater borrowing & consumption aka ‘wealth effect’
- higher housing prices constrain spending power of homebuyers but overall wealth effect of higher asset prices ^EG
AUS’ LT eco challenges are described by AUS Treasury as ‘the 3 Ps’
- productivity
* sustaining LT productivity growth - participation
* high lvls workforce participation - population
* continued population growth from natural growth & immigration
to help AUS achieve highest possible rate eco grwoth
* significance of policy measures to lift productivity growth & participation in LT
macroeco policy
used by gvt to influence rate EG
- main role influenc eco grwoth ST w/ aim to smooth volatile fluctuations in BC
- only limited impact on lvl of long-run growth rate bc only limited influence on AS
- affect growth rate in ST by influencign AD & achieve highest lvl growth eco can sustain in S-MT\
- can help ^ AS some ways (gvt spend edu, low IRs encourage investment in cpaital equip), main role influence EG ST by influencing AD
- manage demand to smooth fluctuations in BC & achieve highest lvl growth eco can sustian S-MT (improving perf for full emp & price stability)
fiscal policy
use federal Budget to achieve eco objs (esp stabilise eco activity, optimise resource allocation, redistribute income)
- gvt expeniture in Budget injection into eco, gvt revenue (taxation) leakage
- by adjusting expenditure & rev, gvt influence lvl AD –> lvl eco grwoth
- if gvt wants ^ eco growth: reduce taxation, ^ expenditure, both via discretionary/explicit changes to FP (stimulus package/reduce tax rates)/automatic stabilisers –> ^ lvl injections relative to leakages –> ^ EG than w/o expansionary policy
- alt, eco grwoth constrained if taxation rev ^ ^/gvt expenditure reduced (via discretionary change eg. ^ tax rates or cut expenditure)/automatic stabilisers
- more eff stimulating growth during downturn than slowing down eco growing too fast (bc discretionary changes to FP would have contractionary effet (^ tax rates, cut spending) politically unpopular
- eg. limitations of FP (S<) FY06-08 federal budget surplus ^ but cut income tax rates & super meant while fiscal contractionary stance, surpluses significantly smaller than would’ve been –> criticised bc added inflationary pressures when EG strong (promted tighter MP) & created structural problem in budget (from revenue) –> structural problems (unable return to budget surplus, larger deficits, accumulate gvt debt…georgeious0
monetary policy
gvt use to influence eco grwoth
- RBA changes official CR to achieve gvt eco objs (price stability, full emp, sustianable EG) –> influece lvl IRs in eco –> influneces lvl AD & rate eco grwoth
- if gvt & RBA stimulate growth, reduce IRs –> encourage consumer & bus spending (downward pressure ER, boost int competitiveness of X & M-competing firms)
- effective inflation targeting –> MP can contribute LT growth (low, stable inflation –> conditions conducive to high consuemr & bus confidence & support int competitiveness)
super low CR 2013 to 2019 but EG stil lbelow LT trend bc
- macropolicies msot effective when used in coordinated, complementary way (contractionary FP reduced effectiveness of expansionary MP)
- low IRs inflated asset prices (property) by ^ demand
- MP more effective as contractionary > expansionary (^ IRs ties ^% income in loan repayments –> force lower HH consumption bc ppl cant spend moeny they no longer have) while IR cuts only ENCOURAGE ^ consumption (reducing repayments doesnt force ppl to spend)
microeco policies
to ^ eco’s sustainable grwoth rate by ^ AS & reducing extent higher growth causes inflationary & CA problems (by boosting int competitiveness –> trade balance) factors not capacity constraints that can constrain higher growth
- ^ AS to keep pace w/ rising AD
- Productivity Commission argues AUS strong growth rates 1990s from far-reaching microeco policies
- increased incestment in workforce skills & physical infrastructure in recent budgets aimed ^ eco’s AS w/ reforms to ^ competitive pressured & Reduce unnecessary regulation
- effectiveness/lack of AUS microeco reform deteriorated recent decades, most sig contribution recent yrs from state gvts substantial investments in infrastructure (roads, ports) to relieve transport & SC bottlenecks
COVID 19 impactso n AUS eco
one of most powerful ext shocks in AUS eco history
- ended AUS’ record breaking 28 yr eco growth cycle
- shut down state & national borders, enforced lockdowns across AUS,** temporary prohibition on entire sectors** of eco activity
- consumer spending shifted dramatically
- travel, leisure, entertainment spending curtailed
- spending increased as HHs stockpiled emergency supplies from supermakrets & spent more on home entertainment
-
share market fell 37% in a month
( paragraph for essays here) - gvt’s FP measures complemented by immediate MP action from RBA cut cash rate down to 0.1 Nov 2020 also supported supply of credit to keep eco afloat & undertook asset purchases (outright purchase of assets by RBA from private secotr)
effects of COVID 19 recession that were far-reaching:
- eco grwoth
- GDP fell 2 successive quarters of 2020 (essay stats)
2. labour market - u/e peaked 7.5% july 2020, highest rate over 20 yrs
- 2020 retail & hospitality managers, hospitality workers, sports & personal services workers 3 occupations most job losses
- Participation rate hsitoric high April 2021
3. businesses - diff impacts across industries
- rely on international tourism suffered severe
- bus in accommodation & food services, tranpsrt, postal & warehousing, arts & recreation services hit hard by lockdowns & most likely report diff meeting financial commitments
- others (delivery, onlnie retail) benefited from expanded opps
4. inflation - unusually large but temporary price movements (most bc gvt decision to make child care free for several months) ersulted in 1st decline in year-ended CPI inflation since early 1960s & largest quarterly decline since 1931
- underlying inflation expected remain below inflation target range (?0
5. distribution of income & wealth - lasting effects on distribution of welath takes many yrs to emerge
- income ineq worsened steadily w/ disproportionate effects on lower skilled workers
while there was a huge cost to AUS’ policy response to COVID, ppl agreed that LT eco costs wouldve been even greater without intervention. the eco damange wouldve been
larger & more permanent as bankrupcties & u/e wouldve risen moresharply & HH consumption & bus investment wouldve fallen further
* success of the vaccination rollout in AUS & globally key factor reducing need lockdowns & achieving recovery
measuring economy’s health through the state of the labour market
proportion of ppl engaged in productive work
- high lvls u/e major problem bc opp cost of ^u/e is less production, slower EG, lower taxation revenue, higher SWP
- LT social costs including ^ inequality, poverty, family problems, crime, social division
- underemployment & underutilisation of labour
recent decades labour market changes
- age & gender profile of workforce
- expansion of highly skilled
- decline of unskilled jobs
- move away from secure full time employment
measuring unemployment lvl using the labour force
section of population 15/+ yo working/actively seeking work
- all employed & u/e persons in country at PIT
consists of: - ppl aged 15/+ currently employed for at least 1 hr per week of paid work, includes those on paid leave, on leave, stood down w/o pay for < 4 weeks, on strike, on workers’ compensation, receiving payments whilst undertaking full time study
- self employed ppl workers at least 1hr per week
ppl who arent included in the labour force
- children under 15 yo
- full time, non working students 15/+ yo
- ppl who perform full time domestic duties
- u/e ppl who arent willing to actively apply for jobs & attend job interviews/not available to start work
- ppl retired from labour force
labour force participation rate to measure u/e
% of pop aged 15/+ (working age pop) in labour force employed or unemployed (either working/actively seeking work)
- working age population if 15/+ (can participate in LF)
- size of LF account ppl’s willingness & ability participate by working or , looking for work
- choose not to participate in LF (studying, carer’s responsibilities, volunteering FT, other income sources, feel unlikely find work)
- labour force/working age pop
using unemployment to measure unemployment
situation where individuals want to work but unable to find job, as result labour resources in eco not utilised
- reflect no. ppl out of work but actively seeking
- to determine rate of u/e, ABS conducts monthly survey of labour force (~50 000 ppls), calculating total no. u/e & rate of u/e
to be classified as actively seeking work, must satisfy any one of criteria eg…
- regularly checking ads from diff sources for available jobs
- willign to respond to** job ad**vertisements, apply for jobs w/ employer & attend interviews
- registering with an employment agency linked to Job Services AUS
problems with the method used to measure u/e
from structural changes occurred in AUS LM recent years, classifying ppl into 3 categories (employed, u/e, not in LF) doesnt provide compelte pic of actual utilisation of labour/spare capacity
* disguise extent AUS’ LM problems
2 main problems associated with current LF statistics
- by classifying ppl un/employed, official stats dont account NO. HRS PPL WORK
- some emplyoed wanna work more hrs (UNDEREMPLOYED)
- 40 hr week job –> 4 diff 10 hrs per week jobs, reduce official u/e rate w/ increasing real eco activity/demand for labour
2. classifying ppl in not/in LF, official u/e stats DONT include ppl who UNABLE FIND work & LEFT LF (HIDDEN U/E) - discouraged jobseekers eg, students would rather work, disabled who wouldve taken if available
taking into account the combo of u/e & underemployment, ABS publishes additional measures of underutilisation of labour. the first of these is…also publishes an…
labour force underutilisation rate measuring no. ppl u/e + no. who wanna work more hrs
* also publishes an extended LF underutilisation rate, adds to underutilisation rate 2 groups who are marginally attached to the LM (ppl actively looking for work & able to start within 4 weeks but not within 1 week & discouraged jobseekers)
what is the problem with merely adding the % of u/e & underemployed workers together (ABS)? & how does the RBA better measure the amt of spare capacity in the LM?
doesnt give accurate view of spare capacity in LM bc u/e usually wanna work 3x as many additional hrs as underemplyoed ppl
- to measure better amt of spare capacity in LM, RBA calculates an ‘Hours based Labour Underutilisation rate’, a measure that adds to the u/e rate the extra hrs underemplyoed PT workers seeking –> converts those hrs to equivalent of FT jobs
recent u/e trends
- LM unusual volatility recent yrs due to COVID –> surge u/e –> lowest in almst 50 yrs (quick, large-scale policy response)
- peak u/e early 90s bc ^ severe recession in global eco, falling AD –> cutback production & close firms –> shed labour & ^u/e –> worsened by structural change & microeco reform
- many lost jobs declining industries bc job vacancies need higher/diff skills, new tech and prod techniques changed bus structures
- gradual downward trend in u/e from 1993 to 2008
- conditions suddenly changed GFC triggered worldwide recession but AUS ^ u/e much milder than most adv ecos
- during 2010s, AUS’ u/e rate stayed mostly range 5-6% (Rising marginally higher in 2015) just below avg for adv ecos
- after covid recession, u/e peaked 7.4% july 2020, highest seen in over 20 yrs but still lower than peaks in 1990s
- AUS’ job market less affected, recovered to pre-pandemic lvl early 2021 (more than 18 months ahead OECD avg)
- AUS’ LM sustained faster growth in PT than FT jobs recent decades, ^underemp > c’s
AUS needs eco growth rates above _% to make progress on reducing u/e
3%, assuming no changes in medium term trends in immigration, family sizes, productivity, participation
the relationship betw eco grwoth & u/e is explained by _’s Law which says that to reduce u/e, the..+ trade off betwen productivity & growth
Okun’s Law to reduce u/e, the annual rate EG must exceed the sum og % growth in productivity + ^size of LF in a yr
- an implication of O’s L is that in ST, higher rates of productivity growth make it more diff to reduce rate u/e
- conversely, one of ST impacts of lower productivity growth often lower rate u/e
- trade off betw faster productivity growth & faster employment growth only ST
- LT, higher lvl productivity growth should –> stronger EG & more job creation but in ST mroe jobs likely created during period lower productivity growth bc emplyoers forced ot hire more workers to^ production
to reduce u/e by 1% GDP must grow 2% above its LT trend –>
structural u/e
occurs bc of structural changes within eco caused by changes in tech/pattern of demand for g&s
- workers skilsl previously useful in declining industries dont match job opps opening up in newly emerging industries
- msot of AUS’ persistent, LT u/e problem attributed to structural u/e
cyclical u/e
occurs bc of downturn in lvl eco activity & falls during times strong eco grwoth
* falling demand –> fewer emp opps
* major contributor to rise u/e in 2020 bc covid pademic let so short recession
frictional u/e
represents ppl temporarily u/e as they change jobs
- finihsed one job but havent started new one
- takes time to move form 1 job to another as workers invest time & effort finding suitable job & emplyoers invest too to search for suitable candidates
- inevitable although increased by delays in matching u/e ppl to available jobs
- improving efficiency of job matching services through job & skills databases can hep reduce frictional u/e
seasonal u/e
occurs at predictable & regular times throughout yr bc seasonal nature of some kinds of work k
- accounts for influx of students finishing school, uni, TAFE courses betw Dec & March every yr
- official u/e figures usually seasonally adjusted to account for these fluctuations
hidden u/e
ppl who can be considered u/e but dont fit ABS definition of u/e & not reflected in u/e statistics
- discouraged job seekers no longer actively looking for job
- not participating in LF
- shows in statistics as decline in LFPR but not shown in u/e statisitcs
- ABS reported sustained ^ in recent yrs in no. ppl who wanna work & able to work but not actively seeking work eg. family responsibilities, ST illness, study
underemployment
ppl who work less than FT (35 hrs/week) but would like to work longer hours
- not classified as u/e
- AUS more ppl underemplyoed than u/e
- LT trend rising underemp reflects faster growth in PT & casual work than FT jobs recent yrs, esp for young workers
LT u/employment
ppl out of work for 12 months or longer, usually from structural u/e
- once a large pool LT u/e ppl exists, it can be diff to reduce
- high EG can help bc stops pool growingbut on own not enough to solve problem
- often turns into permanent u/e bc ppl out of work long period harder to find job even when eco activity picks up
why is it harder for ppl out of work for long periods to find a job even when eco picks up?
- new arrivals into u/e pool are re-absorbed into workforce more quickly esp if have skills up to date & attractive for employers > LT u/e
- LT u/e usually suffer from structural u/e & dont possess skills demanded in LM
- u/e ppl lose confidence they’ll find work when persistently unsuccessful in **applying **for jobs
- u/e ppl lose contact w/ paid work & dont learn new skills & developments in LM –> reduce emp opps further
- potential employers look less favourably toward ppl out of work for long PIT
trends in long term unemployment
- sig decline LT u/e as prop total u/e 90s & 2000s
- LT began rising again after GFC + discouraged jobseekers (not actively seeking work) nt counted in LT u/e
- AUS’ large scale policy resposne to COVID rcession effective** prevent**ing LM ‘scarring’ (LT u/e) whcih initaialy doubled but mid 2023 fell below pre-pandemic lvl –> success of policy respnse
hard-core unemployment
ppl out of work for so long that employers consider unemployable bc personal circumstances
- mental/physical disability, drug abuse, anti-social behaviour
- when someone assessed unable to undertake work even on PT basis, placed on disability support pension, not counted in official u/e statistics
NAIRU
non-accelerating inflation rate of unemployment
- lvl of u/e with no cyclical u/e (where eco is at full employment)
- some lvl u/e inevitable in eco & efforts to reduce u/e below ‘natural’ lvl counterproductive
- conflict betw inflation & u/e can be shown on Phillips Curve
- suggests policies to encourage eco grwoth & reduce u/e will be worthwhile up to a point but beyond, policies only create inflation
- lower NAIRU increases eco’s capacity to grow w/o ^ inflation, achieved over LTthrough policies reducing structural, seaosnal, frictional, hardcore u/e
- trended downward in recent decades
when u/e is above & below NAIRU
- when u/e above NAIRU, there is spare capacity in LM –> policymakers should stim eco grwoth to reduce u/e
- when u/e at/below NAIRU, ^ eco grwoth will ^ wage pressures bc insuff nos. u/e ppl to fill job vacancies (need to have right skills & be available to work)
- efforts to reduce u/e below NAIRU result in higher inflation
hwo to reduce NAIRU
- over LT through policies that reduce structural, seaosnal, fricitional u/e
- eg. ^ retraining programs to aid structural u/e or make easier for workers to change jobs/mvoe interstate/removing hurdles for ppl w/ disability to access workplace
why is estimating the NAIRU very complex
no simple way to measure,/ calculations that aim to remove cyclical influences even though lvls u/e & inflation highly influenced by cyclical factors
* also diff to pinpoint as can shift up & down w/ changes in structure of LM
changesi n structure of LMt yrs suggested that NAIRU
is lower than previously thought.
* previously estimated ~5%, Treasuy estimated was 4.5-5% in 5 yrs before COVID
* also strong LM recovery in 2021 meant recession will have less impact on NAIRU than initially expected
explanations for u/e offered by economists
- EG too low to generate adequate employment grwoth
- jobseekers dont have right skills to fill job vacancies
- jobseekers not enough adequate opps for edu & training
- rapid structureal change in eco –> more workers whos skills no longer demanded
- wage rates too high esp for low-skilled workers
- too many regulations surrounding employment, discouraging emplyoers from hiring new employees (>..)
- some ppl choose remain u/e bc can receive gvt welfare benefits
- workers in HI ecos whos jobs can be performed overseas cant comepte w/ workers who paid low wages in developing ecos
- not enough done to help ppl w/ mental illness/disability to find suitable work
how lvl eco growth causes unemployment
demand for labour is derived demand for g&S that labour helps produce
- if downturn in lvl AD, downturn in demand for labour, ^ U/E LVL
decline AD can be from: - eco downturn w/ lower domestic consumption & investment
- gvt policeis (eg. contractionary F/MP) to dampen demand
- decrease in demand for AUS’ exports due to global recession, slower growth in ecos of major trading partenrs/less competitive AUS g&S in world markets
- u/e likely start rising when growth falls below ~2%
- growth >3%, lvl u/e likely fall
- generally time lag ~6 months betw change in lvl EG & change in employment lvls
- changes in lvl eco grwoth mainly affect cyclical u/e
- trends in measures of u/e & underutilisation confirm correlation w/ rate of EG
stance of macroeco policies affecting u/e
MP settings can influence lvl cyclical u/e in S-MT by influencing BC
- F&MP both influence lvl AD by influencing BC –> influence lvl u/e S-MT
- expansionary stance to ^ EG & job creation
textbook
constraints on eco grwoth causing u/e
- LT, u/e influecned by lvl sustained EG
- if sig constraints, eco struggle create enough jobs to reduce u/e
- recent yrs concerns abt hisotric constraints on grwoth (Inflation & external balance) low although inflatioanry pressures emerged briefly 2008 as eco approached full employment
rising Participation rates causing unemployment
- ^ LFPR tend cause ^ rate u/e in ST bc more ppl who previously not seeking work (not officially unemployed) start actively seeking employment
- usually during eco recovery when many discouraged jobseekers observe emp opps improving & start looking for work
- re-enter LM & unless obtain job immediately, u/e
- lvl u/e only reduced slowly during eco recovery wven when EG & employment growth strong bc more ppl looking for jobs
textbook
structural change causing unemployment
- involves sig ST costs
- very sig is loss of jobs in less eff industries or/& major structural change
- globalisation contributed to changes in LMs around world w/ domestic bus’ more integrated into GSCs –> offshoring some jobs
- OECD countries recent decades whos trade & globalisation only 1/2 job losses as automation
- ^ remote working & reduction in jobs involving face to face contact after COVID
TECHNOLOGICAL CHANGE CAUsing unemployment
rapid tech change in ST cause u/e
- pace of change in LM expected to acceleratei n 2020s as automation driven by AI applications continues transform jobs
- administrative jobs (accountants, HR staff) most at risk with >1/2 lost as algorithms replace human data processing on spreadsheets & email
- structural u/e although tech also creates new job opps
how productivity causes unemployment
productivity of labour sig affecting employer decision to ^/reduce u/e
- low productivity grwoth diff S< impacts
- ^productivity grwoth slows emp growth/^ u/e ST bc fewer emps required per unit of output but LT, contributes ^EG & lower u/e
- slowdown productivity grwoth –> lower u/e ST but higher u/e LT sicne eco less competitive & slower growth (emplyoers can sub greater use of capital for reduced labour use)
how inadequate lvls of training & investment cause unemployment
structural u/e related to mismatch betw skills of u/e & skills demand by employers for job vancies
- 2000s sig skills shortages emerged for occupational grousp eg. tradesppl, health professionals, construction workers
- persistent skill shortages continue for wide range technicians & trade workers eg. butchers, air-conditioning mechanics,
- sig nos ppl out of work –> gaps in AUS’ edu & training system –> make AUS more reliant on skilled migration to fill job vacancies
textbook
how increased labour costs contribute to unemplyoment
sustained ^ labour costs (wages)
- SHORTAGE of SKILLED LABOUR –> employers compete for limited pool of labour –> force up general labour costs –> wage inflation
- EXCESSIVE WAGE DEMANDS
- nominal wages rise too fast –> outstrup inflation & productivity ^ –> reduce bus profits.
- bus sub capital for labour/reduce output to improve profits
- FWC ^award wages substantially in its National Minimum Wage Order to improve LS of lower paid workers –> too expensive for employers to keep workers
- substantial ^ labour ON-COSTS
- additional costs employing labour (super, sick leave, holiday pay, workers’ compensation
- mainly affected by gvt policy decisions
- too high, decline demand for labour
Fair Work Commission
gvt agency regulated AUS workplaces
- sets min wages
- approves enterprise agreements
- sometimes resolves industrial disputes
dont use in SA lol
how inflexibility in LM causes u/e
- one reason for higher labour costs
- relatively high min wages rates make less attractive for employers to hire less-skilled workers –> ^ u/e
- deregulation of LM –> lower min wages & lower u/e
- but OECD studies of AUS LM point to relative flexibility of AUS LM & highlight need for improvement in skills & training to reduce underemp than LM rules
opportunity cost as en economic cost of unemployment
u/e –> eco’s resources not used to full capcity, operating below its PPF –> u/e comes w/ OC since u/e not contributing to PP
- lower total output = lower HH incomes & expenditure –> lower sales & profits
- higher u/e –> reduced bus investment, production, EG
lower living standards as eco cost of u/e
u/e have lower incomes (rely on welfare payments) –> lower LS
- employed need contribute higher taxes to cover cost of income support to u/e
- high rates u/e –> lower prod of consumer & capital goods –> lower LS
decling in LM skills for LT unemployed as eco cost of u/e
- persistently high u/e –> those unemplyoed lose LM skills, confidence, experience, less/un employable
- cyclical/ST u/e can turn into LT structural u/e , ‘hysteresis’
- new members of LF eg. young school leavers, new uni graduates more diff to develop skills if unable obtain jobs soon finishing edu
hysteresis
process where u/e in current period results in persistent u/e in future periods as u/e ppl lose skills, job contacts, motivation to work
costs to gvt as eco cost of u/e
high lvls u/e sig influence on gvt’s revenue & expenditure –> federal Budget
- falling incomes from u/e generates less tax revenue & gvt burdened w/ ^ transfer payments (unemp benefits) to u/e, & cost of training programs
- decrease in rev & ^ in expenditure deteriorates gvt’s budget balance
lower wage growth as eco cost of u/e
high u/e –> excess labour supply in eco –> fall in equilibrium lvl wages
- ‘downward stickiness’ for wages: wages dont often get reduced bc eg. set through formal EAs/industrial awards
- more likely lead to slower wage growth over time than actual reductions in wages
- wage grwoth remained low since GFC
- u/e not main explanation for slower rate wage growth
increased inequality as social cost of u/e
u/e occurs more frequently among lower-income earners eg. young & unskilled
- u/e = loss of income, relatively worse off comapred to higher income earners –> poverty & inequality in income distribution
- ‘intergenerational’ dimension of inequality & poverty where disadv passed from 1 generation to next aka ‘poverty trap’
other social costs as social cost of u/e
u/e associated many serious personal & social problems in AUS
esp those suffer from LT u/e ^ incidence of:
- severe financial hardship & poverty
- ^ lvls debt
- homeslessness
- family tensions
- loss work skills
- ^ crime lvls
- poor health, mental health, higher risk suicide
- social problems have eco cost for community since more resources directed towards dealing w/ em
- more public funds spent on health, welfare services, social workers, police than satisfying other community wants
- ^ u/e & inequality can create social tensions & backlash against globalisation esp after GFC for many countries
u/e for particular groups as social cost of u/e
- u/e problem more severe for some societal groups compared to others
- young 15-19 exp lvls u/e 3x rate general pop
- ATSI relatively high u/e rates esp in sparsely settled regional areas but no diff in employment rates if higher lvls edu, –> edu & skills critical closing gap
- age related u/e highest u/e rates, high LF underutilisation rate, lower earnings & fewer opps for career progression
- older workers also greater difficulty finding work once they lost a job & most likely out of work for long PIT while younger workers least likely exp LT employment
- specific regions suffer from higher u/e rates than others
- ppl born outside AUS
- higher u/e rate during 1st years in country when adjusting to language & cultural differences, 1/4 permanent skilled migrants over-qualified for current job but lacked work experience & access to local networks
- COVID lockdowns greater impact on u/e for migrants relative to AUS born pop bc conentration in accommodation & food services industries
- higher u/e for some groups can indicate discrimination & unequal emp opps in LM
- LT cause high u/e rates among groups is failures in edu systems eg. remote learning challengign for disadv students & low skilled workers reduced opps for learning during pandemic, greater need future retraining in changing jobs market
high youth u/e rates are from
employers seeking workers w/ greater skills & experience
- explains AUS’ ^ing school retention rate & LT ^participation in tertiary education
- most jobs require post-secondary school skills, challenge for AUS’ edu & training ststem to manage transition from school to further edu, training, apprenticeships
- no. young workers looking for FT employment u/e 12+ months ^54% in yr to march 2021 bc above-avg lvls casual & PT empoyment & heavier concentration of young workers in sectors eg. hospitality & accommodation among devastated industries
gvt challenges using policies to reduce u/e
lasting reductions in u/e take time to achieve, dependent upon sustaining EG over long time
- rising u/e –> gvts challenge to minimise ST ^ in joblessness to acheive fastest return to low u/e
- broader gvt challenge to reduce LT structural u/e through LM policies, investing in training & wider eco reforms
gvts choose policies to reduce u/e based on
what they see as main causes of u/e
- believe main cause is structural u/e implement policies that aim to train workers w/ new skills
- if gvt believes cyclical u/e main reason for ppl out of work (eco downturn), policies to encourage stronger EG
- changing priorities of gvt policies reflect changing views of causes of u/e
main instruments to reduce cyclical unemployment
macroeco policies to sustain grwoth & minimise sharp downturns in BC
- employment is derived demand for production –> reductions in u/e need ^output
- expansionary FP (lower taxes/^ gvt spending) can stim eco activity & ^ output through multiplier effect
- eg. gvts ^ expenditure on infrastructure –> bus ^ investment & employ more
- expansioanry MP (lower IRs) stim consumer spending & bus nvestment –> ^ output
main macroeco policy goals since 1990s
- goals achieving eco grwoth rate 3/+% & keeping inflation in 2-3% targt band central to macroeco policy since 1990s
in addition to addressing cyclical u/e through macroeco policeis, gvts also use … to address structural u/e
by lifting eco’s efficiency, competitiveness & productivity, microeco reform aims to ^ EG & job creation over LT
- reduce tariffs, deregulation, national comp policy, privatisation, tax reform
- esp LM policies (industrial relations, edu, training, welfare to work initiatives) to ^emp growth over time
labour market policies
imp role reducing types u/e
range available to gvts :
- edu & training programs for ppl out of work/risk of u/e
- measures to improve matching u/e to job vacancies
- policies to ^ demand for labour by making more attractive for employers to hire workers eg. wage subsidies
- OECD during covid 2021 urged member c’s to ^ investment in active LM policies to help ppl who lost jobs to reenter job market
since 1990s, changes to LM regulations (eg. _ _) gave employers more flexibility in determining _ _. these changes aimed to
enterprise bargaining, employment conditions
- ^ productivity & give employers incentives to hire workers
- ongoing debate how AUS can balance policies give flexibility to employers & policies provide fair pay & conditiosn to employees
in 2021, the Fair Work Act was amented to
create a clearer definition of casual employment & require employers to be more transparent providing info to casual employees
* under amended law, employers must give casual employees option becoming permanent if been in job 12+ months & work regular hr patterns
policies for general regulation of LM have an influence on how the _ _ _ _ _ interact in the labour market
forces of supply & demand interact
successive gvts have implemented LM policies to
move inds off welfare & into paid employment
- making harder to access welfare payments eg. longer waiting periods, toughter eligiblity rules, requirements to** keep applying** for jobs & undertake training
- if more diff to access income support payments, encourage u/e to actively seek work/add edu & training
gvts can influence LM through immigration policies
AUS high lvls immigration
- doesnt increase lvl u/e bc immigration program focus on skilled workers
- 2020 & 2021 most stopped bc closed international borders & since ww2 more ppl leaving country than arriving, negative net migration
how gvt policcy changes aimed at supply side of LM
^ WF particiaption by reforming way tax & welfare systems interact
- u/e ppl & low income earners often face high ‘effective marginal tax rates’ –> every extra dollar earned from work pay tax & lose a portion of welfare benefit
- reducing EMTR –> incentives to lift WF participation & ^ employment
- changes to parental leave programs ti & supply by making it easier for parents to stay emp LT
- paid parental leave w/ policies to make child care affordable & accessible easier for both parents to maintain employment & take care of children
gvt policies can help reduce frictional u/e by
helping match jobseekers w/ job vacancies
- aus gvt operated national job search agency but 1990s closed & replaced by natwork of job search agencies aka jobactive run by private sector & some charities funded by gvt on basis how many jobseekers they train & place into jobs
- introduced new employment services model July 2022 to replace jobactive w/ focus on online job searching & funding most disadv jobseekers & LT u/ed.
- criticised for underinvestment in helping those need most, AUS spends <1/2 OECD avg on employment services
inflation
sustained increase in general lvl of prices in an eco
* measured in AUS by % change in CPI, which summarises the movement in the prices of a basket of g&s, weighted according to their significance for the avg AUS HH
* annual inflation rate caclulated by % change in CPI over the year
CPI
- basket of g&S used to calculate the CPI doesnt include all g&S available in eco but covers wide selection reflecting avg HH spending patterns
- CPI gives good indication of overall movement in prices of consumer goods & reflects general changes in cost of living (how much ocnsumers have to pay for g&S they buy)
- compiled by ABS & published every 3 months
- excludes some items of Hh spending eg. changesi n mortgage IRs & consumer credit charges
- doesnt include prices of property/land so changes in residentical property prices recent yrs not reflected directly in CPI
- weights given to expenditure groups in the basket based on ABS HH Expenditure Survey
- ABS regularly updates weighting for each expenditure group to accurately reflect avg consumer purchasing patterns
the official rate of inflation its limit, how to combat it
‘headline’ inflation
* calculated using the CPI
* can be misleading indicator of ongoing price pressures in eco bc includes some g&S whose prices highly volatile/affected by one-off factors
* RBA prefer look at lvl underlying inflation aka ‘core’ inflation
* underlying inflation removes effects of one-off/volatile price movemetns –> less variable than headline inflation
* underlying inflation either below/above headline inflation rate eg. one-off dramatic falls in prices of certain goods reduced headline inflation rate but had much smalelr impact on underlying rate
measures of underlying inflation
no single measure in AUS, Treasury & RBA have own calculation of the rate
* most focus on 2 measures (trimmed mean & weighted median) originally develoepd by RBA & quarterly published by ABS which adjsut official CPI figures to give less weight to g&S that experienced very large rises/falls in price
trimmed mean inflation (to measure underlying inflation)
calculate avg inflation rate after excluding the 15% of items w/ largest price increases & 15% of items w/ smallest price increases/(largest price falls) from the CPI
weighted median inflation
calculated by comparing the inflation rate of every item in the CPI & identifying the middle observation
* inflation rate is 1/2 of items in CPI > weighted median inflation rate
* inflation rate of other 1/2 less than that
when the RBA refers to its own estimate of underlying inflation, it is referring to the
average of the trimmed mean & weighted median added together & then divided by 2
* (trimmed mean + weighted median)/2
in 2011, ABS introduced more measures of inflation to
seasonally adjusted & underlying measures of inflation to help make CPI adjustments more comprehensive & reliable –> enhances accuracy of the trimmed mean & weighted median measurements
in recent yrs, both headline & underlying inflation have been high/low but during certian periods they can move..
LOW, move in opposite direction
* headling inflation alone can give impression that inflation if volatile but underlying inflation poitns to real ongoing trends
covid recession 2020 began w/ largest quarterly fall in CPI since 1931 & 1st annual decline in inflation since 1960s, which reflected
very weak lvls eco activity across eco
* prices for fuel & many services falling
* several gvt emergency pandemic policies put downward pressure on inflation –> eco activity picked up –> inflationary pressures rebounded w/ headline inflation surging to 3.7% above RBA’s target band for 1st time in decade but underlying inflation remained low
demand pull inflation (main causes of inflation)
when AD/spending growing while eco nearing its supply capacity so higher demand leads to higher prices than more output
* in market eco, prices determined by interaction of supply & demand in market
* when AD/spending exceeds eco’s productive capcity, prices rise as output cannot expand further in ST
* consumers force prices up by bidding against each other for limited g&S available
* consumers willing pay higher price any given lvl supply
(price ^ that results from higher AD)
cost push inflation (main causes of inaltion)
when ^ in production costs eg. (wage increases) that producers pass on in form of higher prices, raising inflation rate
* casued by ^ in costs of FOP
* when production costs rise, firms try pass on to consumers by raising price of products
* producers face higher costs so supply less quantity for any given price lvl
* prices increase –> contraction in demand
major sources of cost push inflationary pressures in AUS eco
- Wages & prices of raw materials eg. fuel
- when wages ^ faster than productivity growth, cost of labour for each unit of output increases
- wages typically 60% of firm’s costs, firms attempt pass wage ^ to consumers to maintain profitability
- ^ price raw materials –> ^ price product to maintain profit margins (similarly)
(2 ways) inflationary expectations (main causes of inflation)
- if prices of g&s expected to ^ in eco, consuemrs attempt purchase products before prices increase
* consumers ^ consumption –> higher demand-pull inflation
* if firm expects demand for product will ^, raise prices to maximise profits –> ^ inflation - employees expect inflation ^, negotiate wage increases
* workpalce contracts typically negotiated in advance for next 2,3 yrs so if emp expects higher inflation next few years ask for higher wage rise to preserve purchasing power of wage –> firms pass wage increases –> cost push inflation
managing inflationary expectations as a major challenge for policymakers
once inds expect higher inflation, act in way that accelerate higher inflation, entrench in eco –> take eco contraction (eg. 1990s recession) to bring expectations down
imported inflation (main causes of inflation) + international factors in reducing inflation
transferred to AUS through international transactions
* ^ price of imported goods will ^ inflation rate as if domestically produced good
* depreciation in AUD will ^ domestic price of imports –> inflation
* extent ^ in import prices/fall in AUD –> consuemrs pay higher prices for imports depends on market conditions
* if imports face comp from locally made products, importers can reduce profit margens & not pass to consumers full effect of overseas price rise/depreciation
* imported inflation accounts for larger share of variability in headline inflation rate than past (AUS integration with global eco)
- also international factors sig reducing inflation in AUS (lwo fuel prices directly reduce inflation bc sig item in basket of g&s to measure CPI, but also indirectly bc lower prod costs for AUS businesses)
gvt policies (other causes of inflation)
direclty influence lvl inflation (&price):
* by ^ indirect taxes, gvt impact general lvl prices
* eg. gvt make child care free for parents during lockdown reduced headline rate of inflation to below 0
* deregulating an industry
* changing tariff rates
* imposing price controls
* price monitoring
* increasing charges for g&S provided by AUS gvt
excessive increases in money supply ( other causes of inflation)
- when ^ money supply outstrips eco’s growth rate, an ^d volume of money chases the same amt g&s –> prices likely rise
- if money supply ^ w/o ^ real production –> ^ AD relative to supply that causes inflation
- ‘monetary inflation’
causes of inflation (& some history ehhe)
possible to have all cayses oeprating at same time
* often 1 or 2 types more prominent at PIT
* recently, infaltionary expectations subdued due to persistently low wage growth
* slower eco growth late 2010s weakened demand-pull pressures
* depreciation of AUD 2015-2019 ^d imported inflationary pressures esp in retail industry
inflation impacts on eco
S<
* higher lvl inflation mroe negative consequences
high inflation effects on eco growth & uncertainty
- one of major constraints on eco grwoth
- excessive eco grwoth –> raise inflationary pressues (^ wage demands, strong ocnsumer demand bidding up price lvls)
- higher inflation distorts eco decision making (producers & consumers change their spendign & investment decisions to minimise effect on themselves eg. buy assets > investing income producing activities)
- discourage bus investment bc makes producers uncertain abt future prices & costs –> future profit lvls
- distort consumers’ decisions to spend/save disposable income
- likelier spend & not save during high inflation bc purchasing power moneyreduced over time
however recently other factors (house prices, super, broader eco outlook) can be mre influencing lvl savings in eco
* when eco performing strongly & ppl’s assets rising value, consumption rises & savings rate falls even when inflation rates low
low inflation effects on eco grwoth & uncertainty
- sustained lower inflation rate –> moderate eco grwoth maintained w/o curtailing growth through higher IRs
- low inflation beneficial eco grwoth bc removes distorition to investment & savings decisions from high inflation
- restors incentive to invest in LT productive assets > ST speculative investments (bus investment)
- sustained low inflation encourage consumers to save higher prop of disposable income
effects of inflation on wages
major influence on nominal wage (pay received by employees in dollar terms for contribution to PP not adjusted for inflation) demands
* higher inflation –. employees seek larger wage increases to compensate for erosion of purchasing power of nominal wages –> wage-price inflationary spiral diff to break, wage ^ –> higher prices –> higher wage demands…
* AUS recent yrs lower inflation rates reduced annual wage growth (check tectbook)
* if inflation exceed growth of nominal wages, real wages decline as employees lose purchasing power as prices ^ at higher rate than income
inflation effect on income distribution
high inflation rates –> lower income earners incomes dont rise quickly as prices, face higher IRs on borrowings
* hurts inds on fixed incomes/incomes not indexed to/rise as fast as inflation rate
* erod value of existing savings so inds who cant protect their savings from the impact of inflation’s net wealth declines
how inflation affects unemployment
closely related in ST
* higher lvls inflation –> more contractionary fiscal & monetary policies –> slower eco grwoth & higher u/e in S-MT
* high lvls u/e often have low infaltion rates (demonstrated by Phillips curve)
* previously gvts chose betw low inflation & slower growth/lower u/e at risk of rising inflation
* over LT inverse relationship breaks down eg. mid 1970s AUS simultaneous ^s in inflation & u/e (Stagflation)
how inflation causes an exchange rate depreciation
purchasing power parity theory says ER in LT changes to reflect real purchasing power of currencies –> goods traded globally (processed food, clothes, electronic goods) cost roughly similar amts in diff countries once moeny converted into local currency
* ecos w/ high inflation should exp depreciation relative to ecos w/ lower inflation rates
* assumes free trade & floating exchange rates eg. ER equal 2 countries if 1 higher inflation then price of its bikes rise & AUS become more internationally competitive, ^ exports to NZ & NZ consumers switch to cheaper AUS substitutes –> ^ demand for AUD –> appreciation –> AUS bikes less competitive, restore PPP betw 2 ecos
* doesnt work perfectly bc local factors (transport costs, taxes, ST influences of global financial flows on currencies)
* PPP LT anchor for ER betw diff countries
how inflation affects international competitiveness
ability of an eco’s exports to compete on global markets
* eco can be competitive by selling products of higher quality/lower price than competitors
* high inflation –> ^ prices for AUS exports –> reduce international competitiveness –> lower quantity of exports
* as price domestic goods ^, soneumrs switch to import substitues –> worsen trade deficit
* low inflation improve AUS IC –> price of AUS g&s more attractive to other countries & make local products more competitive w/ imports –> expansion of exports & replace imports w/ domestic substitutes –> improve trade deficit
inflation impacts on the ER
ST higher inflation appreciation of ER bc speculators anticipate RBA raising IRs –> respond by attracting greater financial flows
* high inflation causes currency to depreciate over time
* stronger relationship when depreciation causes high inflation
* LT, sustained low inflation may foster greater interntaional confidence in AUS eco & strengthen value of AUD
how infaltion affects IRs
lower inflation –> reductions in nominal IRs (nominal IRs based on real rate of return (real IR) + inflation)
* record low IRs in adv ecos after reduced inflation after COVID recession 2020
* higher inflation –> higher IRs as RBA tries reduce demand pressures in eco & avoid neg consequences of high inflation
benefits of inflation
limited
* small amt inflation beneficial bc allows adjustments in relative prices in an eco w/o requiring reductions in normal prices often ‘sticky’ esp wages
* low positive lvl inflation reduces likelihood of eco experiencing falling prices (deflation), can also have neg consequences
* deflation gives consumersi ncentive to delay purchases –> fall consumer spending & eco downturn
* also makes borrowing money less attractive bc amt repaid rising in real terms (not falling)
* also make hiring workers less attractive if nominal wage rates stay same & real wages rise
* RBA targets low inflation lvls to avoid but dont strive for 0 inflation –> ^ risk of deflation & other eco problems
___ policy has been the main tool to acheive low inflation but occassionally ___ ___ __ -____also used to address price pressures
MONETARY, other parts of the policy mix
* played primary role in AUS’ low inflation record since early 1990s
* S-MT, MP attemps sustain eco grwoth lvl doesnt create inflationary pressures, hold between RBA’S 2-3% target
* if starts rising, RBA ^ IRs throughout eco by tightening MP –> dampen sonumer & investment spending –> lower lvl ecoactivity –> lower inflation
RBA has used __ monetary policy by
pre-emptive MP by taking action against inflation before problem
* generally aims to ^ IRs before inflation reaches top of target band to account time lag betw policy implementation & effect
RBA attemped to make use of MP predictable by emphasising
consistently its intention to use MP primarily to ensure inflation remains within target band –> lower inflatioanry expectations –> reduce inflation
how fiscal policy CAN Also play a support role in maintaining inflation (not main policy)
- period rising inflationary pressures, gvt can ^ revenue & reduce spending to minimise demand pressures in the eco –> reduce demand-pull inflation
- FP settings support low inflation object can reduce need for higher IRs to combat inflation
(3) AUS GVT’s use of microeco policies contributed to eco’s __ record of low inflation
LT
1. reduced protection –> lower prices of imports & ^ comp faced by domestic producers from overseas competitors & new entrants to domestic markets –> mroe diff for domestic producers to raise prices
2. reforsm to LM attempt ensure wage ^s linked to productivity improvements
* if productivity rises, eco afford real wage ^S w/o inflationary pressures & large wage rises in other sectors of eco (deregulated LM)
3. greater investment in eco infrastructure (roads, railways) avoid transport & bottlenecks that ^ production costs & add inflationary pressures
hence ^ comeptitive
pressures so harder for firms to raise prices
in LT, inflation more influenced by _ factors than by uniquely _ factors
global > domestic
external stability
aim of gvt policy to promote sustainability on external accs so AUS can service its foreign liability in M-L run & avoid ucrrency volatility
* ensures imbalances in AUS’ relationship w/ global eco dont hinder achieving domestic eco policy goals (higher growth, lower u/e, lower inflation) bc goals affected by external imbalances (unsustainable ^ in CAD/foreign liabilities/large movements of ER)
* IFoverseas investors decide AUS’ external position not sustainable –> depreciation of currency, withdraw investment funds, diff for firms to access overseas FMs, higher IRs, slower eco growth
key concern behind the issues of external stability
- for AUS ot sustain eco prosperity, must manage relationship to global eco
- avoid imbalanced that could threaten LT prosperity
a persistent CAD as an external stability issue for AUS recent decades (check the textbook for these)
- relatively high deficits on its CA since early 1980s driven by deficit on net primary incoem acc
- historically sustained deficit onf CA under 3% GDP but grew mid 1980s & during 2000s avg 4.9% of GDP
- concern lessened as fallen recent yrs avg 2.9% 2010s & surplus 2019-20-21
volatile terms of trade as an external stability issue for AUS recent decades
- recent yrs AUS’ TOT fluctuated from largest commodity price boom in AUS history 2003-2011
- after falling for several yrs & beginning improve from 2016, TOT rose sharply during COVID pandemic, record lvls 2020-21
- combo of strong demand from China & supply constraints –> surge in commodity prices esp for AUS largest export iron ore
growth of foreign debt as an external stability issue for AUS recent decades
- size of AUS’ net foreign debt rapidly grew 6-35% of GDP during 1980s
- growth slower since
- continued to grow, past 2 decades of low global IRs –> foreign debt servicing costs lower than 1990s
rising foreign ownership in AUS as an external stability issue for AUS recent decades
- high lvls result in large share profits going offshore
- outflows on net primary income acc offsetbut inflows of profits from AUS investments overseas
- many sectors of AUS eco high lvls ofreign ownership
volatility of AUD as an external stability issue for AUS recent decades
- commodities make large share of AUS’ exports –> valeu of AUD reflects fluctuations in commodity prices
- AUS’ ER strong rise 2001-2011 (> 60% on TWI)
- further volatility occured onset of COVID 2020 refelcting strength in AUS eco recovery & strong demand for AUS commodity exports
although ppl concerned abt AUS’ external imbalances, grown/receded recent yrs bc
receded bc improvement on CA & bc external imbalances havent had neg effects on AUS’ eco performance
* AUS maintained confidence of foreign investors while exp larger external imbalances than most adv ecos
* ^ commodity export revenues strengthen confidence in sustainability of AUS’ external imbalances
CAD as % of GDP
best measure of trends in CA over time rather than size of CAD in dollar terms
* accurate comparison across time & betw countries
* long history large CADs since 1980s, paid out considerably more for goods, ervices, income than received from overseas
diff explanation for AUS’ persistent CAD
- extent CAD perceived as problem & policy response required depends on factors causing it
- sustainable?
- high CAD 1st as largely a trade problem related to AUS’ balance on g&s, most ppl see as structural issues related to primary income acc
- CAD result of Svings & investment gap rather than a trade gap –> argue sustainable since result of high lvls direct investment in AUS –> help generate higher eco grwoth & exports in LT
- others say puts AUS risk not able to finance its external liabilities
CAD as a trade deficit 3 explanations of AUS’ persistent CAD + 2 arguments that its from a trade gap (mindmap this)
- CAD 1980S blames on persistent deficits on balance of g&S caused by slow export growth & expanding demand for imports
- balance on g&s not main contributor to AUS’ CAD but crucial part of AUS BOP performance
- AUS lacks international competitiveness in many higher value-added areas of global trade eg. ETMs
* many of AUS’ trad manuf industries lose their markets at home & overseas bc unable to compete w/ overseas comeptitors who specialise in large-scale, low cost manufacturing
* many areas manuf largely moved offshore (clothes, textiles, electronics)
* AUS’ manuf sector declined as share total output –> ^ reliance on imports
* since 2000s sustained period high commodity prices –> higher values for AUD –> AUS’ non-commodity resources less competitive
* ‘Dutch disease’ demand for 1 type exports may drive up value of ER –> make other exports less competitive –> contraction in production of said exports
* lack IC from cost factors (ability to sell g&s at attractive prices on global markets due to ERs, labour costs, productivity lvls) & non cost factors (quality of production, reliability of supply, marketing efforts, customer services)
* AUS lags behind avg for adv ecos in infrastructure access esp electricity & IT –> impact ability AUS access international export markets - AUS’ TOT major effect changes in CAD
* global commodity prices went into LT decline 1975-2000 –> slower growth in AUS’ export rev & higher CAD
* trend changes 2003 TOT ^ dramatically
* large ivnestments in mining sector to take adv of higher prices for resource exports –> 2010s sustained downward trend in CAD –> aus’ 1st CA surpluses in almsot 5 decades
* relationship betw movements in TOT & AUS’ trade balance (hence CAD) strengthened recent yrs from avg deficit 1.5% of GDP 200s to avg surplus 0.2% 2010s
* while AUS profited from period high commodity prices, risk of heavy reliance on minerals & energy exports is sharp fall in prices fror them/major disruption to AUS’ exports to China –> large ^ in CAD
CAD as a savings-investment gap, 3 explanations of AUS’ persistent CAD
result of excess domestic investment > domestic savings savings-investment gap
* if dometic spending > domestic output –> CAD –> make up by bringing in financial inflow from overseas (AUS BORROWS from overseas/sells domestic assets to overseas)
* foreign savings instead of domestic savings used to finance domestic investment
* if gvt runs budget deficit –> reduce lvl national savings & widen savings-investment gap
* relationship betw/ bus investment, net saving & fall in investment helped narrow gap & lower CAD
- AUS’ persistent CAD & need for capital inflow partly conequence of eco features
- country w/ small pop, large land mass, extensive natural resource AUS relied on overseas capital to fill gap betwn domestic savings & investment to develop its eco
- foreign ivnestment & borrowings made possible to develop more rapidly than if relied only on domestic sources of capital
- as long as foreign investors & loans increasing AUS’ productive capcity & not just funding purchase of existing assets eg. housing, add to AUS’ capacity to service its foreign liabilities –> CAD sustainable in LT
the ‘consenting adults’ thesis (Pitchford thesis) ,3 explanations of AUS’ persistent CAD
thesis: as long as a CAD result of savings & investment decisions by private sector & not from distorition to normal market mechanisms, no concern abt eco’s ext stability
* popularised 1990s
* AUS’ CAD & foreign liabilities almost entirely generated by private sector –> argue AUS’ CA problem diff from other c’s w/ large external imbalances who exp financial crises from large foreign debt burdens bc their debt was result of gvt borrowings
* AUS’ foreign liabilities helped fund private investment projects/were direct investments in firms & ventures by foreign residents
* if private sector decision making not distorted by other factors eg. gvt policy, inds & firms make proper calculations of risks & costs of borrowing fro overseas & borrowers & lenders responsible for own decisions - ‘consulting adults’
* AUS’ foreign liabilities largely accumulated by private sector –> aus gvt no need to be too concerned abt lvl foreign liabilities more than w/ lvl domestic liabilities
cirticism against ‘consenting adults’ thesis (Pitchford thesis) contributing to persistent CAD
- criticised since GFC, whether assunption (that private sector decision making involves proper calculation of risks) always true
- large FIs unable accurately calculate risks of borrowing & lending w/ complex financial products (mrotgage-backed securities) in GFC
- also assumes private sector debt entirely separate from public sector debt but GFC national gvts forced to assume liabilities of their c’s private-sector banks to avert serious financial collapse
but AUS better eco perf during global recession GFC supported at least in enviro of strong commodity prices, AUS’ external imbalances sustainable
net foreign liabilities/net external liabilities
are equal to
AUS’ financial obligations (foreign debt + foreign equity) to rest of world - rest of world’s ifnancial obligations to AUS
hence, net foreign debt (or next external debt, total stock of loans owed by aussies to foreigners = total stock of loans owed by foreigners to aussies) + net foreign equity (total value assets in AUS eg. land, shares, companies in foreign ownership - total value assets overseas owned by aussies)
- reflect AUS’ total finacncial obligations to foreigners minus total financial obligations of foreigners to AUS
overseas borrowing adds directly to AUS’
foreign debt
* initial borrowed sum eventually has to be repaid & debt must be serviced w/ regular interest payments
* servicing of AUS’ debt constitutes an outflow of funds on CA –> ^ CAD
* selling assets to foreigners doesnt add directly to AUS’ foreign debt
* AUs doesnt have to repay price of purchasing equity unless company/assets sold back to aussies
* however aud does need to send overseas returns on equity investment (company profits, rent on land, dividends on shares)
* recent yrs equity servicing costs on primary income account exceeded interest repayments on debt
* returns on equity AUS pays to overseas investors partly offset by returns received by aussies from investments overseas
growth in AUS’ net foreign liabilities as % of GDP
reflects growth in net foreign debt & changes in net foreign equity
* trend of ongoing growth in AUS’ net foreign debt to GDP ratio since beginning of globalisation era 1980s
* fluctuations can occur in ST responding to movements in AUD & trends in foreign investment inflows & outflows
in LT, excessive growth in AUS’ foreign debt could lead to a __ __ problem
debt sustainability problem
* if size of debt rising faster than ^ in GDP (like most yrs) the interest payments on debt will progressively take up greater prop of GDP –> reduce AUS overall SOL & eco growth protential
* high foreign debt can create cycle “debt trap scenario”, starting with a high CAD –> requires an inflow of foreign funds as either foreign debt/selling AUS assets to foreigners –> larger foreign debt, AUS’ interest payments on the debt ^ –> record as primary incoem debits that flow out on CA, hence today’s foreign debt adds to future deficits on the CA
if international FMs suspect AUS’ debt may become unsustainable, they may … however, AUS has avoided a debt sustainability problem bc..
reduce AUS’ international credit rating (whcih reflects confidence that FMs have in AUS) –> More diff to borrow funds internationally –> ^ IR on borrowing
* a sustained long period of low global IRs & rising export revenue ensured AUS able to service its foreign liabilites
debt servicing ratio
one of most reliable measures of c’s capacity to service its foreign debt
* indicates the prop of export revenue msut be spent on interest payments on foreign debt
* c better service its foreign debt when has high volume of exports –> earning large amt of foreign currency
* 2020-21 AUS fell, despite ^ in foreign debt lvls, very low lvls of global IRs & rapid growth in value of exports meant that servicing cost of that debt is manageable
historically, most foreign investment flows into AUS (both _ & _) have been into the _ sector
debt & equity into the private sector
* partly represented an inflow from offshore funding of banking sector - Aus banks borrowed on overseas FMs to make loans to AUS HH &bus
* however after GFC banks reduced reliance on offshore funding bc ^d domestic savings
* larger share of capital flows into AUS gone into investment securities as foreign investors purchase AUS GVT debt
* AUS gvt one of small no. national gvts that still holds a AAA credit rating, attractive to overseas lenders bc very low risk lvl
net foreign equity
smaller component of AUS’ foreign liabilities
* when foreign investors buy assets in AUS, recorded as ^ in foreign equity
* when aussies buy overseas assets, recorded as dec in net foreign equity
* since 2013, value of AUS’ foreign assets > value of foreign ownership of AUS assets (net foreign equity becoems negative) –> trend ^ in AUS ownership of foreign assets
* as a % of GDP peaked in 1990s bc foreign ivnestment in AUS increasingly involved asset sales than foreign borrowing
* mroe volatile than net foreign debt –> reflects ER movemetns & shifts in market valuation of companies & assets which are affected by changes in investor sentiment
foreign equity attracts servicing costs in the form of _ & _ that are…
profits & dividends returned to overseas investors, can create ongoing strain on AUS’ external accs by worsening net primary income acc (although offset by earnings from AUS’ overseas investments)
* some dis of foreign ownership but sustainability of servicing costs for foreign equity less concern than foreign debt bc dividends only sent overseas when AUS asset/bus generating profitable return while interespt payemtns on debt must be paid regardless if theres profit
equity servicing costs account for around _ of total primary income outflows
half
while there has been a rise/fall in AUS’ net foreign liabilities, this masks the ..
.large rise in value of AUS investments overseas & overall growth of other ocuntries’ liabilities to AUS
* 2000-01 to 2020-21 AUS ownership of equity overseas rose while AUS loans overseas grew
* however, AUS’ gross foreign liabilities still larger & over same period, foreign owned equity in AUS increased while gross foreign debt increased
* while AUS’ gross foreign debt ~2/3 > lvl AUS lendign to overseas, gap betw foreign equity inflows & outflows much smaller
in overall terms, as AUS become increasingly integrated into global eoc, foreigners have been lending & investing in AUS more/less than AUs has been lendign or investing overseas
more
Australia’s extenral imbalance has potential to cause problems for AUS in short/long term, although
longer term, but occassionally concern in recent decades
* among adv ecos, AUS has relatively high foreign liabilities w/ CADs appear unsustainable in LT
* if global conditions became less favourable to AUS they in last 2 decades, can make AUS vulnrable
* eg. reliance of AUS financial system on ongoing inflow of foreign capital major reason whygvt provided a temporary guarantee for all overseas loans of banks & FIs after GFC
* gvt argued w/o, banks wouldnt able to obtain overseas loans & financial system wouldve faced crisis
* shows extent consistently high lvl external imbalance increases vulnerability of eco to adverse eco developments overseas
AUS’ exchange rate
direct link betw AUS & rest of world
* all trade & financial relations betw AUS & other countries mediated through this
* hence sig impact on AUS international competitiveness & external stability
AUS’ ER volatility
- high lvl volatility in AUD result of AUS heavily reliance on commodity exports, larger fluctuations in commodity-based currencies often attract speculators
- more result of ^d global eco instability than domestic
trends in AUS’ ER
- very low commodity prices 2000s & internet developed –> countries w/ ‘low tech’ ecos eg. AUS shunned by global markets
- changed after 2003 when AUS began largest TOT boom in its history as commodity prices rose sharply w/ China’s surging demand for natural resources
- trend ^ in AUD continued until 2011 bc of rising exports, sustained eco grwoth & IR differential betw AUS & other ecos
- falling TOT sharp fall in AUD early 2010s
- another depreciation alter that year reflected weakness in AUS eco, stronger growth in other ecos, then COVID 19 global reccion on commodity exporters eg. AUS but resilience & its rising TOT contributed to appreciation in currency
although the ER itself experienced periods of volatility, it has operated as a powerful _ mechanism that helped AUS eco adjust to …
pwoerful mechanism to adjust changing conditions in global eco
* during periods weaker growth in AUS/global eco, ER depreciations helped AUS more internationally competitive & stimulated export growth
* after 2011 fall in TOT, depreciation made exporters & import-competing sectors more comeptitive
* many non-mining firms in there adversely affected by high value of AUD during mining boom
* recent yrs lower dollar supported international competitiveness in export industries
floating ER on AUS’ external stability
helps AUS adjust to changing global conditions w/ sig impact on AUS external stability
* change in ER influences BOP by affecting AUS’ international copetitiveness & size and servicing costs of AUS foreign debt borrowed in foreign currency
* if value of dollar continually subject to change, 2 of major indicators in AUS’ external stability also volatile, create policy challenges & eco instability
what happens if theres a sudden/large depreciation in AUD due to a fall in condifence of foreign investors?
vicious cycle
* investors fear further volatility in the dollar & discouraged investment decisions if dollar falling sharply bc target of finacnial speculators who make money from ST FM changes
* once downward trend, can continue until enough investors believe currency undervalued & starts buying again
* Forex markets often overshoot when major currency movements occur
macroeco policy & achieving external stability
recent yrs, external stability not major obj of macroeco policy
* while policymakers continue monitor CA, foreign liabilities, ER
* aim improving external stability not major influence on F/MP settings
* reflects acceptance of ‘consenting adults’ view of CA among policymakers that CADs & foreign debt reflect ecisions of private sector & dont require policy change by gvt
* reduced concern also related to AUS’ improved Medium term export prospects, recent trade surpluses & ^ HH savings
* achieving sustainable outcomes on CA & foreign liabilities & stable value of currency LT ojbs of eco policy, addressed through AUS’ LT policy settings aim to reduce risk of external shocks could adversely affect AUS’ access to GFMs
the LT policy settings addressing external stability issues to reduce risk of external shocks neg affecting AUS’ access to GFMs:
-
MP
* past, contractionary MP used to reduce consumer spending on imports to create ST improvement in balance on g&S
* now ineff since impact only temporary & results in slowdown across whole eco
* higher IRs can ^ capital inflows –> generate higher net primary incoem outflows –> worsen CA
* unable to target LT structural causes of AUS’ external imbalances -
fiscal policy
* some role addressing AUS’ low lvl national savings
* adopt policy of fiscal consolidation (running balanced/surplus budgets over course of eco cycle), gvts since late 90s reduce influence on private savings over medium term
* after COVID fiscal strat gvt prioritised higher growth & ower u/e > fiscal consolidation –> aus’ public debt lvls remain high throughout 2020s & neg effect on national savings
* if debt falls as share of GDP 2024-25 onwards, improvement in national savings & lessen upward pressure on IRs & ‘crowding out’ of private borrowers -
compulsory super requires employers to set aside 10% of emp’s wages in a superfund –> lifted lvl national savings since early 90s
* major contribution to ^d AUS’ overseas investments –> create financial inflows on net primary income acc
* legislated ^s in super so reaches 12% over 5 yrs –> support external balance -
microeco reform can address structural problems causign AUS’ external imbalances
* international competitiveness of AUS g&s improved if measures lifting productivity of AUS producers
* policies include measures to reduce capacity constraints in the eco by improving infrastructure & alleviating skills shortages, remove protectionist barriers shielding ineff producers from foreign comp, LM reforms to ^ productivity & Workforce participation
in practical terms, what is the best measure of external stability? how does the gvt appraoch this?
the extent whcih AUS maintains confidence of international investors
* gvts through consistent, medium-term policy settings eg. AUS’ infaltion targeting, goal budget surpluses, contniued commitment to microeco reform –> largely successful approach maintaining international confidence in AUS’ eco recent decades
* international investors mostly accepted ‘consenting adults’ view of AUS’ CAD & foreign debt
connection betw private & public sector borrowings
- even if high lvl foreign debt result of private sector borrowings, gvts can be forced to tak eresponsibility or those borrowings to prevent a meltdown of their entire financial system & potential eco depression
- AUS GVT guaranteed its private sector foreign debt, which undermines argument that private sector borrowings from overseas dont matter bc shows in times of extreme financial isntability, external imbalance (whatever origins) can make eco mroe vulenrable to external shocks
distribution of income & wealth
major challenge gvt policy to ensure fairness in distribution of welath & eco opp in society
* ecos w/ smaller gap in incomes betw high & low income earners have greater happiness, better health outcomes, higher lvls social mobility
* globalisation increased inequ in many countries
* one o greatest challenges adjusting to structural eco change is ensuring one part society doesnt have unfair share of burden of change & benefits dont just flow to those financially well off
AUS’ income & wealth distribution
traditionally relatively lw lvls inequality
* around OECD avg
* income ineq increased 1990s & 2000s but sustained eco grwoth, unviersal access to public edu & healthcare & well targeted social security safety net prevented greater widening of ineq
* deg of income ineq in AUS ^ since mid 1990s
* AUS has more unequal dist than many OECD ecos (above median)
many factors that increase inequality are
side effects of policies that encourage market forced & improve competitiveness
* lvls ineq can ^ when nations implement eco policies eg. reduce marignal income tax rates, restrict welfare, reduce spending on public services, deregulat LMs
* but always trade-off betw increased grwoth & reduced inequ
* high lvls ineq can reduce eco grwoth
personal income
- amt of money/other benefits measured in monetary terms that flows to inds/HHs from sale of FOP over PIT
- wages from labour, rent from land, interest from capital, profit from enterprise
- benefit flows to owners of FOP for owning, maintaining, managing productive resources
- pensions & benefits from gvt
incoem inequality
degree which income unevenly distributed among ppl in the eco
* high lvl equality : ppl receive similar share of income or large gap betw high & low income earners
how incoem ineq cna be measured
by the share of total income received by diff groups
* prop of dispoable income (after tax) received by each quintil (20% grouping ranked lowest to highest income earners)
* past 25 yrs share of income risen for highest income quintile
* but trend towards rising ineq stabilsied since GFC
* diff in avg incomes (before tax & welfare pyments)
mean income vs median income
mean
* avg lvl income calculated by dividing total income of group/no. income recipients in group
median
* lvl incoem divides incoem recipients in group into 1/2
* 1 having incomes above median
* 2 incomes below median (middle income)
measuring income inequality using the Lorenz curve
graph of income distribution, plotting cumulative ^ in pop against cumulative ^ in income
* cumulative % of total income received (y-axis) against cumulative % of income recipients (x-axis)
* if income ditributed evenly across pop, curve diagonal line through origin line of equality
* further curve away from line, greater deg income ineq in society
measuring income inequality using the Gini coefficient
no. betw 0 (all incomes equal) & 1 (single HH receives all income) that measures extent of income ineq in an eco, calculated by measuring deg curve deviates from line of equality
* single statistic summarises distribution of income across pop
* ratio of area betw actual Lorenz curve & line of equality (A) & total area under line (A+B)
* smaller gini coeff, mroe even distr of inc
measuring distribution of HH wealth in AUS
more complex than measuring income lvls
* dist welath more unequal than distr income, lvl ineq existed long time
* top quntile earns 40.4% of total income, top quintil owns 63.5% total welath
* bottom quintil earn 7.5% total income, <1% total wealth
* wealth ineq remained relatively stable over time but gini coeff shows improvement 1980s & 2000s before worsening from 2012
what was a key influence on the lower Gini coeff in early 200s
positive impact of compulsory super introduced in 1990s
* build store of wealth for ppl in lower income quintiles w/ jobs who often dont have assets eg. real estate
increase in wealth inequality recent years reflects how wealth
accrues to owners of capital during periods of growth & decline
* AUS’ house prices risen dramatically past 2 decades, ^ wealth of asset owners but harder for low & middle income HHs to buy home
* real estate prices in expensive areas mroe responsive to IT changes –> very low IRs recent yrs widening wealth inequality as owners of expensive properties see value of assets ^ > less valuable real estate
how inequality welath can increase/decrease during downturns & upturns
increase
* strong demand in some sectors in pandemic eg. techm edical care also highlighted how ppl w/ weatlh able to capitalise on new opps in changign eco conditions
how each FOP contributes to HH income lvls (factors influencing distr of inc)
wages from labour
* main source of income for consumers
* wage/salary payments for labour when consuemrs participate in LM
* includes non wage income eg. bonuses, fringe benefits, employer contributions to super aka returns to labour
rent from land
* many consumers own land that becomes source of income when rented eg. own investment property generates rental income
earnings from cpaital
* returns from ownership of capital are sig source of HH income
* returns include earnings from financial assets eg. investment funds, super accs & bank deposits, ownership of shares/whole companies
* bc ownership highly concentrated among msot welathy HHs, large share of these earnings goes to wealthiest HHs
* main way ineq in distribution of welath contributes to ineq in distr of inc
profit from entrepreneurshup
* substantial no. aussies operate bus’ (esp small)
* if bus makes profit, income considered return for entrepreneurial skill
* ABS calculates mixed income from unincorp enterprises but diff to estimate
transfer payments
* paymetns from gvt to assist ppl w/ basic costs of living
* sig prop HH income through social welfare aka transfer payments/gvt benefits
* 2 types: social assistance benefits (Welfare payments) & social insurance benefits (eg. workers compensation)
* income collected through taxation & transferred from gvts to HHs
* >1/3 total incoem tax collected used to pay u/e & sickness benefits, age & disability pensions, family alowances, etc
sources of wealth in AUS
HH net worth used by ABS to measure private sector wealth
* net worth is extent whcih value of HH assets eg houses & savings (things they own) exceeds value of liabilities (loans, things they owe)
* most from owner occupied property, super, investment property (ranked)
2 largest components of Hh wealth
housing & super increased recent yrs while savings & ownership of bus assets declined
* more value held in owner-occupied properties than any other asset
* combined w/ investment properties, real estate assets >1/2 % HH welath in AUS
* super funds 2nd largest Hh asset & largest ifnancial asset
trends in distr of inc & wealth (check textbook)
- recent decades AUS experienced modest increase in overall lvls inequality
- income distribution asymmetric, relatively small no. HHs have relatively high incomes & large no. HHs relatively low incomes
- wealth mroe unequally distributed than income
- hihgly unequaly distr of wealth & even greater concentration of wealth at ‘top’ compared w/ distr of income
- income remain highest bet 35-54yo main yrs of working life, 15-19 lowest
- younger brackets employed in casual, PT jobs lower-paying
- higher edu qualifications eg. tertiary degrees enjoy income lvls much higher than w/ vocational training/no qualifications beyong high school
- earnings highest w/ postgraduate degree & lowest w/o post-school qualification
- rapid ^ in housing prices 2000s sig widened ineq in ditr of welath by age
gender & occupation trends in distr income & wealth
- FT female workers earn less than males
- little change in wage relativities since ABS began publishing wages data for owmen over 3 decades ago
- 1985 women in FT jobs earning 82% male earnings
- part of diff in earnings explained by historic human capital factors (past attitudes concerning role of women in society, females fewer opps to acquire edu, skills, qualifications)
- after accounting diff in jobs & work hrs, avg weekly earnings females lower
- current gender pay gap influenced by occupations w/ high prop female employees paid lower wages, women have greater home caring responsibilities, fewer senior roles for employees who choose work PT (as higher prop of women do)
- experience in&Direct discrimination
- discrimination confirmed w/ avg male & female earnings working FT in same industries
- after account occupations, on avg, female emps earn less than male regardless same qualifications & experience
- gender pay gap not exclusive to male-dominated industries, greatest income discrepancies occur in industries where females account greater prop of workforce (health, social services)
1 contributor to gender inequality in welath distribution
way women accumulate lower super balanced during working lvies
* super balances for women who worked FT through careers 17% lower avg than men
* including casual & PT, gender gap 33% reflects higher prop women working these positions –> women paid lower wages, take longer career breaks for caring responsibilities, when take parental leave employers not required make super payments
ethnic background trends in distr income & wealth (check textbook for these ones)
- almost halfaussies born overseas (1st gen aussie)/have 1/+ parent born overseas (2nd gen aussie)
- ~60% migrants come from countries not mainly English-speaking nations
- ST, migrants (esp from non english speaking countries) have slightly higher rates u/e
- LT, u/e same lvl foraus born & overseas
- migrants from english speaking countries likelier to be highly skilled & professionaly qualified –> lower rate u/e comapred to recent migrants
- those who came to AUS under skilled migration program have LFPR 85%, higher than PR for pop 67%
- little data on relation betw migrant status & HH income & Wealth
- compared w/ native-born, aussies w/ migrant bg have higher incomes if from english-speaking countries & lower incomes if not, sig less wealth, higher underemployment –> barriers to employment in higher paid jobs for non english speaking migrants due to english proficiency
family structure trends in distr income & wealth
recent demographci changes in AUS eg. growth of female particiaption in workforce, decreasing fmaily sizes (couples raise fewer children avg) , ^ prop of ppl living alone
* large disparity in family income & Wealth lvls
* 1 person HHs & single parents HHs receive weekly income lvls sig below median
* small % single parent w/ children under 4 employed FT
* single parents work longer hrs as hcildren older, work fewer hrs than couples –> lower incomes, almost 1/2 bottom incoem quintile –> lower rates FT employment bc caring responsibilities
* couples w/o dependent children highest income family structure
* relationship betw ind’s age & family structure ind belongs imp
* couples w/ dependent children have much lower prop HH members in paid work, lower avg incomes than coupels w/o dependents
* couples w/ children more likley to be older so adults in HH likelier have higher ind incomes even if share among HH members
* major reason for low incoem lvls single person HHs is bc large no. aged ppl no longer in paid workforce & rely on gvt benefits as primary income source
* ^ transfer payment rates for older Aussies & low-income families fell
the distribution of wealth by family type shows similar/diff pattern to income distribution…
similar pattern to income distribution, with couple-HHs enjoying sig higher wealth lvls compared w/ single parents & person HHs
* main diff is single person HHs much mroe wealth than single parents despite similar weekly incomes –> influence of ‘income-poor & asset-rich’ elderly ppl in single person category who paid off mortgages & live off gvt pensions/other retirement incomes
georgraphy trends in distr income & wealth
regional factors influence demographic change (ppl in disadv areas ‘take flight’ to prosperous areas) & major issue driving direction og gvt policies for inc ineq.
* avg income lvls differ among states but ineq betw ppl in major cities & regional areas, between better-off & less well-off suburbs in major cities more sig
* ACT & NT enjoy highest HH incomes & Tasmania suffer lowest income
* WA &NT (regions w/ largest shares of eco activity in mining) experienced lasting benefit from mining boom & have incomes above majority of eastern states
* age role in interstate inequalirt where areas w/ younger pops eg. ACT & NSW have higher incomes than states w/ older populations eg. Tasmania
* inequ iwthin states esp betw major cities & rest of state
* 1/2 NSW’s most disadv regions concentrated in 6% of state, geographical ineq barely changed since 2007
* NSW pop living in capital city area earn more than those rural areas
* even larger diffs for net wealth, big diff betw property values in cirites compared to regional areas, Sydney HHs have property assets, worth more than double avg home values for HHs in rest of NSW (remember the limitations for interstate too)
important limitation on geographic data on distr inc & welath
doesnt account differences in cost of living
* Sydney pay highest weekly rents in country, but weekly median rent for Pertt property is 2/3
* incomes may be similar in both cities but actual living costs lower in smaller city –> higher LS
( remember w/ interstate comparisons, cost of living differences mean raw income lvls can exaggerate true extent of incoem ineq betw geographic areas.)
relationship between income & wealth (box)
although distr welath in AUS way more unequal than distr income, closely related
* inds w/ high incomes alos enjoy greater lvls wealth compared to low income earners
* HH income can be used to purchase g&S, service debts & acquire assets
* more income a HH has left after covering living expenses, greater capacity to build wealth
* mroe wealth HH has, greater capcity to generate income
* HH can generate higher income in form rent from property investment/dividends from a share portfolio but these assets may not be affordable until income lvls reach certain threshold
* ^ in income ineq can result in widening wealth ineq, & ^ wealth ineq can result in ^ income ineq –> explains gap betw incomes of AUS’ youngest & oldest age groups grown since 2008
costs & benefits of inequality
ineq has some limited eco benefits but sig social costs
* some argue ineq natural consequence of free market functioning effectively since each ind receives share of income according to their marginal productivity & create and strengthen ind incentives to ^ share of output (ppl more encourages to work harder to gain larger share in distr of income)
* but some argue system of free market capitalism divides society into diff classes (wrking, middle, upper) tends to entrench high lvls ineq & poverty
inequality reduces overall utility (eco costs of inequality)
inequality in distr income reduces total utility in society bc ppl on higher incomes gain less utility from ^ in income than ppl on lower incomes
* principle of diminishing marginal utility: as more of good consumed, provide progressively less utility to consumer
* extra $1 of incoem worth more to lower income earner than higher income earner
* more equitable distr of income –> ^ total utility (create greater overall lvl satisfaction in society)
* diff to measure accurately
inequality can reduce eco growth (eco costs of inequality)
low income earners spend higher prop of income than hgiher income earners since cost of basic essentials (housing, food) take higher prop of their income
* lower income earners have higher MPC bc spend more of each additional dollar earned than higher income earners –> an eco w/ high lvl income inequality, relatively lower lvl consumption & higher lvl savings –> lower eco activity, employment, investment, LS
* higher lvls of inequality –> lower lvls of eco grwoth
* rise in income ineq in OECD ecos 1985 - 2005 reduced cumulative growth from 1990 to 2010 bc as ineq increases, lower income HHs less able access edu opps
* w/ lower educational attainment, inds less likely to stay employed & eco will experience costs of hiehr u/e & lower participation rates
inequality creates conspicuous consumption (eco costs of inequality)
- ineq in distr of income creates a ‘leisure class’ of higher income earners in society
- leisure class puts large prop of their money towards CC, consume expensive g&s –> culture where ind worth depends on access to lifestyle
inequality creates poverty & social problems (eco costs of inequality)
ineq inc distr causes relative poverty –> develop underclass of low income earners w/ limited access to edu opps, suffer health & ther disadv –> reduce LFP & create self-perpetuating cycle of disadvantage
inequality increases the cost of welfare support (eco costs of inequality)
gvts provide safety net income support for ppl out of work, aged, disabled
* higher lvls inequality place ^d demands on gvt revenue as larger no. ppl on low incomes require gvt assistance
* entrenched disadv imposes proportionately greater costs on gvts as inds cease to participate in workforce & rely heavily on gvt services
social class divisions (Social costs of inequality)
distr of incoem & ewalth creates class distinctions in modern ecos eg. upper, middle, working class
* class divisions –> tensions betw ppl & betw diff regions, higher lvls crime & social disorder
* wage disputes betw workers & employers where workers try improve income lvl commonc cause of dispute
* divisions may lead to social & eco instability esp in developing ecos where gains of rising prosperity often unequally distributed
poverty (Social costs of inequality)
aus doesnt suffer from high lvl of absolute poverty but experiences sig lvls of relative poverty
* over 1/2 of aussies who exp poverty over 10 yr period only for 1/2 years
* 3% of aus population persistently in poverty –> traps families into vicious cycle of low incomes & limited eco opps
* high poverty lvls associated w/ ^ lvls of crime, suicide, disease, reduced life expectancy
eco benefits of inequality
inc inequality can ^ productive capacity of resources –> ^ real GDP per capita
* eco benefits mainly derived from incentive effects of inequality
inequality encourages the LF to ^ edu & skill lvls (eco benefits of inequality)
- higher qualifications & skills reap higher income rewards –> new entrants & existing participants in LF encouraged to imrpvoe edu & skill lvls
- assumes children growing up in poor HHs still ahve opp to access good edu, perform well at school, afford higher edu
- if children in low income groups dont have opp gaining good educational standards, eco likely suffer LT from lower lvls productivity growth
- inc ineq may then encourage ^ quality of LF
inequality encourages the LF to work longer & harder (eco benefits of inequality)
- potential to earn higher incomes produces incentive for workers to work longer hrs/overtime –> enhance eco grwoth
- only willing to give up leisure to work longer hrs if feel extra income more valuable than leisure time
- if ^d output rewarded through higher pay, encoaurges improved labour productivity
inequality makes the LF more mobile (eco benefits of inequality)
higher incomes incentive to encourage labour to move where most needed
* more mobile LF –> more eff allocation of resources & higher rate eco grwoth
* past decade imp as high earnings in mining jobs attracted workers to remove parts of AUS eg. NT
inequality encourages entrepreneurs to accept risks more readily (eco benefits of inequality)
prospect of considerable incoem rewards for entrepreneurs encourages risk taking with new investment & innovation
* if entrepreneurs received no extra reward for risk taking fewer entrepreneurs & businesses, lower rate eco grwoth, weaker investment, less innovation, fewer jobs, reduced productive capacity in eco
inequality creates potential for higher savings & capital formation (eco benefits of inequality)
strong relationship betw income & saving lvls
* higher income earned –> greater prop of income saved vice versa
* greater income ineq should encourage ^ savings in eco bc greater no. higher income earners
* ^ savings –. reduce AUS reliance on foreign capital by providng domestic funds for investment
social benefits of inequality
diff to identify
* potential eco benefits eg. higher lvls of saving/productivity maybe bnefit all members of society
* social benefits from eco system encouraging hard work, risk taking & social mobility but income ineq has few social benefits overall since system (that determines distr of income & welath) doesnt give everyoen same lvl opp to pursue their income & wealth goals
* given the problem of ineq of opportunity, social benefits associated w/ inequality are very limited
inequality of opp exists in AUS due to several factors: (social benefits of inequality)
existing ineq in distr of income & wealth perpetuates ineq of opp
* higher income earners have better access to edu opps, likely to gain admission to uni courses & take higher paid occupations
not everyone has same metnal & physical attributes and same potential to acquire income & wealth
* some more talented at manual work –> lower paying jobs than ones requiring analytical skills
ppl who acquire welath through inheritance greater opp to build wealth through investments > start with no wealth
ppl may not have access to same networks of ppl for new opps
* new migrants likley find diff to access social & bus networks
* this ineq makes diff to overcome bc many barriers to opps are informal (bus ppl prefer do bus w/ ppl they know, similar social bg) exclude
gvt policies & inequality
direct & indirect influences
* fiscal & LM policies have most direct impact by changing lvls gvt benefits, taxation, wages, salaries
* side effects of policies for other purposes eg. mciroeco polciy also affect ineq
* recent decades gvts adopted strat reducing intervention in markets but take additional targeted policy steps to reduce eco & social disadvs eg. personalised assistance w/ training & finding work
* during heightened instability, major policy intervenions to prevent severe eco downturn that could sharply ^ ineq (covid)
macroeco management & job grwoth (gvt policies & inequality)
- employment main source of income for HHs –> u/e main reason for low incomes & poverty
- periods of u/e & underemp contribute sig to ^ gap betw high & low income earners (AUS)
- u/e rely on gvt benefits –> siig below avg incomes earned by employed
- lower u/e rates –> reduce gap betw rich & poor
- inequ higher when ppl of working age drop out of LF/remain u/e for LT, LT u/e very diff to find employment
- ^ workforce participation to keep emps in workfroce & support re-entry of LT u/e into work can help reduce lvl income ineq LT
changes in the LM (gvt policies & inequality)
changes in pattern of employoment –> many jobs created recent yrs casual/PT > FT (‘secondary’ jobs not worker’s main source of income)
* decline of FT work –> ^ underemp, often hold casual, temporary jobs low paid in ‘gig eco’ w/ work hrs changign weekly –> lower incomes, suffer greater fluctuations in income lvls bc when eco downturn, 1st measure bus take is reduce casual & overtime hrs
decentralisation of LM widened ineq betw wage earners
* under EAs, workers w/ greater skills & bargaining power achieved higher avg wage ^s > less skilled workers who rely on industrial awards for wage rises
* jobs became more highyl skilled & specialised –> gap betw pay for high skilled & unskilled work widened
* FWAct 2009 recognise problem of ^d wage dispersion, help low paid workers engage in enterprise bargaining
AUS’ industrial relations regulated FWC influence ineq through annual decision on adjustments to min wages in AUS
* establishes min wage lvls for millions emps covered by awards & agreements, & indirectly influences other wage outcomes
* since 1st min wage decision 2010, FWC willing to raise min wages to assist low paid workers when confident ^s affordable
gvt policies to reduce inequality (gvt policies & inequality)!! (textbook this)
changes in gvt taxation, transfer payments & other assitance have most direct impact on ineq in AUS
* overall gvt intervention reduces income ineq by taxing wealthiest groups heavier & redistributing income to lower socio-eco groups
* final income of HHs more evenyl distributed than income from private sources
* w/o taxes/gvt benefits, incoem for highest qunitile >12x avg for lowest quintile (receive most age pensions & disability support)
* gvt policies –> avg annual disposable income received by lowest quintile of income earners almost doubled so highest income earners take lil over 5x lwoest quintile
gvt largest transfer payments
- largest transfer payments age pension, disability support pension, u/e & other working age benefits, carers payment
as income rises, so does lvl taxaction. why?
lvl taxation is diff betw gross income & disposable income
* bc AUS has progressive incoem tax system w/ higher marginal tax rates for higher income lvls
* lowest 40% income earners had proportionately larger tax burden bc indirect consumption taxes not related to income offset by gvt benefits assist lowest 3 income quintiles
* gvt payments ot u/ed, low incoem earners, elderly & provision of gvt services eg. health, edu, housing primary mechanism reducing disadv
* family payments increase incoem for low & middle income families
how has compulsory superanuation influenced distribution of wealth in AUS
since introduction 1992
* employers required contribute min 10% of amp’s wages to superfund cant access until retirement
* since mid 1980s, prop of emps covered by super rose like 52%
* while super assets boost wealth of all wealth quintiles, esp imp for low-middle income earners (one of few sig financial assets)
* low income earners disproportionately affected by covid recession –> could ^ ineq in LT as lower income earners lost benefit of savings
* beneficial effects of compulsory super for reducign ineq expected grow further if compulsory super contributions ^ to 12% of employee incomes by 2025 (longstanding policy commitment of successive gvts) CHECK TEXTBOOK
the indirect impact of gvt policies (gvt policies & inequality)
impact og gvt policeis to create more equitable distr of income can be outweighed by consequences of other gvt policies that widen gap betw higher & lower inc earners
* using MP to slow rate of eco grwoth: IRs ^ –> transfers wealth from low to high income earners bc low income earners are borrowers & must pay higher IRs but high income earners often have net savings so high IRs ^ their income -> unintended side effect used for other purposes eg. maintain low inflatio nrate
microeco reform sometimes require eco restructing –> create u/e ST/closure of some industries
* privatisation of formerly GBEs often followed by price ^s & ‘downsizing’ of workforce to improve profitability for SHs
* to improve efficiency & ^ ROIs to owners of assets –> benefits flow to wealthier asset owners while costs felt most by lower income earners
* challenge to implement in way doesnt ^ inequality
* often substantial adjustment packages to compensate for hardship lower income groups experience from reforms ensure not disadved
* targeted transitional support to groups directly affected by reforms minimise hardships associated w/ structural change
gvt policies mixed impact on distr of income & wealth
progressive income tax, swp, gvt services, compulsory super reduced inequality
microeco & LM reforms contribute to rising inequality
natural environmeny
represents the totality of physical enviro which human society lives
* includes land, water, climate, plant & animal life
* gvts address impact of eco activity on enviro to improve QOL & preserve natural enviro for future gens
enviro sustainability
protecting & enhancing natural enviro
* protecting quality of air, water, soil, *preserving natural enviros & biodiversity,
* ensure sustainable use of non & renewable resources,
*minimise neg enviro consequences of eco activity
AUS key enviro sustainability challenges
- reducing emission of GH gases –> climate change
- ensure adequate supplies of water for HHs, farmers, businesses
- preserving health of forests, waterways, ecosystems
farming, mining, industry –> land degradation, depletion of non-renewable resources, extinction of plant & animal species, pollution of water systems
while prioritising enviro concerns may involve _ costs in short/long term, sustainable eco grwoth in short/long term depends on a healthy environmetn
economic costs in short term, grwoth in long term
* protect enviro –> support eco grwoth in M-LT
environmetnal economics
recent decades enviro factors incorporated into eco theory through EEs
* emphasises need to pursue sustainable lvl growth, accounting effects eco activity has on enviro
* unless hidden costs of eco grwoth accounted, fast growth –> rapid depletion of resources, polluted enviro, reduce QOL
ecologically sustainable development
conserving & enhancing the community’s resources so ecological processes & QOL maintained
* conserving & enhancing the community’s resources so ecological processes & QOL maintained
* lvl of eco activity compatible w/ LT preservation of enviro than max lvlgrowth possible in ST
* principle of fairness betw generations /intergenerational equity describes resources shouldnt be used in way that’ll limit QOL of future gens (1 of major principels)
sustainable eco grwoth (chapter 7 too)
grwoth should be maintained at lvl not so low u/e ^ & not so high that causes excessive inflation/external imbalance
* overuse/exploiting natural resources for ST grwoth can deplete resources & permanently damage enviro –> reduce productivity of affected sectors
* consumption depleting eco’s natural resources –> reduce future potential output in LT esp primary industries rely natural resources as inputs in PP –> decrease eco’s PPF
what is the LT purpose of achieving both eco grwoth & enviro protection?
improve QOL
* satisfying greater no. material wants diminished if at expense of damage to natural enviro, depletion of natural resources/harmful for human health
* harming enviro reduces QOL for future pops by depleting natural resources –> future growth of eco
impact of ecologically unsustainable development
- severe depletion of natural resources play major role in collapse of past civilisations
- deforstation & soil erosion –> impossible to sustain food supply for local populations
5 key principles of ecologically sustainable development
- integrating eco & enviro goals in policies & activities
- enuring enviro assets appropriately valued
- managing enviro risks w/ caution
- ensuring fairness allocating costs & assets withing & betw generations
- accounting global effects of enviro issues
AUS’ National Strat for Ecologcially Sustainable Development NSESD
developed 1992
core objectives of strat:
* enhance individual & community wellbeing & welfare by following a path of eco developmetn that safeguards welfare of future generations
* provide for equity within & betw generations
* protect biological diversity and maintain essential Ecological processes & life-support systems
ecologically sustainable development incorporated in policies & programs of AUS gvts is a..
sig policy objective
* gvt departments required report on enviro matters in annual reports
* principles & objectives remain relevant today & continue guiding gvt initatives eg. National Waste Strat & Action Plan
price mechanism
in modern market eco, key determinant in decisiosn abt what goods produced, what quantity, price which sold
* interaction of market forces of supply & demand to reach an equilibrium price & quanttiy of production –> market outcomes reflect balance betw consumer preferences (demand) & costs of producing output (supply)
* when consuemrs demand goods, producers make available if they can receive a price that at least covers costs
* as demand ^, production ^
limitation of price mechanism
but doesnt effectively account LT effect of eco activity on enviro
* bc producers enjoy private benefit from the activity that depletes resources/pollutes enviro but dont directly face social costs that their eco activity creates
* market price paid by consumers dont reflect social costs
market failure
occurs bc price mechanism only accoutns private benefits & costs of production to consumers & producers
* doesnt account wider social costs & benefits –> passed on to otehr members of society (externalities)
negative externality
- unintended neg outcome of an eco activity whose cost isnt reflected in operation of price mechanism
- adverse spillover effects on the enviro from eco activity
- demerit goods g&S have neg externalities
one of main eco problems lie behind market’s failure to account for enviro impacts in production
- eco system based on private property ownership w/ no general property rights associated w/ enviro resources eg. oceans
- price mech doesnt determine price/value for these resources, freely used w/o regarding depletion –> enviro & common resources destroyed overuse
- this market failure is the tragedy of the commons
road transport (negative externalityz)
eg. company reduces freight costs by transporting goods by road >rail
* use trucks –> damage roads in area + noise & air pollution –> damage cars bc pot holes, loose stones, ^ risk accidents, ^ noise pollution of trucks, respiratory problems from worsened air quality
* costs not to company (saving money)
* generates neg externality bc society bears cost of raod damage, noise, air pollution
the price mec plays a limited role in protecting enviro by
limiting sales of depleted resources that have a price
* when enviro resources scarce –> cost of natural resources ^ –> reduce no. resouces consumed
* if many trees cut to sell on market –> mroe expensive to supply –> remaining supply in remote location of lower quantity –> prices rse & reduce no. ppl who can afford –> induce producers & buyers to look for & develop alt inputs to production
* but this approach only protects resources sold in markets (minerals, timber)
* price mech no role allocating enviro resources that can be used for free eg. atmosphere to dispose gas generated in PP
* remaining resources may not be protected if price ^s too late by too little
positive externalities
unintended positive outcome of an eco activity whose value not reflected in operation of price mechanism
* beneficial spillover effects from eco activity
* production doesnt usually generate positive enviro outcomes but eg. ^ train service use –> reduce commute times for passengers, reduce road congetion & car pollution
* g&s w/ positive exts are merit goods
* benefits of production not enjoyed by ind consumer
social cost
supply curve for whole society lies above normal supply suve
* vertical dist betw 2 supply curves is size of externality
* if neg ext from producer/cosumer, price rise reflecting higher cost of production & output fall bc g&S w/ neg ext overproduced
- add social benefits social benefit demand curve above normal demand curve
- vertical dist betw 2 demand curves size of pos ext
- market only account private costs & benefits of production
- if pos ext enjoyed by producer/consumer, price rise (higher value of good’s production)
- output rise (g&S w/ pos exts under-produced)
2 characteristics of public goods
-
non excludable
* once provided, producer cant exclude consumers from enjoying benefit of goods even if not prepared to pay
* national defence, street lights, clean environment -
non-rival
* consuming good by ind consumer doesnt reduce quantity of good available for other consumers
since publci goods non excludable & non rival, they create the opp for __ __ behaviour
free rider : groups/inds who benefit from g/s w/o contributing to cost of supplying g/s
* consumers/bus benefit w/o having to pay for its production/maintenance
* eg. fishing company benefits from clean oceans w/o paying cost of cleaning up ocean pollution
* private markets dont/under provide public goods since private firms unable charge consuemrs for enjoying benefits –> price mech cant produce equilibrium outcome properly reflecting forces of supply & demand & setting price doesnt limit consumption of public goods
* incentive for free riders undermines attempt by private sector to clean enviroment/protect from overuse/depletion –> provided by GVT
public-sector goods
g&s provided by gvt (or its agencies)
* not all are publci goods
* train services provided by gvt but excludable (pay to ride)
* not all public goods provided by gvt
why achieving enviro sustainability is so difficult
- ppl disagree on how to calculate the enviro costs of eco activity
- which policies most effective solving enviro problems
- industries resist pressure to change their practices/pay full costs of enviro impact
- gvts msut decide whose evidence most convincing, how enviro & eco goals balanced
(major enviro issues w/ eco consequences gvts must confront in eco policymaking) preserving natural environments
in LT, eco cant keep growing if enviro degraded
* enviro damage affects human health (higher lvls air & water pollution, restricts availability of resources)
* awareness developed slow in AUS & industrialised world
* AUS poor record preserving biodiversity despite one of 6 biodiverse nations
measures preserving enviro try avoid social & eco problems when enviro not actively preserved eg:
* restricting development in enviro-sensitive areas (mining, national parks)
* protect native plant & animal species from extinction
* controlling emissions of waste products
* requiring new plantation in areas where logging occurred
what 3 sig problems do gvts often face when trying to preserve natural enviro?
-
ST, enviro policies can reduce eco grwoth through interventions in price mechanism may cause higher prices/reduce supply
* eg. agri producers oppose reduction in water allocations for irrigation bc lower agri output in ST -
industries face higher costs if have to comply w/ rigorous enviro standards
* in highly competitive global eco, enviro standards can make us less competitive compared w/ other c’s / weaker enviro safeguards
* AUS may miss out opps lifting eco grwoth & exports
* farming, mining, construction most affected industries & may lobby gvts to rpevent strict enviro protection policies -
cost of repairing damage to enviro often borne by taxpayers than those who caused eco damage
* eg. gvt expenditure on grants to community groups for projects to manage erosion & protect habitats of threatened specieis
* gvt may pass costs on to industry eg. recycle bottles for 10c reform reduce littering, ^ recycling w/ scheme costs borne by beverage producers
* gvt can improve incentives for industries to better preserve enviro
pollution (major enviro issues w/ eco consequences gvts must confront in eco policymaking)
natural enviro degraded some way eg. harmful chemical substances, noise, untreated rubbish
* affects atmosphere, water resources, land
* all sectors (manuf, agr, HHs) contribute
* problem since many ppl lived clsoe proximity in towns & cities
* Industrial Rev 18th century made pollution major health & eco concern (Waste & pollution generated by production, pop grwoth, high concentrations of ppl in cities)
* mining & manuf processes create toxic waste & pollution
* problem for global eco, national gvts, international institutions, eg. high lvls industrial pollutants eg. toxic metals & plastics found in aquatic life across oceans
renewable resources vs non renewable resources
renewable
* can naturally regenerate/replace themselves in relatively short PIT
* may be depleted to pt where become non renewable (cant regenerate) & lost forever eg. overfishing species –> cant reproduce, extnct
non-renewable resources
* natural resources in limited supply bc can only be replenished over a long PIT/cannot be replenished at all
* fossil fuels (petroleum, coal), minerals (copper, iron ore)
gvt policies to reduce pollution within individual countries
*laws banning environmentally damaging production techniques
* quotas to restrict emission of harmful pollutants
* subsidies to encourage enviro friendly practices
* taxes to discourage some forms eco activity
climate change (major enviro issues w/ eco consequences gvts must confront in eco policymaking)
aka global warming related to GG emissions (CO2, N2O, CH4) nitrous oxide, methane
* produce most profound threats to global enviro
* changes in Earth’s climate unprecedented across thousands (even hundreds of) yrs
* bc worldwide reliance on fossil fuels, close link betw ^ eco grwoth & higher carbon emissions in most ecos
* as SOL improve, greater demands on limited natural resources to satisfy world’s energy & food supply needs
* AUS vulnerable bc importance of fossil fuels to energy production & exports & proximity to other countries afected by ^ temps & rising sea lvls (indonesia, bangladesh)
biggest sources of GG emissions
- electricity & heat production
- agri, forestry, other land use
- industry
- transport
IPCC reports on climate change
Intergovernmental Panel on Climate Change
* msot authoritative source of info on climate science w/ many world’s leading scientists
* estimate next 20 yrs global temps reach/exceed 1.5 degrees of warming –> ^ heat waves, longer warm seasons, shorter cold seasons
* 2 degrees –> heat extremes reach critical tolerance thresholds for agri & healthy more often
* even w/ sustained reductions in CO2, estimated take 20-30 yrs for global temps to stabilise
why do many nations inc AUS STRUGGle to implement effective policy resposnes to climate change despite having a scientific basis for targeting reductions in CO2 emissions?
climate change is a global problem
* addressing CC by reducing co2 reduces eco grwoth esp ST
* nations reluctant to reduce eco potential esp if unsure other nations do same
depletion of natural resources (major enviro issues w/ eco consequences gvts must confront in eco policymaking)
*both enviro & eco problem
* w/o intervention, market likely fail & allow important resources overused
* greatest impact on future gens
* sustainable resource management to ensure present generation odesnt overconsume stocks of renewable resources & minimises depletion of non R resources, ensure new tech makes alt resource us possible
how do economists determine what lvl resource use is sustainable?
estimate optimal rate for use of resources over time
* calculate for both R & NR resources
how to establish optimal rate of use for renewable resources
arriving at a threshold exploitation lvl alows resources to regenerate so there’s no LT decline in the resources
* critical water shortages in AUS esp relying on Murray-Darling River System reflect LT overuse of renewable resource of fresh water
how to calculate an optimal rate of use for NR resources
determine a rate of decline acceptable for present & future generations
* eliminate overuse & waste
* take action to recycle/curb consumption of resources
what are the 2 main challenges economists face when calculating the optimal rate of resource use for a NR resource?
- hard for present gens to predict needs of future gens
- hard to assess existing stock of a mineral/other resource
* may be limited/conflicting evidence abt quantity of resource available
gvt policies & enviro sustainability
*gvt policies can influence enviro management by discouraging enviro harmful activities & incentivising firms & inds to act in envrio responsible manner
enviro issues still secondary role to other eco objs eg. eco grwoth despite recent decades increasingly imp issue for policymakers worldwide
* benefits of LT enviro policies less apparent than costs of improving enviro protection
* enviro problems take years/decades to emerge, msot solutions also need years to have impact –> gvts delay acting on enviro problems bc less urgent than other issues & results policy actions often less immediate
what is the most extreme action a gvt can take to achieve improved enviro management?
ban production/sale of a g/s
* banning product eliminated externalities associated w/ its production & use to the extent that its use can be stopped
* gvt bans can impose severe costs on firms & inds esp those whose employment depends on its production
* gvts only consider option if product causing severe enviro/social damage/suitable substitute product exists
* can also prevent consumption/activities harm enviro eg. China gvt banned imports of mixed recycled materials from other c’s flow on effects for AUS recycling industry (AUS recycled waste exports to C) –> prices in recycled waste markets dropped significantly –> impact viability of AUS recycling industry –> oversupply of recyclable waste, dump into landfill
what is another measure gvts can take to reduce consumption of a g/s (for enviro reasons)
impose a tax on its production/use
* to internalise the externalities associated w/ an eco activity
* require firm/ind that causes externality to pay for some/all its costs
* eg. fed gvt imposes tax/excise on fuels eg. petrol –> recalculated very 6 months in line w/ ^s in CPI, tax on petrol forces owners of vehicles to pay some costs of air pollution
(2) how can gvts intro policies to encourage firms & inds to use more enviro-friendly g&S? (gvt policies for enviro sustainability)
- in every major AUS city, gvts provide Subsidised public transport services eg. bus, train to offer inds alt to motor vechiles
also gvt funding to accelerate introduction of new techs w/ envir obenefits but hgih establishment costs eg. the Clean Energy Innovation Fund
however, for public goods, gvt subsidies can lead to _ of resources. what will the gvt do to resolve this?
underprovision of resources
* gvt may need to provide services itself
also seek to Monitor & measure changes in enviro over time eg. fed gvt publishes ‘State of the Enviro’ report documents changes in AUS enviro over 5 yr period (atmosphere, biodiversity, marine enviro, land,)
* ABS records the AUS Enviro-Eco Accs measures AUS’ stock of enviro assets as addition to typucal measure of assets in eco
* availability of better quality data provides gvts better info abt trade-offs in decision making to manage eco & enviro outcomes esp adverse consequences
overall, gvts have shifted away from __ _ & directly ___ __ to using market mechanisms eg. __ & __ (for enviro sustainability)
away from outright bans & providing public goods, eg taxes & subsidies
* but exceptions eg. expansion of AUS’ renewable energy Snowy Hydro Scheme jointly owned by Commonewealth, NSW, Vic gvts
