Unit 4 Flashcards
Macroeconomic objectives
- Sustainable economic growth
- Price stability
- Full employment
- Equitable income distribution
- Efficient allocation of resources
Sustainable economic growth
○ Definition
§ Strong and sustainable economic growth refers to an increase in the real value of final goods and services produced in Australia over time (real GDP)
§ That does not cause inflationary or external pressure
§ This increase in production also needs to be sustainable in the long term so it does not deplete non renewable resources, degrade the environment and reduce the ability of future generation to meet their needs and wants
○ Target
§ 3.25% per year
○ GDP
§ The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period
○ Measurement
§ GDP
§ Real GDP
§ GDP per capita
○ Refinements
Limitations
Price stability
○ Definition
§ Refers to a stable price level over a medium term of the BTC
§ Two types:
○ Underlying
§ Measures inflationary pressures that are predominantly due to market forces
§ Takes out any volatile price changes that skew the data (that haven’t been created by supply or demand) - e.g. oil change created by the oil companies pulling back their supply
○ Headline
§ Raw data figure that is reported through CPI by the ABS
○ Target
§ Target: 2-3% per medium of term of BTC (one cycle)
○ How is it measured
§ Is measured by CPI
○ An index that measures the monthly charge in prices paid by consumers in a countr
○ Causes of inflation
More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.
Full employment
○ Definition
§ Refers to 0% cyclical unemployment
○ Cyclical unemployment is unemployment due to changes in economic activity
§ Occurs in the recessionary phase and highest in the trough phase
§ This is the ‘bad’ unemployment - the one to be avoided
§ Right now it is at 0% as the economy is at full employment
○ This is linked with BTC (demand in the economy)
§ There will always be some form of unemployment
○ Structural: due to a mismatch of skills
§ Due to changes in the structure or composition of the labour force (a fundamental change)
§ Examples of structural unemployment
○ Technology (machines) displaces workers
○ Industry mergers and acquisitions
○ International trade (workers lose jobs due to trade)
○ Changing demand (tobacco, coal mining)
§ Averages about 2% of the 4% unemployment rate
○ Frictional: individuals between jobs
§ Temporary and unavoidable unemployment
§ Short-term
® New collage grads looking for jobs
® Parents returning to the work force
® Quit job to look for a better one
® Relocating to a new area
® Fired from your job and looking for a new one
§ Considered a necessary unemployment and non-issue
§ Averages about 2% of the 4% unemployment rate
○ Hardcore: refers to the unemployed (more than 6 months)
○ Target
§ Target is around 4.5%
○ Underemployment: a person is employed, but is willing to work more
○ Unemployed: a person is not employed at all
○ How is it measured
§ Unemployment
○ Unemployment rate calculation
§ Unemployed/labour force * 100
□ Labour force = employed + unemployed
○ Calculation of unemployment rate
§ Reported by Australian Government every year
§ Calculated monthly based on survey of 60,000 households each month (statistical example)
§ To be ‘unemployed’, one must be actively seeking work
○ Types of unemployment
§ Cyclical unemployment is unemployment due to changes in economic activity
□ Occurs in the recessionary phase and highest in the trough phase
□ This is the ‘bad’ unemployment - the one to be avoided
□ Right now it is at 0% as the economy is at full employment
§ Structural: due to a mismatch of skills
□ Due to changes in the structure or composition of the labour force (a fundamental change)
□ Examples of structural unemployment
® Technology (machines) displaces workers
® Industry mergers and acquisitions
® International trade (workers lose jobs due to trade)
® Changing demand (tobacco, coal mining)
□ Averages about 2% of the 4% unemployment rate
§ Frictional: individuals between jobs
□ Temporary and unavoidable unemployment
□ Short-term
® New collage grads looking for jobs
® Parents returning to the work force
® Quit job to look for a better one
® Relocating to a new area
® Fired from your job and looking for a new one
□ Considered a necessary unemployment and non-issue
□ Averages about 2% of the 4% unemployment rate
Hardcore: refers to the unemployed (more than 6 months)
Equitable income distribution
○ Definition
- The goal is to have a more equitable (fairer) distribution of income. That means productive income is divided among the member of the economy more equitably
- It ensures all persons have access to sufficient resources to maintain a minimum standard of living and to reduce the income gap between the lowest and highest income groups
○ Target
- Gini coefficient of about 3
○ How is it measured
- Gini coefficient measures inequality on a scale from 0 to 1, where higher values indicate higher inequality. 0 indicates perfect equality.
Efficient allocation of resources
- No specific measurement
- Fiscal policy is used to make continuous improvements
Indicators
○ An indicator is anything that can be used to predict future financial or economic trends
○ For example, the social and economic statistics published by accredited sources, such as the various departments in the government are indicators
○ Some of the popular indicators they put out include unemployment rates, housing statistics, inflationary index, and consumer confidence
○ Official indicators must meet certain set criteria; there are three categories of indicators, classified according to the types of predictions they make
1. Leading indicators
2. Lagging indicators
3. Coincident indicators
In summary, leading indicators move ahead of the economic cycle, coincident indicators move with the economy, and lagging indicators trail behind the economic cycle
Leading indicators
- Signal future events
- Predicts changes in the general level of economic activity before a direction becomes evident in the rest of the economy
- Tend to be quick changes
e.g. - Inventory levels: amount of excess stock that producers have
○ If inventory levels rise unexpectedly, that is bad, because it means people aren’t buying as much
○ If inventory levels are falling unexpectedly, they need to increase their supply etc. - Consumer/Business Confidence (business and consumer confidence)
○ If people aren’t confident about the economy, they won’t spend as much, which slows economic growth
Lagging indicators
- Tend to occur after trend has been established
- Are slow changes
Importance of a lagging indicator is the ability to confirm that a pattern in occurring
e.g. - Unemployment rate
○ Unemployment is one of the most popular lagging indicators
○ If the unemployment rate is rising, this indicates that the economy has been doing poorly - Consumer Price Index (CPI)
○ Another example of a lagging indicator is the Consumer Price Index (CPI) which measures changes in the inflation rate - Inflation rates
○ It is reported after prices have already risen
This type of lagging indicator provides important information about the economy that is used to set public policy
Coincident indicators
- Occur at approximately the same time as the conditions they signify
- Rather than predicting future events, these indicators change at the same time as the economy or the stock market
e.g. - Personal income
○ Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy - GDP
○ It is correlated with the current level of economic activity
Business Trade Cycle
○ Fluctuations in the growth of the real output, consisting of alternate periods of expansion (increasing real output), and contraction (decreasing real output), are called business cycles, or economic fluctuations
○ Also known as the economic cycle or trade cycle
○ A business cycle plots real GDP on the vertical axis, against time on the horizontal axis
○ GDP here is measured in real terms, so that the vertical axis measures changes volume in the output produced after the influence of price-level changes have been limited
○ Four phases of the business trade cycle
- Expansion
- Peak
- Contraction
- Trough
Expansion
○ An expansion occurs when there is positive growth in real GDP, shown by those parts of the curve that slope upward
○ During the periods of real GDP growth employment of resources increases, and the general price of the economy (which is an average over all prices) usually begins to rise more rapidly (this is known as inflation)
Peak
○ A peak represents the cycle’s maximum real GDP, and marks the end of expansion
○ When the economy reaches a peak, unemployment of resources has fallen substantially, and the general price level may be rising quite rapidly; the economy is likely to be experiencing inflation
Contraction
○ Following the peak, the economy begins to experience falling real GDP (negative growth), shown by the downward-sloping parts of the curve
○ If the contraction lasts two months (two quarters) or more, it is termed a recession, characterised by falling real GDP and growing unemployment of resources
○ Increases in price level may slow down a lot, and it is even possible that prices in some sectors may begin to fall
Trough
○ A trough represents the cycle’s minimum level of GDP, or the end of the contraction
○ There may now be widespread unemployment
○ A trough is followed by a new period of expansion (also known as a recovery), marking the beginning of a new cycle
