ECONOMIC GROWTH:

Definition:
Economic growth is when there is a sustained increase in a countries productive capacity measured y
increase percentage G!" over a period o# time$
Explain why is economic growth important to an economy?
It is the %ey o&ective o# government po'icy as it creates &os( raises standards o# 'iving and ma%es it possi'e
to satis#y more materia' wants$
Outline the main factors that influence consumption and investment levels in the economy.
Consumption is in#'uenced y:
Consumer e)pectations on the #uture state o# the economy
*eve' o# interest rates + e##ects the amount consumers can orrow ecause o# return they have to pay$ This
there#ore e##ects what they can spend$
!istriution o# income on the economy$ The more e,uita'e the 'ower the average propensity to consume
due to having enough to save$ I# 'ess e,uita'e in income distriution( the -"C wi'' e higher #or those
with 'ow incomes as they spend most o# there income on essentia' goods and services
Income 'eve's and consumer pre#erences + degree o# M". and M"C
Investment is in#'uenced y:
The cost o# capita' e,uipment / This depends on interest rate 'eve's0changes( government po'icy changes
to investment a''owances0ta) deductions( the price and productivity o# 'aour$
1usiness e)pectations + e)pected product demand( genera' economic out'oo%( whether new innovative
techno'ogy has hit the mar%et and in#'ation 'eve's in the economy$
.tate the 'ea%ages and in&ections e,uation:
. 2 T 2 M 3 I 2 G 2 4
Where .( T and M are 'ea%ages and I( G and 4 are in&ections
Explain the effect on the level of economic activity when
a5 total leakage>total injections decrease in economic growth as there is 'ess money in the economy
5 otal leakages!total injections higher economic growth as more money is in the economy to #und
higher productivity$
Define the multiplier:
The mu'tip'ier is the changes in aggregate demand that wi'' 'ead to a proportiona''y 'arge increase in G!"$
Explain how the concept of the multiplier is related to our understanding of economic growth.
Economic growth is caused y an increase in aggregate demand$ This -! increase resu'ts in higher growth o#
nationa' income as a resu't o# the mu'tip'ier process
"tate the multiplier e#uation and how the multiplier co$efficient is determined.
6G!" 3 % ) 6 -!
% 3 7778777
M".
Discuss how the government may influence the level of aggregate demand:
Macroeconomic po'icies can e used y the government in the short term$
Fiscal + to increase -! the govt cou'd run an e)pansionary #isca' po'icy where there wou'd e an increase in
government e)penditure and a decrease in ta)ation revenue meaning more in&ections are in the economy$
-'ternative'y i# the government wishes to decrease the 'eve' o# -! in the economy it can emp'oy a
contractionary #isca' udget$
Monetary + aims to smooth out short term internationa' usiness cyc'e #'uctuations$ The R1- can increase
aggregate demand y emp'oying an e)pansionary stance y decreasing interest rates to encourage consumer
spending$ -'ternative'y i# the R1- wishes to decrease aggregate demand it can increase interest rates to
decrease spending and increase savings
Microeconomic re#orms concentrate on 'ong term in#rastructure to indirect'y increase growth to a sustaina'e
'eve'$ Competition policy promote competition etween #irms to increase there e##iciency to increase
aggregate demand in the economy$ Labour market reforms indirect'y in#'uence aggregate demand y
increasing the #'e)ii'ity and productivity o# the 'aour #orce 'eading to rea' G!" increase$ In#rastructure
po'icies and pu'ic sector re#orm don9t p'ay an important ro'e in increasing aggregate demand in the economy$
However trade policies imp'emented y the government improve our trade per#ormance$ They improve
materia' standards o# 'iving through i'atera' trade agreements which get us more imports( increasing
consumption and there#ore aggregate demand$ Trade po'icies to decrease protection 'ead to increased
e##iciency and internationa' competitiveness o# industries meaning higher productivity and higher G!"$
Discuss the positive and negative impacts of higher growth for the economy.
External stability + higher savings comes #rom the higher incomes generated due to growth$ Higher savings
mean 'ower C-! as there is 'ess #oreign det #rom orrowing #rom overseas$ 1:T higher disposa'e incomes
are generated #rom higher growth 'eading to higher aggregate demand #rom imports which are registered on
the 1oG. de#icit$ Higher growth 'eads to -:! depreciation due to more consumers purchasing M ;more
money in supp'y5$ !epreciation 'eads to having to pay ac% more interest on our #oreign det which has a
negative impact on net income account o# C-!$
Environmental management + as a resu't o# higher standards o# 'iving o# the economy an environmenta'
conscience is gained$ However growth 'eads to increased use o# natura' resources to meet the higher aggregate
demand #or goods and services y consumers on higher incomes$
Individuals + have higher rea' incomes meaning higher savings and higher standards o# 'iving$ However the
government ta)es higher incomes more$
Government + can ta) more o# higher income meaning it is a'e to use revenue to provide etter socia' and
economic in#rastructure$ However ta)ation is ta%ing money out o# the economy 'eading to s'ower growth$
Unemployment + greater ta)ation y government e,ua's etter we'#are support #or unemp'oyed$ !ec'ine in
cyc'ica' unemp'oyment due to higher aggregate demand in the economy there#ore more &os$ 1ut there wi'' e
increase in structura' unemp'oyment due to techno'ogica' and structura' changes in industries to increase
e##iciency$
Distribution of Income + greater ine,ua'ity as rich reap growth ene#its$ .tructura' unemp'oyment usua''y
#e't y 'ow s%i''ed 'ow income popu'ation$ However government9s progressive ta) system wi'' attempt to even
out ine,ua'ity$
Firms + increase aggregate demand #or goods in the economy wi'' 'ead to higher revenue #or #irms with
greater opportunities to underta%e capita' investment to increase e##iciency$ However #irms may not e a'e to
produce goods demanded y the pu'ic productive'y 'eading to demand pu'' in#'ation ma%ing #irms 'ess
internationa''y competitive$
Inflation + high demand and overuse o# natura' resources can 'ead to demand pu'' in#'ation$
Outline the main features of the international %usiness cycle.
.ynchronisation o# growth rates o# economica''y integrated countries as a resu't o# g'oa'isation$ Has 'ed to
g'oa' ooms and recessions
&riefly discuss how the current economic cycle compares with previous %usiness cycles.
We are current'y in our 8<
th
successive year o# growth in -ustra'ia ma%ing this one o# the 'ongest cyc'es o#
growth on record with usua' economic cyc'e 'asting = years$ Our growth rate is current'y >$?@ up #rom the
/8@ we had in 8AAB/A8 and down #rom the C$=C@ growth rate we had in DBBB$
ENEIRONMENT-* M-N-GEMENT
Descri%e the term 'natural environment(
The natura' environment is the who'e interaction o# c'imate( soi's( p'ant and anima' 'i#e$
Discuss why environmental management is often at conflict with other o%jectives?
Economic growth usua''y comes at the e)pense o# environmenta' management$ The concept o# most
economic o&ectives in the economy is to ma)imise the ene#its o# economic growth in the economy and to
increase the materia' standards o# 'iving #or its peop'e$ However #or economic growth to occur the economy
needs to ma)imise its resources ;natura' #actors5 to increase its productivity$ This 'eads to renewa'e and non/
renewa'e resources$ "roduction o# most goods 'eads to e)terna'ities which are usua''y negative such as
po''ution and sa'inity #rom over #arming$ Economic o&ectives ta%e into account increasing materia' standards
o# 'iving in the economy ut not the we'#are o# the environment that is needed to 'ive in$
Define the term 'ecologically sustaina%le development(:
Concept o# maintaining a 'eve' o# ,ua'ity and growth that doesn9t resu't in 'ong term damage to the
environment or dep'etion o# 'imited resources$
Descri%e what is meant %y a 'pu%lic good(
- pu'ic good is a good that cannot e e)c'uda'e to other memers o# society$ Everyone can en&oy the
ene#its o# a pu'ic good even i# they haven9t paid #or it$
&riefly examine the economic pro%lem of 'free riders(
Free riders use pu'ic goods without paying #or them ut can9t e e)c'uded #rom using them
)dentify what methods governments may use to control pollution levels.
Research and deve'opment into using means o# energy that don9t create po''ution eg$ .o'ar and wind
energy$
Trading permits #or po''ution$ .etting a ma)imum po''ution 'eve' #or each industry$ Companies not wi''ing
to cut po''ution emissions in that industry have to trade0uy permits o# #irms in the industry who are
wi''ing g to cut po''ution$
Ta) on car petro' to encourage pu'ic transport use to reduce car emissions
*egis'ative re,uirements on po''ution #or producers$
Explain what is meant %y an externality giving an example
-n e)terna'ity is a spi'' over e##ect o# economic activity which is not measured in the production costs or
revenue$ It is most 'i%e'y to e a negative e)terna'ity such as air po''ution ut may e a positive e)terna'ity
such as increase emp'oyment opportunities$
Outline how market failure occurs in relation to managing the environment.
Mar%et #ai'ure is the #ai'ure to measure a'' the costs o# production especia''y in society in the #orm o#
e)terna'ities$ -s a resu't the mar%et price o# the good is 'ower than the optima' socia' price 'eading to
overproduction o# these goods( hence environmenta' damage$
Discuss what is meant %y the distinction %etween 'renewa%le( and 'non$renewa%le( resources.
Renewa'e resources are those who natura''y rep'ace themse'ves over time$ Non/renewa'e resources are
'imited in there numers as they can9t e regenerated in a short time #rame$ It is important these D categories
are distinguished #rom each other as the e)p'oitation o# non/renewa'e resources now wi'' mean there won9t
e any avai'a'e #or #uture generations$ Current'y <0C our energy re,uirements uti'ise non/renewa'e
resources$
INF*-TION
Define 'inflation(
Increase in the genera' 'eve' o# process in the economy
Explain how the inflation rate is calculated.
The Consumer "rice Inde) ;C"I5 is the measurement o# movements in retai' prices o# a as%et o# weighted
commodities that ma%e up a signi#icant proportion o# an average wage earner9s househo'd e)penditure$ The
rate o# in#'ation measures any changes in C"I over the year indicating whether there has een an increase or
decrease in the cost o# 'iving$
Rate o# In#'ation 3 C"I
D
/ C"I
8
8BB
C"I
D

8
Outline the main causes of inflation
a5 !emand pu'' in#'ation + when aggregate demand is growing whi'e the economy is nearing its supp'y
capacity so that the higher demand spi''s over into higher prices rather than more output$ May e a
resu't o# insu##icient supp'y o# resources
5 Cost push in#'ation + when there is an increase in production costs ;eg higher oi' prices or unions
pushing #or higher wages5 that producers pass on to consumers in the #orm o# higher prices thus
increasing the rate o# in#'ation
c5 Imported in#'ation + occurs when there is an increase in the price o# imports either due to in#'ation in
the economies o# out trading partners or ecause o# a depreciation o# the -:! which resu'ts in higher
prices to consumers #or imports o# the import inputs used in manu#acturing o# domestic goods$
d5 In#'ationary e)pectations + when in#'ation may e perpetuated y the e)pectations o# wor%ers or #irms
that it wi'' occur$ Eg i# wor%ers e)pect higher in#'ation rates they may demand higher wages to
compensate #or rates$ This 'eads to higher production costs which mean cost push in#'ation to
consumers$
Discuss the reasons for *ustralia(s low inflation rates over recent years.
85 :se o# R1- in#'ation targeting + R1- egan to target in#'ation using monetary po'icy in 8AAD and has
since een a'tering interest rate 'eve's to %eep prices in 'ine o# the D/>@ target$
D5 Eery 'itt'e wage growth over the past decade due to decreased union power and pressure$
>5 .trong productivity growth has resu'ted #rom microeconomic re#orms and the increased competitive
pressures that go with them$
)dentify the type of inflation most likely to occur if %usinesses raise there prices due to higher wage costs.
Cost push in#'ation
Explain the role of inflationary expectations in determining the level of inflation.
I# wor%ers e)pect higher in#'ation rates they may demand higher wages to compensate #or rates$ This 'eads to
higher production costs which mean cost push in#'ation to consumers$
Explain why it is difficult for government policies to successfully address full employment and price sta%ility
at the same time.
Having simu'taneous #u'' emp'oyment and price stai'ity de#ies the princip'es o# supp'y and demand$
I# there is strong aggregate demand in the economy it wi'' 'ead to higher emp'oyment opportunities to meet
the demand$ However higher emp'oyment means higher production costs there#ore 'eading to cost push
in#'ation$ This cou'd e caused y the government imp'ementing a #isca' de#icit in an attempt to stimu'ate
growth$ I# government then wanted to decrease the rate o# aggregate demand it wou'd emp'oy a
contractionary #isca' po'icy$ There wou'd e 'ess demand #or goods 'eading to e,ui'irium price ;de#'ation5
ut this wou'd resu't in increase cyc'ica' unemp'oyment as there is no demand #or 'aour$ The con#'ict
etween #u'' emp'oyment and price stai'ity is i''ustrated y the "hi''ips curve$
$
Outline the likely impacts of higher inflation on the *ustralian economy:
/distortion o# resource a''ocation
/redistriutes income
/ reduces internationa' competitiveness
4 + Worsens C-! as our 4 are not competitive as they are higher in price than those #rom other countries
who are asent #rom in#'ation$ M are cheaper there#ore we M more rather than uying #or domestic goods(
increasing 1OG. de#icit and C-!
G /
: + Increase in#'ation 3 decrease unemp'oyment + inverse re'ationship$
I /
! + Greater ine,ua'ity$
E
F + Ine##icient a''ocation o# resources
I + 'ower purchasing power( greater ine,ua'ity in community 'eading to socia' unrest$
G + !eterioration o# udget outcomes 'eading to higher det interest in the #utureGGGGGGGGGGGG
Discuss +olicy options to maintain low inflation in *ustralia:
Fiscal + Contractionary stance wi'' decrease -! putting a downward pressure on demand pu'' in#'ation$
However 'ow in#'ation is not the main #isca' o&ective$
Monetary + main too' to contro' in#'ation with success#u' imp'ementation ensuring we have sustained 'ow
in#'ation with R1-9s D/>@ in#'ation targeting$ R1- uses !MOs to in#'uence the 'eve' o# investment and
consumption and thus -!$ Increase IR wi'' increase the cost o# orrowing there#ore decreasing consumption
and investment and reducing demand pu'' in#'ation$ The R1-9s e)ce''ent record with in#'ation targeting has
decreased in#'ationary e)pectations$
Competition !olicy + re#orms under the nationa' competition po'icy aim at esta'ishing the ma)imum
amount o# Hwor%a'e competition9 across the economy( and as a resu't have 'owered usiness costs and
increased productivity ensuring 'ower cost push in#'ation$
Labour market reforms + enterprise argaining has signi#icant'y contriuted to -ustra'ia9s 'ow in#'ation rate
as wage rises are now ased on productivity improvements$ "roductivity growth increased #rom an average
D@ in the 8AIBs to >@ in the ABs a''owing #or increases in rea' wages without putting pressure on cost/push
in#'ation$
Infrastructure policies + deregu'ation in transport( communications and uti'ities have reduced usiness costs(
decreasing cost push in#'ation$
!ublic "ector #eforms + privatisation and outsourcing o# government wor% to the private sector increases
the e##iciency with which these services are provided and decreases costs$ Ma&or pu'ic re#orms inc'ude the
privatisation o# Jantas( the Commonwea'th an% and <A$A@ sa'e o# Te'stra$
$rade !olicies + Reduction o# trade arriers increases competitive pressures etween 'oca' and internationa'
#orms( encouraging the adoption o# new techno'ogy to cut costs in order to remain competitive$ Reduced
protection a''ows #or cheaper imports #or individua's and #irms( signi#icant'y reducing the 'eve' o# imported
in#'ation$
:NEM"*OKMENT
Define 'la%our force(
The section o# the popu'ation aged 8C years and over who is neither wor%ing nor active'y see%ing wor%$
Define the 'la%our force participation rate( and explain how it is measured.
The 'aour #orce participation rate is the percentage o# the wor%ing age popu'ation who are either wor%ing or
active'y see%ing wor%$
*aour #orce

8BB
*F"R ;@5 3 Wor%ing age pop 8
Discuss how unemployment is measured and how official unemployment statistics may understate the true
extent of the unemployment pro%lem in *ustralia.
:nemp'oyment is measured using the #o''owing #ormu'a:
Numer persons unemp'oyed

8BB
:nemp'oyment rate ;@5 3 Tota' 'aour #orce 8
The unemp'oyment statistics may not e an accurate measure o# the true e)tent o# unemp'oyment in the
economy due to the #actor o# hidden unemp'oyment who are those on the economy who are unemp'oyed and
not see%ing emp'oyment$
Outline the recent trends in unemployment in *ustralia
There has een a downward trend in cyc'ica' unemp'oyment in recent years due to strong domestic economic
growth as we now approach the NR:$ Current'y at C$I@ ;e'ow OEC! average5 having #rom a high 8B$=@ in
8AA8/D during the recession$ However our unemp'oyment per#ormance #aces ongoing pro'ems with
structura' unemp'oyment remaining high and underemp'oyment increasing due to 'aour mar%et re#orms and
casua'isation o# the wor%#orce$ *ong term unemp'oyment sti'' a ma&or pro'em in the economy ma%ing up
D>@ unemp'oyment$
Outline the main types of unemployment that may occur in the economy$
"tructural :nemp'oyment + descries those persons unemp'oyed due to mismatch o# 'aour s%i''s with those
demanded in the economy$ Occurs due to techno'ogica' change and rapid changes in consume demand where
'aour s%i''s cannot adapt ,uic%'y enough to these changes$
Cyclical :nemp'oyment +resu't o# a downturn in the usiness cyc'e$
"easonal :nemp'oyment + temporary unemp'oyment caused y seasona' #'uctuations in the demand and
supp'y #or 'aour eg$ Fruit pic%ers$
Frictional unemp'oyment + those unemp'oyed due to time 'ags in the transition etween &os$
%idden Unemployment + peop'e who can e considered to e unemp'oyed ut don9t #it the o##icia' de#inition
o# unemp'oyment thus not re#'ected in the statistics$
Long&term unemp'oyment + those who have een without a &o #or more than 8D months$ :sua''y a resu't o#
structura' unemp'oyment$
,ist the factors that may lead to higher unemployment.
8$ 'ow 'eve' o# economic activity + demand #or 'aour is derived #rom -! or goods and services
D$ constraints on economic growth
>$ macroeconomic stances + contractionary 3 increase
<$ rising participation rates
C$ productivity changes + decrease productivity 3 increase unemp'oyment
?$ structura' change and techno'ogica' change
=$ 'aour mar%et in#'e)ii'ity
I$ inade,uate training and investment
A$ rapid increase in 'aour costs + 'aour prices itse'# out o# a &o
Discuss the causes of unemployment in the *ustralian economy.
Factors'
External issues + Tari## reductions throughout the ABs 'ed to an increase in structura' unemp'oyment in
import competing industries especia''y in the manu#acturing sector$ -ttempts y #irms to set up production
#aci'ities overseas to ta%e advantage o# 'ower 'aour costs can increase structura' unemp'oyment in the short
term$ Recent -:! appreciation decreases the IC o# out e)porting industries( increasing the ris% o# &o 'osses$
Gro(t) + the demand #or 'aour is derived #rom the 'eve' o# aggregate demand in an economy$ - downturn in
the 'eve' o# -! ;occurring in periods o# recession5 wi'' 'ead to decreased demand #or 'aour and wi'' increase
cyc'ica' unemp'oyment$ Recent -ustra'ian e)perience has een 8> years o# consecutive economic growth(
reducing the unemp'oyment rate down to C$I@ DBB>/< and a'most e'iminating cyc'ica' unemp'oyment$
Unemployment + 'ong term unemp'oyment can ma%e it harder #or wor%ers to enter wor%#orce due to 'oss o#
&o/re'ated s%i''s$ In this way( cyc'ica' unemp'oyment can turn into structura' unemp'oyment therey
increasing the NR: ;Hhystereses5
Inflation + "hi''ips Curve ana'ysis suggests and inverse variation etween unemp'oyment and in#'ation$ High
'eve's o# in#'ation may 'ead to governments using contractionary po'icies therey decreasing economic growth
'eve's and there#ore decreasing 'aour demand increasing unemp'oyment$ However microeconomic re#orm in
-ustra'ia has a''owed #or the simu'taneous achievement o# 'ow in#'ation and decreasing unemp'oyment$
Distribution of Income + a more une,ua' distriution o# income wi'' decrease consumption 'eve's as 'ow
income earners tend to have a higher M"C$ *ower consumption wi'' decrease aggregate demand and thus the
demand #or 'aour( increasing cyc'ica' unemp'oyment$
*ctors'
Firms / Many industries have introduced 'aour saving techno'ogy$ !ecreasing the demand #or 'ow/s%i''ed
wor%ers and contriuting to structura' unemp'oyment in -ustra'ia$ However this has een o##set y increase in
high'y s%i''ed emp'oyment in the techno'ogy #ocused industries$ *aour mar%et rigidities such as high
minimum wages and e)cessive 'aour mar%et regu'ations may reduce the wi''ingness o# #irms to hire or %eep
wor%ers due to increased 'aour costs$ Increases in 'aour productivity wi'' encourage emp'oyers in the 'ong
term to hire wor%ers as they can increase production without adding to average production costs$ *aour
productivity has increase #rom D@ average in 8AIBs to a >@ average in the 8AABs$
Individuals + 'ong term unemp'oyed individua's #ind it much harder to &oin wor%#orce as they may 'ose their
motivation or &o/re'ated s%i''s and emp'oyers ecome more re'uctant to hire them$ Over 8 in C unemp'oyed
peop'e in -ustra'ia are c'assi#ied as 'ong term unemp'oyed$
Government + macroeconomic stance can have an adverse impact on unemp'oyment in the short to medium
term$ Contractionary #isca' and monetary po'icy wi'' 'ead to a reduction in -! in the economy which wi''
increase cyc'ica' unemp'oyment$ E)pansionary po'icies with 'ead to a reduction o# cyc'ica' unemp'oyment
due to the increase in -!$ *ong term microeconomic re#orm agenda o#ten invo'ves signi#icant increases in
short term structura' unemp'oyment as #irms ad&ust to increased competition$ However in the 'ong term the
growth o# e##icient industries shou'd resu't in a net increase o# &os in the 'aour mar%et$
Outline the economic and social costs for *ustralia of a sustained high rate of unemployment.
/ E)terna' stai'ity issue due to 'ower M". 3 'ess nationa' savings$ "rivate sector can9t orrow #rom govt as
they have higher e)penditure due to we'#are pro'ems 'eading to orrowing overseas 3 net income urden
with returns 3 higher C-!$
G + Higher unemp'oyment 'eads to 'ower wages$ This 'eads to decrease -! #or goods and services and 'ower
growth$ *eads to 'ower .O*$ Reduced capita' production 3 'ower chance o# #uture productivity there#ore 'ow
#uture growth$ Higher M"C o# consumers with 'ower incomeL 'ower savings$ Money in the economy spent
dea'ing with socia' costs rather than increasing growth
: + *ess emp'oya'e in #uture due to 'oss o# s%i''s$
I /
! / Greater ine,ua'ity as usua''y 'ower income groups who are unemp'oyed$ Higher M"C o# 'ow K
E / N0-
F + Resources not used to #u'' capacity there#ore operating within ""C$ Reduced investment
I + increasing ta)ation urden$ *ower wage growth #or those whom are sti'' emp'oyed$ Increasing socia'
pro'ems$ Increased individua' det 'eve's$
G + Have to pay more #or e)penditure on we'#are payments 'eading towards higher de#icit$ *ess income #or
individua's e,ua's 'ess ta) revenue$
Explain what is meant %y the 'natural rate of unemployment(:
Emp'oyment rate when the economy is at #u'' emp'oyment and which can9t e e'iminated y stronger growth$
Discuss how government policies can influence the rate of unemployment in the economy(
Macroeconomic:
Fiscal + E)pansionary #isca' po'icy wi'' increase economic growth and reduce cyc'ica' unemp'oyment$
Monetary + a decrease in IR 'eve's wi'' increase economic activity thus increasing the demand #or 'aour in
the economy( reducing cyc'ica' unemp'oyment$
Microeconomic
Competition "o'icy + Increase competition etween competitors may 'ead to industry shrin%age or
techno'ogica' change( increasing unemp'oyment$ However Hwor%a'e competition9 may ensure domestic
competition doesn9t reach the point o# massive unemp'oyment increases
Labour Market Re#orm + speci#ic 'aour mar%et programs can reduce structura' and #rictiona'
unemp'oyment eg$ Wor% #or the do'e and Mo Networ%$ Reduction o# minimum wage 'eve' wou'd decrease
unemp'oyment as producers cou'd a##ord to higher more peop'e$ Increase #'e)ii'ity o# 'aour mar%et through
enterprise argaining$
Infrastructure po'icies + increase #inding into education to ensure the appropriate s%i''s are supp'ied to meet
demand$
"u'ic sector re#orm +
$rade policy + decrease trade arriers may 'ead to increase internationa' competition and in the short term
'ead to an increase in structura' unemp'oyment as industries switch to techno'ogy to ecome more e##icient or
industry c'oses$ However in 'ong term economic growth and e)pansion wi'' o##set the initia' unemp'oyment
increase$
E4TERN-* .T-1I*ITK
Define 'external sta%ility(
Where e)terna' indicators o# C-!( #oreign 'iai'ities and the e)change rate are at a sustaina'e 'ong term 'eve'
where they won9t have a negative economic conse,uence$
Descri%e a situation of external insta%ility.
High C-! o# more than ?@ G!"( high 'eve' o# #oreign 'iai'ities e,ua''ing to more than CB@ G!" and a
vo'ati'e e)change rate$
-hy is our external sta%ility important?
-ustra'ia9s e)terna' stai'ity is important as to maintain overseas investor con#idence$ I# overseas investor
con#idence is 'ost it can resu't in serious e##ects #or -ustra'ia inc'uding a depreciation o# the -:!( a
withdrawa' o# investment #unds( higher interest rates and s'ower economic growth$ E)terna' stai'ity is
increasing'y important in recent times as we pursue economic integration as we are more re'iant on higher
trade and #inancia' #'ows with other nations$
&riefly descri%e at what level the current account deficit may %e sustaina%le.
-verage e'ow >@ G!" in mong term with a short term average o# 'ess than ?@
Examine recent trends in the si.e of the /*D
The current account de#icit has een a sustained de#icit over the past 8B years wavering around /D$=@ to
/?$B@ current'y$ The C-! has reached the highest 'eve' ever in do''ar terms current'y N<=n in DBB>/B< up
#rom NDDn in DBB8/BD$ The a'ance o# goods and services has #'uctuated over time showing its response to
cyc'ica' #actors$ It has moved #rom high de#icits to 'ow surp'uses current'y at a DB year high o# /D<$8n
re#'ecting the e##ect o# drought on our 4( our narrow e)port ase and s'ow wor'd growth which has to
compete with our strong domestic growth ;terms o# trade deterioration5$ The net income component is
consistent'y a de#icit now at a high 'eve' o# /D>$>n re#'ecting the returns we pay on our high det 'eve's
Explain the difference in the economic effects of a rising levels of foreign de%t and foreign e#uity.
Foreign det is -ustra'ia orrowing money #rom overseas to pay o## e)isting dets$ Interest has to e paid on
the det$ This 'eads to det increasing accumu'ating on the net income account o# the C-!$ This has een
seen as the case over the past DB years as our net income de#icit has een increasing$ This increases our C-!
and ma%es us 'oo% economica''y un#avoura'e to investors meaning 'ess investment here and retreat o#
investors a'ready here 'eading to decrease in economic growth$ Foreign e,uity is the tota' va'ue o# -ustra'ian
assets owned y #oreigners( not adding direct'y to our #oreign det$ We don9t have to pay ac% the price o# the
asset on'y the returns such as pro#it( dividends on shares etc$ Foreign e,uity has 'ess o# an impact on the C-!
as it doesn9t create a det trap scenario$
Examine the recent performance of the *ustralian dollar.
Record 'ow o# :.NB$<= was reached in -pri' DBB8 a period when the -:! was serious'y underva'ued$ This
was during a 'ong run depreciation which reounded in March DBB< when -:! reached :.NB$IB$ Current'y
the -:! is 7777777 ;=Bc has een the 'ong run average5$
Outline how the *ustralian dollar may pose an external sta%ility risk.
The M/curve theory stipu'ates that a sustained reduction in the va'ue o# the currency shou'd improve a
country9s a'ance o# payments ecause e)ports wi'' rise and 'oca''y produced goods are ought in sustitution
o# M$ However this ignores the va'uation e##ect where a rise in #oreign det wi'' occur ecause o# the 'ower
do''ar which wou'd signi#icant'y impact the C-!$ -:! appreciation e##ects our 4( decreasing them re'ative
to the cheaper imports we ut 'eading to 1oG. 'ow/out$ In DBB8/BD the C-! was ND8$?n ;>@G!"5
ecause o# sustained depreciation o# -:!$ 1ut in B>/< the C-! 'ew out to N<=n ;?@5 ecause o# -:!
appreciation reducing the IC and 4 growth$ This re#'ected in >@ 1oG.$
Outline the policies that the *ustralian government has used to address the external sta%ility issue.
Macroeconomic
Fiscal + 'ong term #ocus on the under'ying causes$ "rocess o# #isca' conso'idation ;a'anced udget over the
cause o# the economic cyc'e5 aims to reduce the negative impact o# udget decisions on domestic investment
'eve's and #oreign det ;avoiding the Ocrowding out e##ectP5$ The government has a'so initiated measures to
increase nationa' savings through the introduction o# compu'sory superannuation$ This wi'' decrease #oreign
det 'eve's and improve -ustra'ia9s persistent C-! ;decreasing private sector orrowing #rom overseas5$
.peci#ic government re#orms can e used to promote a diversi#ication o# -ustra'ia9s e)port ase a'so
addressing -ustra'ia9s current account ima'ance$ For e)amp'e government changes to speci#ic sectors ;such
as the wine ta) reate in B</B< or the deregu'ation o# the tertiary education sector5 wi'' increase -ustra'ia9s
e)port earnings in these sectors$
Monetary + is genera''y ine##ective in addressing e)terna' stai'ity$ -n increase in interest rates may reduce
import spending ut wi'' a'so 'ead to increased #inancia' #'ows( increasing #oreign 'iai'ities and an
appreciating -:!( hurting our 4 competitiveness$
Microeconomic re#orm:
Competition !olicy + competition may 'ead to c'osure o# sma''er industries$ This wou'd 'ead to #ewer e)ports
#rom the industry and more imports #rom consumers to ma%e up #or the 'oss o# good providers worsening our
terms o# trade$ However in the 'ong term competition po'icy wou'd improve our IC and improve our C-! due
to more e##icient e)port industry$
Labour market #eforms + Incentive to increase e##iciency through enterprise argaining$ Wi'' improve our
e)port industry competitiveness improving our e)terna' stai'ity
Infrastructure #eforms + deregu'ation o# tertiary education sector wi'' increase our e)port earnings in the
sector$
$rade policy + in the short term a reduction in protection wi'' 'ead to a deterioration o# the trade a'ance due
to increasing M 'eve's$ In the 'ong term the increased e##iciency and productivity wi'' improve the e)port
industry competition and improve the trade a'ance$
/ritically evaluate the argument that the /*D and foreign lia%ilities are not a significant pro%lem in
*ustralia.






Explain the concept that the /*D is the result of a shortage of domestic savings. Discuss the extent to which
you think the /*D reflects a shortage of savings and to what extent a poor trade performance.
!I.TRI1:TION OF INCOME
Distinguish %etween income and wealth
Income is the amount o# #unds or other ene#its measured in money terms that #'ow to individua's( househo'ds
etc #rom the interaction o# mar%et and non/mar%et sources whi'st wea'th is a measure o# the assets ;eg$
Residentia' or usiness capita' etc5 he'd y individua's or groups in society$
Explain how the following can %e used to measure the degree of ine#uality in the distri%ution of income:
a0 the ,oren. curve 1explain using diagram0
The #urther the *orenQ curve is #rom the 'ine o# e,ua'ity( the greater in degree o# income ine,ua'ity in society
%0 the 2ini /oefficient:
-77
Gini coe##icient 3 - 2 1
The Gini coe##icient ranges etween B and 8$ The sma''er the Gini coe##icient( the more even the distriution
o# income in the society$
Outline how age and gender can influence the distri%ution of income
Those o# a younger age have 'ess s%i''s and e)perience in the wor%#orce meaning there wage is 'ower$
Incomes are the highest etween DC/C<yrs o# age as these are the main years a person wor%s$ The >C/<<yr o'd
rac%et contains the highest mean income o# appro)imate'y NA?B0wee%$ The 8C/8A yr o'd rac%et is the 'owest
with mean income o# >AC0wee%$ Income increases to midd'e wor%ing age then decreases as wor%ers get o'der
as more peop'e retire and re'y on pensions$ The #actors indicate that ine,ua'ity is present etween the high
midd'e wor%ing age rac%et and the 'ower younger and o'der wor%ers$
.ti'' in modern day society incomes etween se)es di##er with women earning on average ?D$C@ o# what men
were earning in DBBD/>$ This is due to the Hhuman capita' #actor9 and the past attitudes o# society that have
previous'y 'imited opportunities or women to gain s%i''s and wor% in the wor%#orce$ These #acts indicate
income ine,ua'ity etween men and women$
Examine which groups tend to %e adversely affected %y ine#uality according to occupation3 education and
cultural %ackground in *ustralia.
Occupation + those with 'ower s%i''s and e)perience are su&ect to occupationa' income ine,ua'ity as the
manageria' positions and pro#essiona' occupations gain higher incomes$ This indicates high incomes resu't
#rom higher education
Education + the higher the education( the higher the income and wea'th$
Cu'tura' ac%ground + Overa'' peop'e orn overseas have a s'ight'y higher average mean income than those
orn here ;8$C@ higher5$ However this a'so depends on region o# migration ;:. migration mean K 3 N>8(=IBL
-sia migrants mean K 3 ND=(CAB5( whether an Eng'ish spea%ing ac%ground is apparent ;'ower K i# migrant
doesn9t spea% Eng'ish5 and how 'ong the person has resided in -ustra'ia ;'onger 3 higher K5$ Indigenous
-ustra'ians mean K 3 N>?C0w% compared to N<A>0wee% o# rest o# -ustra'ian popu'ation$
Discuss the recent trends in the distri%ution of income in *ustralia in recent years.
-ustra'ia is current'y e)periencing and increase in ine,ua'ity shown y an increasing Gini coe##icient
current'y B$>88 rising #rom B$DA? that was in the mid 8AABs$
Outline the economic costs and %enefits associated with income ine#uality.
1ene#its:
Incentive e##ects
Encourages 'aour #orce to gain a higher education in order to gain a &o with a higher income
Encourages 'aour #orce to wor% 'onger and harder to gain a higher pay$ This means there is greater 'aour
productivity meaning greater G!" per capita and greater growth$
Greater moi'ity o# 'aour 'eading to more e##icient a''ocation o# resources and higher economic growth
Encourages greater entrepreneuria' ris% through higher income rewards$
There is a potentia' #or higher savings 'eading to higher capita' #ormation$ This wi'' 'ead to 'ess re'iance
on #oreign capita' as domestic #unds can e used #or investment( decreasing the net income component o#
the C-!$
The government can ta) higher income earners more to gain revenue( 'eading to more #avoura'e udget
outcome
Costs:
*ess satis#action with income as higher income earners won9t appreciate the va'ue o# there money as
much as 'ower income earners
*ower consumption and investment as 'ow income earners have a higher M"C on essentia' needs$ There
is 'ess consumption in genera' decreasing economic activity$ The decrease demand #or goods and services
wi'' increase the unemp'oyment rate which wi'' increase ine,ua'ity #urther as we'' as decreasing usiness
investment and decreasing the standards o# 'iving$
Creates conspicuous consumption creating cu'ture where individua's worth is ased on there income and
wea'th$
Creates poverty and socia' pro'ems with socia' division etween high and 'ow income earners$
This 'eads to higher costs o# we'#are supports$ This increases the demand #or government revenue
deteriorating the udget a'ance$
Outline the social costs and %enefits of ine#uality.
There a 'itt'e to %nown ene#its o# ine,ua'ity in society( with the socia' costs eing ovious'y preva'ent:
There may e ine,ua'ity o# opportunity with higher incomes eing a'e to gain a higher education which
wou'd increase ine,ua'ity #urther$
.ocia' c'ass division wou'd e created 'eading to socia' and economic instai'ity$
The vicious cyc'e o# poverty is created as a resu't o# income ine,ua'ity with 'ower incomes gaining
'imited opportunities$ High poverty creates e)terna'ities o# increase crime( suicide and disease 'eading to
'ower standards o# 'iving$
Discuss government policy options to improve the distri%ution of income and wealth in *ustralia
Macroeconomic po'icy:
Fiscal !olicy + is the most e##ective too' #or addressing the distriution o# income$ It has a direct impact
through the use o# the progressive ta) system to generate revenue with government we'#are payments then
redistriuting income ac% into the economy ;eg unemp'oyment ene#its5$ However recent changes in #isca'
po'icy have had a mi)ed impact on income ine,ua'ity$ In the DBB</BC udget ta) cuts #or higher income
earners has made the ta) system 'ess progressive$ However this has part'y een o##set y increased #ami'y
we'#are payments to 'ower income earners$ The government9s introduction o# compu'sory superannuation has
had a positive impact on the distriution o# income #orcing a'' wor%ers to accumu'ate savings$ Changes in the
DBB</BC udget were designed to increase contriutions to superannuation #urther through the e)pansion o#
the co/contriution scheme$
Monetary + has a 'imited impact upon income distriution$ They impact indirect'y$ -n increase and interest
rates wi'' redistriute income #rom 'ow income earners ;who are genera''y orrowers5 to high income earners$
Microeconomic re#orm:
Competition po'icy + higher 'eve's o# competition wi'' increase ine,ua'ity in an economy due to high
structura' emp'oyment #rom techno'ogica' change made y #irms$ However y creating wor%a'e competition
ine,ua'ity wi'' remain sta'e$
Labour Market re#orm + high minimum wage reduces the e)tent o# ine,ua'ity in the economy ut may a'so
'ead to increase in unemp'oyment which wou'd o##set reduction 'eading to ine,ua'ity increase$
$rade !olicy + the remova' o# tari##s #rom goods and services wi'' improve the distriution o# income as
overseas wishes to uy more o# our goods which are cheaper 'eading to increase income #or those in the
e)port industries$ However i# -ustra'ian protection is removed( M competing industries wi'' su##er 'eading
towards an increase in unemp'oyment in the sector and an increasing'y une,ua' income distriution in the
economy$