Test term 3

• economic growth: an increase in the real output of goods and services produced in a country
• economic growth is measured by annual changes in real Gross Domestic Product (GDP)

  a 3% change is the target
• economic growth/GDP % change = y2-y1/y1 x 100
• Nominal GDP: the value of output expressed in the prices of the day (current prices) inflation is included in economic growth
• Real GDP: the constant price is adjusted to remove the effect of price increases or inflation
• Real GDP/population=GDP per capita
• Limitations of GDP

  • only includes value of goods and services that are exchnaged for payment - no volunteering, charity, etc
  • understates the change and improvement in quality
  • doesn't account for rising productivity
  • income distribution issues
  • environmental impacts
• APF

  
• PPF

  
• Determinants of economic growth:

  • land
  • labour
  • capital
• Benefits of economic growth:

  • increased real income + material welfare
  • more economic opportunities
  • a taxation dividend to government
  • higher quality goods and services
• Costs of economic growth:

  • may not raise the living standards of everyone in the community
  • associated with structural change in the economy
  • may bring inflationary pressure
  • social costs
• Country's GDP rose 0.1% int he first quarter of 2024
• Inflation target: 2-3%
• Inflation is measured using Consumer Price Index (CPI)
• Inflation: the rate of increase in prices over a given period of time
• Inflation = y2-y1/y1 x 100
• In recent years, there has been a shift away from spending on goods towards services
• Headline inflation: total inflation in an economy
• Underlying inflation: inflation excluding volatile items
• Limitations: CPI only reports price movements in metropolitan areas
• Demand pull: households spending more than they normally would, causing prices to rise due to competition for the goods and services available
• Cost push: rising production costs are passed on to consumers, who then pay higher prices for final goods and services
• Causes of demand pull:

  • increased aggregate demand due to COVID recovery
  • consumption + investment increase
  • net exports increase
• Causes of cost push:

  • Russia/Ukraine war
  • floods
  • supply chain issues
• Inflation is currently at 3.6%
• High inflation outcomes in Australia reflect a range of development including:

  • supply issues related to Russia/Ukraine war
  • other global supply disruptions resulting from the COVID-19 pandemic
  • domestic supply disruptions from poor weather
  • strong domestic and global demand has also played a role
• Effects of inflation:

  • Reduces real income
  • Increase in interest rates
  • Decrease international competitiveness
• Reduces real income

  • inflation reduces purchasing power if incomes do not rise in line with prices
  • if price rises faster than incomes, real income falls and households cannot purchase the same volume of goods and services they were able to in the past
• Increase in interest rates

  • inflation affects interest rates because lenders must maintain a margin between their true cost of funds and the rate at which they lend these funds
  • if the interest rate were 7% and prices were rising 8%, the purchasing power or money would fall faster than the rate at which the loan is repaid, so no one would be willing to lend money
  • the real interest rate (nominal I.R. - I.R.) must be positive
  • rising prices place upward pressure on the nominal interest rate
• International Competitiveness

  • international competitiveness is influenced by relative inflation levels
  • an importers choice is going to be based on price
  • a country is disadvantaged if domestic inflation is greater than its competitors
  • a demand for exports falls as prices rise
• Unemployment: occurs when people who are willing and able to work cannot find a job
• NAIRU: lowest unemployment rate that can be sustained without causing wages growth and inflation to rise
• Underemployment: part-time workers who indicate that they would prefer to work more hours
• unemployment + underemployment = underutilisation
• participation rate = labour force/working age population x 100
• unemployment rate = number of people who are unemployed/labour force x 100
• underemployment rate = number of prt time workers seeking more work/labour force x 100
• Frictional unemployment

  • voluntary
  • occurs when workers are transitioning between jobs and have a temporary period of unemployment
  • involves time and search costs
  • short duration
  • brings benefits is the search leads to better outcomes for workers and employers
  • 1 to 1.5% of workforce
  • job search is a key reason why unemployment is never 0%
• Cyclical unemployment:

  • follows the ups and downs of the business cycle
  • lasts around 3 months
  • periods of recession, unemployment will rise
  • economic growth, unemployment falls
  • rises when there is insufficient demand to fully employ the country's resources
  • the demand for labour is derived from the demand for final goods and services