Topic 3: Economic Issues Flashcards
what are the economic issues
- economic growth
- unemployment
- inflation
- distribution of income and wealth
- environmental sustainability
- external stability
what to do with each issue
- define
- measure
- causes
- trends
- impacts
what is economic growth
an increase in the value of goods and services that an economy produces over a peirod of time
how is eco. growth measured
changes in real gross domestic product (GDP) over a period of time typically a year (annual percentage change in GDP)
formula for real gdp
real gdp = nominal GDP x (100/CPI)
economic growth formula
economic growth (%) = (real gdp(current) - real gdp(previous)) / real gdp(previous) x 100
what are the three different time periods that can be used to measure eco. growth
- quarterly rate of economic growth - ABS
- year-on-year growth
- annual economic growth rate
why is economic growth important
raises a countrys level of income and standard of living
what is aggregate supply
total productive capacity of an economy
aggregate supply formula
aggregate supply equation: Y = C + S + T
how to increase aggregate supply
- discovery of new resources
- population growth
- workers acquring new skills
- adoption of new technology
- increased capital
- efficiency measures
- govenremnt policies
what are the constraints of economic growth in regards to aggregate supply
- limited by the amount and quality of resources
- as AD rises –> AS rises until it meets capacity point
- skills shortage
- infrastructure bottlenecks
what is aggregate demand
total demand for goods and services in an economy over a given period of time
aggregate demand equation
AD = C + I + G + (X - M)
what factors influence aggregate demand
consumption
investment
government spending
net exports
equalibrium of eco. growth
AD = AS
or
I + G + X = S + T + M
Injections = Leakages
what is gdp
the total monetary value of all final goods and services produced within a country during a period of time
what is the simple multiplier
the number of times the final increase in national income exceeds the intial increase in expenditure
simple multiplier formula
k = 1 / (1-MPC)
k = 1 / MPS
national income formula - simple multiplier
∆Y = ∆AD x k
∆Y = ∆G x k
∆Y = ∆X x k
positive effects of economic growth
- higher living standards
- higher employment levels
- higher levels of business investment
- improved budget outcomes
- improved economic mobility
- improved social mobility
negative effects of economic growth
- inflation
- rise in income inequality
- external stability
- environmental impacts
what polices are used to control aggregate demand
macoreconomic policies (fiscal and monetary)
demand-side, counter-cyclical policies
how do policies affect AD
- downturn - government stimulates aggregate demand by increase G or reducing T
- upturn - slow the rate of growth by increase T or reducing G
- lower interest rates –> more borrowing –> rise in consumption and investment demand
what policies affect aggregate supply
microeconomic supply side policies
how do the policies affect AS
- increase AS to keep up with AD –> improve efficiency and productivity
- reduction in trade barriers
- labout market reforms
- funding investnment in infrastructure
what are the improvements in efficiency and technology in economic growth
three types:
- technical/productive efficiency –> maximum output at minimum cost
- allocative efficiency –> allocation of resources to reflect consumer preferences
- dynamic efficiency –> adopting cost-reducing innovations over time
what is consumption influenced by
consumer spending by households
* MPC and MPS
* interst rates
* confidence/expectations of the future
* distribution of income
what is investment influenced by
spending by forms on new capital goods to increase productive capacity
* interest rates
* government policies such as grants and taxation
* labour rates and productivity
* confidence/expectations of the future
what is government influenced by
spending by local, state and federa; government - expencditire by governemnt trading enterprises in capital
* stage of eco. cycle - government spending
what are net exports influenced by
X - expenditure by foreigner son domestically produced goods and services
M - domestic expenditure on foreign produced goods and services
* domestic and overseas incoe and value of currency
what is unemployment
labour resources are not utilised
* refers to a situation where individuals want to work but are unable to find a job
how is unemployment measured
unemployment rate - measures the proportion of the labour force that is not working but actively seeking work
what is the labour force
people over 15 are are employed in full or part time work and those who are considered unemployed
labour force equation
labour force = employed (part-time + full-time) + unemployed (actively seeking)
what is the size of the labour force determined by
- size of population
- level of net migration
- age distribution
- participation rate of the working age population
what is the participation rate
proportion of working age population that is in the labour force
LFPR - labour force participation rate
participation rate formula
LFPR = (labour force / working age population) x 100
what factors affect participation rate
- level of economic activity
- number of students staying at school
- number of ppl retiring at older ages
unemployment rate formula
unemployment rate = (total number of unemployed / labour force (employed + unemployed) x 100
what are different types of unemployment
- cyclical
- structural
- frictional
- seasonal
- underemployment
- hidden
- long-term
what are causes of ue
- level of economic growth
- economy transitions
- technological advancements
- increases in wage rates
- inflexibility in the labour market
what is nairu
refers to the level of unemployment at which there is no cyclical unemployment (when the economy is at full employment)
level that could be acheived using maco policy without inflation
what is the srpc
inverse relationship between unemployment and inflation
what is the lprc
natural rate of unemployment (NAIRU)
an economy will always have some level of seasonal, frictional, structural ue where there is no trade-off between inflation and ue
how to reude srpc to lrpc
macroeconomic expansionary fiscal policies are used to decrease cyclical unemployment
how to reduce nairu
use of supply-side policies by the government
* labour market reforms
* improvements in productivity
* education and retraining programs
main groups affected by unemployment
- age
- skill level
- industry/sector
- ethnicity
- region
what are economic costs of unemployment
- opportunity cost
- lower living standards
- higher government defiicits
- loss of skills, long-term unemployed people lose valuable skills
- higher income inequality
what are social costs of unemployment
- increasing rates of crime and family breakdowns
- health issues
- drug issues
- increase in ue
how policies reduce cyclical
expansionary macroeconomic policy which stimualtes ad
how policies reduce structural
microeconomic policy improve efficiency and productivity –> increase eco. growth and job creation
–> educational and training programs
how policies reduce frictional ue
microeconomic policy to help match job seekers to vacancies
what is inflation
a sustained increase in general prices in an economy over a period of time
what is the goal of inflation
to acheive price stability with inflation at 2-3%
what is the importance of price stability
- decline in purchasing power of money
- knowing the real value (accounting for inflation) –> decline in living standards
- misallocation of resources
- higher inflationary expectations
how to measure inflation
using consumer price index (CPI) - measures the change in prices of goods and servives
inflation rate formula
inflation rate = ((current inflation - previous inflation) / previous inflation) x 100
what is headline inflation
this is the official rate and may be mislaeding cause:
* price volaitlity - climatic conditions, prcie wars, industrial disputes
* seasonality products
* governemnt policy
what is underlying inflation
the core inflaiton that removes he effects of the one-offs and volatiltiy - less varaivle
* better indicator of ongoing trends
what are the measures of underlying inflation
- trimmed mean
- weighted median
- cpi excluding volatile items
what are the causes of inflation
- demand-pull inflation
- cost-push inflation
- imported inflaiton
- inflationary expectations
what is demand pull inflation
- inflation occruing due to higher AD
- AD > AS
- increases in AD due to AS
–> consumers bid up prices for limited g/s
–> rise in prices and expansion in supply = inflation
what is cost-push inflation
- occurs due to lower AS
- increases in production costs are passed on to consumers
–> lower AS –> firms produce less for given price level
–> pass onthe increase in cost of the consumers in the form of higher prices
what are the main causes of cost-push inflation
- wage growth > productivity growth
- raw materials –> price increase
- government policy –> MP tightening, taxes, regulation
what is imported inflation
- transferred thrugh international transactions
–> rising import prices
–> depreciation of AUD - causes variability in headline inflation
what is inflationary expectations
- people’s perceptions of the future inflation based on past and current rates of inflation
- if inflation expected to rise –> workers seek higher wages
- if inflation expected to rise –> consumers buy now
wage price inflation spiral - demand pull –> cost-push –> demand pull –> cost-push, etc.
how to reduce inflationary expectations
- monetary policy successful at reducing inflationary pressures
- consumers aware of cash rate changes if inflation increases –> minimises conumer and firms reacting prematurely
examples of inflation
- depreciation of the australian dollar
- higher fruit and vegetable prices/natural disasters
- supply constraints and strong demand
- higher protection (tariffs/quotas)
- higher government taxes and charges
- higher oil prices
- higher wages and non-wage benefits
- wage demands based on cpi
positive effects of inflation
- rising prices of assets
- distrotions in resource allocation
- future prices encourage spending
- ensures accountability
negative effects of inflation
- erodes real incomes
- may increase unemployment
- increase incme inequality
- reduced international competitiveness
- distorts investment and savings decisions
- influences allocation of resources
- the government budget outcomes are affected by inflation
macro policies to reduce inflation
- loosening policy - increase inflaiton
- tightening policy - curbed demand pull inflation
micro policies to reduce inflation
- reduced protection
- deregulation of the labour market
- deregulation of financial market
what is income
flowe of returns to owners of factors of production over a period of time
e.g. wages, profits + transfer payments (pensions)
what is wealth
net value of assets (real and financial) held at a point in time (land holdings, stocks)
what is income inequality
degree to wich incomes in unevenly distributed amongst people of an economy
growing income inequality - more income to higher income percentiles
what are the sources of wealth
household wealth (net worth) - measures private sector wealth - superannuation, property
what is the measure of income inquality
gini coefficienct reflected in the lorenz curve
what is the lorenz curve
a curve that measures the inequality
there is a line of perfect equalit and the size of the area between the line of equality and lorenz curve is the gini coefficient - measure of inequality
what is the gini coefficient
it ranges for 0-1 and the close it is the 0, the more equal income is
Gini coefficient = A / (A + B)
what is the trend of income and wealth inequality
assymetric (highly unequal)
what are the dimensions of inequality
age and education
ethinic background
family structure
gender and occupation
geographical
what are the economic benefits of inequality
- incentive for increased level of education and skills
- more mobile labour forcce
- entrepreneurs are encouraged to take risks and innovate
what are economic costs of inequality
- constraints growth
- strain on government budget due to welfare support
- conspicuous consumption for wealth and high income earners
what are social benefits of inequality
limited social benefits
* only for higher income earners as they gain higher material living standards
* societal value of hard work
what are social costs of inequality
- social class division
- relative poverty of minor grups
- increase levels pf crime, suicide, disease and decreases in life expectancy
what are the policies that reduce inequality
- progressive taxation - proportion and rate of tax on income increases as total income increases
- transfer payments - welfare payments such as pensions, allowances and tax benefits
- public spending - other assistance to low income households through spending such as public housing, education and healthcare
