HSC Economics Topic 3 Notes.docx

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Economics HSC topic 3 – Economic Issues Economic growth  Economic growth involves an increase in the volume of goods and services that an economy produces over time. It is measured by the annual rate of change in real Gross Domestic Product. ???? ??? (??????? ????) − ???? ??? (???????? ????) ???????? ?????ℎ (%) = ???? ??? (???????? ????)  Aggregate de
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  Economics HSC topic 3  –  Economic Issues Economic growth    Economic growth involves an increase in the volume of goods and services that an economy produces over time. It is measured by the annual rate of change in real Gross Domestic Product.  ℎ (%)=  ( )−  ( )  ( )      Aggregate demand refers to the total demand for goods and services within the economy. It includes consumption (c), investment (I), government spending (G) and net exports (X-M)  =(−)      Aggregate supply refers to the total capacity of an economy, i.e. the potential output when all factors of production are fully utilised. This includes consumption (c), savings by households (S), and taxation by the government (T). =      The economy is in equilibrium when the level of aggregate demand and aggregate supply (national income) are equal. =   =      The simple multiplier is the greater than proportional increase in national income resulting from an increase in aggregate demand. =   → ∆= × ∆  For example assume in an economy MPS= 0.2 and there is an increase in investment by $10,000. This expenditure will provide an income of $2000 saved and $8000 spent again. From this $8000 spent it will also be partially spent and saved having an obvious increase in national income greater than the initial $10000. Effects of economic growth    Living standards: Increased economic growth   increase in real GDP per capita. With a greater real age households can enjoy a higher level of disposable income.    Employment: Economic growth creates jobs and potentially ensures everyone who is willing and able to work find employment.    Inflation: Increased economic growth leads to higher prices, larger wage claims   inflation    External Stability: Stronger economic growth associated with increased consumer and business spending thus increasing levels of imports and worsening CAD    Income Distribution: Although generally it’s assumed that increased economic growth contributes to higher wages often benefits are concentrated with shareholders, executives.    Environmental Stability: Increased economic growth often results in damage to the environment via pollution, depletion of non-renewable resources and local environments.  Sources of economic growth    Higher incomes results in greater consumption and this economic growth    Expectations of future price rises , results in greater consumption and thus economic growth    Low interest rates encourages spending and thus boosting economic growth    More equitable distribution of income means larger average propensity to consume    Decreased cost of capital equipment makes investment more attractive    Expectations of future business prosperity often increases levels of investment    Increased government spending and/or reduced taxation    Overseas prosperity and/or weak exchange rate increases export revenue Aggregate supply can be increased when a higher level of output can be produced for the same cost:    Workers acquiring new skills    The adoption of new technology    Measures to improve efficiency A major aim of the government’s economic policy i s to sustain a high rate of economic growth to allow national wealth to grow and individuals to experience a higher standard of living. The use of macroeconomic policies includes:    Fiscal Policy involves use of governments budget in areas of expenditure (increased AD and economic growth) and taxation (decreased AD and reduced economic growth)    Monetary Policy involves the RBA influencing the level of interest rates in the economy which in turn influences the level of aggregate demand and the rate of economic growth. Microeconomic policies aim to increase the economy’s sustainable growth rate by increasing aggregate supply and reducing constraints such as inflationary and current account problems.    Investment in workforce skills programs and infrastructure    Boosting productivity, increasing labour force participation and increase international competitiveness Unemployment Labour force consists of all the employed and unemployed persons in the country at any given time. Those not included in the labour force are children under age of 15, full time non-working students, those not willing to seek job and retirees. Participation Rate refers to the percentage of the working age population that are in the labour force     (%)=     (5+)  ×100  Unemployment refers to a situation where individuals want to work but are unable to find a job.   (%)=      ×100    Problems with the method used to measure unemployment:    Official statistics do not take into account the number of hours people work. Some employed people with a limited amount of work and want to work more are known as “underemployed” and are not evident in unemployment statistics.      By classifying people as either in the labour force or not in the labour force, official unemployment statistics do not include people who have not been able to find work and have left the labour force, known as “hidden unemployed”.  Recent trends in unemployment: Trends in the Australia’s unemployment rate during the last decade have largely been a result of a severe economic recession in Australia and the global economy during the early 1990s in combination with structural and microeconomic reform during the time. Many lost their jobs in declining industries and were unable to obtain new jobs created in emerging industries due to higher or different skills required. These peaks in unemployment were however only short term. Following the recession Australia has experienced a steady long term decline in unemployment levels, falling to its lowest level in 34 years at 3.9% in 2008. This decline in unemployment has majorly been accredited to Australia’s strong economic performance as the businesses formed during structural change continue to grow. Those individuals srcinally left short term unemployed from the less efficient businesses continue to adjust to the structural changes, by training in these new skill areas. However, there have been two minor disruptions in this decline. Firstly, the events of the9/11 terrorist attacks 2001 in the US, sent confidence in the Australian economy plummeting and in turn lead to employers keeping less staff as a more secure financial stance. Australia has also seen the global financial crisis in 2008 effect the unemployment rate. Economic conditions were put on slowdown, reducing the demand for labour and thus increasing unemployment in Australia. Australia’s strong position and fiscal stance during the GFC enabled a relatively quick recovery, resuming Australia’s downward unemployment trend.  Types of unemployment: ã   Structural Unemployment: Occurs because of changes in the structure and composition of the economy due to the effects of technology and the demand for certain goods and services. ã   Cyclical Unemployment: Occurs because of a downturn in the level of economic activity. ã   Frictional Unemployment: Includes individuals unemployed while changing jobs. ã   Seasonal Unemployment: Occurs due to the seasonal nature of some work e.g. fruit pickers ã   Hidden Unemployment: Refers to individuals who can be considered unemployed but are not officially defined as unemployed and thus not reflected in unemployment statistics. This includes individuals who have been discouraged from seeking work and therefore no longer actively seeking it. ã   Underemployment: Refers to people who work less than full time hours per week but would like to work longer hours. ã   Long Term Unemployment: Includes those who have been unemployment for over 12 months. ã   Hard-core Unemployment: Refers to individuals whose personal characteristics make them unsuitable or unacceptable for employment.  Non-accelerating inflation rate of unemployment (NAIRU): This refers to the level of unemployment at which there is no cyclical unemployment. The theory states that if unemployment falls below this level inflation will rise rapidly. Above the NAIRU economic growth creates jobs and reduces cyclical unemployment, but once this has been removed, firms will raise wages in order to attract workers causing inflationary pressures without significant reductions in unemployment. However, the NAIRU can be lowered over the long term through policies tat improve the skills of unemployed people or address constraints on workers ability to participate in workforce e.g. wheelchair accessibility. Causes of unemployment: ã  The level of economic growth: Low Economic Growth   prevention of employment growth ã  Macroeconomic policy stance: Fiscal and Monetary stance ã  Constraints on economic growth: Constraints such as inflationary pressures and current account deficit problems restrict economic growth increasing unemployment. ã  Rising Participation Rates: Increased short term unemployment as those individuals srcinally not included as unemployed that are now actively seeking work add to the levels of unemployment. ã  Structural change: Loss of employment in less efficient industries in the short term. However in the long term, growth of more efficient industries provides employment for the labour market. ã  Technological Change: Rapid technological advancements new and improved methods of production may result in capital being a preferred part of the production process over labour. ã  Productivity: High productivity growth in the short term will increase unemployment because less labour is required but in the long term may lead to higher economic growth leading to lower rates of unemployment. ã  Inadequate levels of training: Mismatch between skills of unemployed and those demanded by employers. Skill shortages suggest low levels of education and training systems in place for these areas of labour. ã  Rapid increases in labour costs: Any circumstances such as shortages for skilled labour, excessive wage demands, increase in award wages and rise in additional costs for employing labour may lead to wage inflation and in the long term economic downturn decline in the demand for labour. ã  Labour Market too highly regulated (employers become discouraged) Economic Costs ã  Opportunity cost: Resources are not being fully utilised and the economy is operating below full production capacity. Poor output can lead to lower incomes, expenditure and profits therefore reducing business growth. ã   Lower living standards: Unemployed rely on support payments and don’t contribute to production process. This leads to those employed and the government needing to fund greater costs and in turn leads to a reduction in Australia’s living standards. ã  Decline in skills: Individuals left unemployed for prolonged periods of time contribute to a loss of skills amongst workers. Loss of self-esteem preventing future employment ã  Costs to government: Lower income levels due to unemployment levels will generate less revenue and secondly larger payouts are needed to fund the unemployed. ã  Lower wage growth: Excess labour supply puts downward pressure on wages.
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