topic 3 Flashcards
1
Q
what are the functions of the government
A
- stabilising economic activity (fiscal&monetary)
- resource allocation (fiscal)
- redistribution of income (fiscal)
- market regulation (legislation)
2
Q
why does government intervene
A
government does this to prevent market failure: resources not always allocated by operation of price mechanism to achieve maximum utility
3
Q
how government stabilises economic activity through
A
- economic growth (change in GDP&AD)
- internal balance (balancing INF&U/E)
- external stability (BOP, net debt, exchange rate stability)
4
Q
how government redistributes income through
A
- to fix excessive inequality by balancing incentives (efficiency) vs equity (fairness)
- want to bridge income gap through progressive tax system and transfer payments
5
Q
how government redistributes environmental regulation
A
- managing externalities
- intergenerational equity
- policies conflict with EG/UE
6
Q
6 economic issues
A
- economic growth
- inflation
- unemployment
- environment
- external stability
- inequality
7
Q
quality of life meaning
A
a qualitative concept of wellbeing
8
Q
sustainable economic growth meaning
A
government’s aim for sustainable economic growth which doesn’t impact other indicators and raises quality of life
- trade off between current GDP and future GDP
9
Q
2 key factors of internal stability
A
- full employment (no cyclical employment and aim to achieve U/E rate near NAIRU)
- price stability (by managing inflation)
10
Q
managing external stability 3 key factors
A
- current account position
- net foreign liabilities
- exchange rate volatility
11
Q
intergenerational equity
A
leaving the environment for the next generation in at least as good condition as the present –> future generations can enjoy the same quality of life
12
Q
what are macroeconomic policies
A
are mainly focused on stabilising economic activity on the demand side
- mainly short or medium term things
13
Q
fiscal policy definition
A
the use of government expenditure and taxation revenue to influence AD, the allocation of resources distribution of income
14
Q
budget outcome definition
A
summary of government expenditure and revenue for a year
15
Q
fiscal stance definition
A
the relationship between budget outcome over the years
16
Q
monetary policy definition
A
aim to use interest rate changes to stabilise aggregate (AD) level of economic activity
- RBA manipulates the cash rate influences money supply –> flow on effects
17
Q
microeconomic policy definition
A
are mainly focused on stabilising economic activity on the supply side (AS) and targets improving Australia’s productivity
18
Q
allocative efficiency definition
A
when resources are distributed so that the net benefit to consumers is maximised –> resources given to most productive suppliers
19
Q
technical efficiency definition
A
when productive output is increased from a set volume of resources
20
Q
dynamic efficiency definition
A
the economies ability to adapt to changing economic conditions –> strong short-term performance while also improving long-term goals
21
Q
what are the areas of micro-reform
A
- deregulation (removal of government controls over a sector over product and factor market)
- privatisation (sale of state owned enterprises)
- legislation (to increase economic liberalisation)
- competition policy (competition & consumer)
22
Q
economic management conflicts
A
- price stability & full employment (wage price spiral)
- price stability & economic growth (AS<AD therefore INF)
- EG & external stability (increase in M worsens AD)
- EG & environment (increase EG from resource consumption)
- EG & distribution of income (increase inequality as EG increases)
23
Q
economic management compatibilities
A
- INF & external stability (improving CAD)
- EG & full employment (increase demand for output)
24
Q
economic growth definition
A
refers to the increase in output (GDP) of an economy over a period of time
- an outward shift in the PPF can demonstrate EG
25
what can cause an outward shift in PPF can be from
- additional resources
- resources increase their productivity
- technology improves
26
if conA>capA
increase short term SOL, decrease long term SOL
27
if conA
decrease short term SOL, increase long term SOL
- capital goods help move curve outwards
28
capital widening meaning
capital grows with pace of labour workforce therefore EG increases while productivity is the same
29
capital deepening meaning
capital per worker grows greater than labour force therefore EG and productivity increases
30
- POG
- NOG
- actual output>>potential output
- actual output<
31
real GDP definition
quantitive measure of the increase in output of an economy after adjusting for inflation
32
economic growth formulas
- real GDP ($) = nominal (money value) GDP x Base CPI/Current CPI
- EG (%) = current GDP - prior real GDP/prior real GDP x 100/1
33
revision economic growth formulas
Y=C+S
Y=O=E
1=MPS+MPC
O=C+I
C+I=C+S
AD=C+I+G+X-M
34
to reach equilibrium at AD=O=Y
- if AD>current O&Y then increase in EG
- if AD
35
what did keynes do
keynes identified that AD was the leading FOP changes and that the difference between leakages and injections would change O&Y and stop at a new equilibrium level of national income
36
consumption function and 3 sector model formulas
C = Co + mpcY
S = -Co +mpsY
AD = Co + I + mpcY
37
what is the k-multiplier
k-multiplier is a relationship between the change in AD component and the change in national equilibrium level of income as when a leakage or injection changes, there is a magnified affect on the change in income
- due to AD=Y=O and leakages=injections equilibrium)
38
k-multiplier formula =
1/mps = 1/1-mpc = change in income/change in AD component
39
change in equilibrium income formula
= k-multiplier x change in AD component
40
characteristics of k-multiplier
- inversely related to MPS
- works for any changes in AD components
- takes time to work
41
inflation definition
inflation is a sustained increase in prices of G&S over time
- fall in purchasing power of money
- measured by monitoring the price of a selected basket of metropolitan G&S sorted into 11 regimes
42
inflation formula (%)
current yrs CPI - prior yrs CPI/prior yrs CPI x 100/1
43
headline inflation meaning
raw inflation figure as reported through the CPI without removing 'volatile' price movements
- more commonly used
44
what is the consumer price index
weighted index numbers are used to convert the price movement of a wide range of common metropolitan household items into a measure of the rate of inflation
45
why is CPI not accurate
- basket content is subjective
- calculated quarterly (RBA meets monthly)
- excludes FOP and raw materials
- lagging indicator of changes in spending
- mortgages (50% of household expenses) are NOT in CPI
46
core or underlying inflation definition
is measured by taking the CPI outcome and excluding volatile and other items such as government charges
- less commonly used
47
broad structural causes of inflation
- demand pull --> demand for G&S rises
- import inflation --> import prices rise
- cost push --> cost of production rises hence G&S price rises
- expectations --> speculation about inflation
- quantitive easing
48
demand pull inflation drivers
C (income, interest rates)
I (profit, interest rates)
G (fiscal, monetary policy)
X (int. comp., TOT, fx rates)
M (NY and other economies demand)
49
demand pull inflation graphically
AS and AD demand graph
- AD shifts right
50
cost push inflation drivers
- mainly by increasing labour costs
- increasing raw material cost
- costs passed onto consumers
- increasing interest rates
51
import inflation meaning
caused by increases in the price of tradable products imported into Australia
52
import inflation drivers
- price rises for G&S in the exporting country
- a depreciation of AUD
53
expectations drivers
- households expect an INF increase they will increase C (demand pull) --> therefore INF increases
- if workers expect an INF increase they will ask for higher wages (cost push) --> therefore INF increases
54
specific causes of higher INF
- high wages and non-wage benefits
- depreciation of AUD
- increased food prices from natural disasters
- supply constraints (restricted warehousing to avoid surplus)(transport constraints)
- government intervention (higher protection) (GST and carbon tax)
- high oil prices
55
negative effects of inflation on firms
- increased production costs (some cost passed to consumers, some absorbed by firms hence reduce profit margins)
- loss of international competitiveness (higher X prices)
- loss of profitability and market share (discourages firms investment in long term growth)
56
negative effects of inflation on households
- loss of real wages (erodes purchasing power, decrease SOL)
- impact of C&S (increase C due to increase prices, decrease savings)
- low distribution of Y
57
negative effects of inflation on government
- weaker fiscal position (increase welfare payments)
- may implement contractionary macroeconomic reform
58
positive rationale for inflation
- stimulates wage growth hence consumer confidence
- better than deflation
- increases asset price growth and interest rates increase profit
- signal that economy is strong
- real value of debt decreases overtime
59
sources of economic growth (IGA)
- international competitiveness (high human capital, improved FOP efficiency)
- government policies (favourable institutional features)
- AD components (increase 5 components e.g X, I)
60
consumption factor of AD in EG
- as national Y increases, consumption increases
- consumption function: CT=C0+mpcY
- as interest rates increase, consumption decreases, increase savings
61
investment factor of AD in EG
- taking advantage of efficiencies and technology
62
gov. spending factor of AD in EG
- usually counter-cyclical to maintain AD
- spending via discretionary fiscal policies & non-discretionary automatic stabilisers
63
exports/imports factor of AD in EG
- increase exports from strong global economy
- int. comp. story through fx rates
- increase imports from strong Australian economy
64
key factors of international competitiveness
P = productivity (economies of scale) and capital deepening)(workers can ask for wage rises without inflation)
Q = quality
R = retail price (fx rate, interest rates, COP)
S = services
65
overall government policies
- macroeconomic (fiscal, monetary)
- microeconomic
- government (institutional) options (e.g protection, infrastructure, labour, - national competition reforms)
- structural focus areas (capacity
constraints, skill shortages, bottlenecks in production)
- institutional policy changes (privatisation, nationalisation)
66
economic growth positive "big picture impacts"
- nations (environment, exports, poverty)
- governments (taxation, spending)
- firms (investment, productivity growth=labour, technological process=capital)
- households (leisure, savings, consumption, income)
67
economic growth negative "big picture impacts"
- external stability (increase imports and CAD, higher borrowing costs, int. comp. hurt if inflation)
- environmental sustainability (pollutes ecosystems, depletes resources, externalities)
- price stability/inflation (demand pull from AD increase, cost push from U/E decrease, inflationary expectations from EG increase, import inflation from increase in imports)
- employment (structural U/E, capital investment, declining industries)
- equitable dist. of income (widens inequality gap)
68
conflicts between eco growth indicators
1. inflation and EG
2. inflation and full employment (cost push inflation)
3. external stability and EG (import and AUD value increase) (CAD management is key)
4. environmental stability and EG (increase consumption of resources)
5. equitable dist. of income and EG (skewed growth, wealth gap)
69
future growth in aus
since resources boom is over, growth from:
- LNG resources goods (becoming largest exporter)
- beef agriculture goods (beef imports to China)
- tourism services (focus on Asian market)
- investment
70
measures of external stability
- the CA as a % of GDP (CAD or CAS)
- net foreign debt as % of GDP
- net foreign liabilities as % of GDP
- stability of AUD Fx rate (countercyclical)
- Int. comp.
- TOT
- IMF
71
external stability definition:
occurs when an economy can meet its short term and long term financial obligations with the rest of the word without concerns
72
long term government stabilisation policies:
- structural = not relying on one export (widening export base)
73
why is CAD bad?
- high CAD = risky investment as country might not manage debt servicing ratio
- to still attract FDI, countries pay 'risk premuim' = higher interest rates
74
australia's CAD is OK
- has CAD for 40 years
- btw -3 to -6% of GDP
- -6.4% before GFC but rose because of GFC
- CAD is ok (one of 10 countries with AAA average rating from S&P, moodys and fitch)
- S&P downgraded to AA in 2020
- pitchford thesis
- low debt servicing ratio (temporarily high due to inflation)
- 55% of imports are intermediate goods to grow aus economy
75
net foreign debt as % of GDP
two key measurements:
1. net foreign debt as % of GDP
2. debt servicing ratio (interest payments as proportion of export revenue)
76
debt v liabilities
- government bonds (dont come with ownership right but increase investment) are debt instruments
- FDI of shares and stocks (have ownership rights) are equities (equity asset = shares we hold, equity liability = shares foreigners hold)
- net foreign liabilities are (foreign debt + foreign equity)
77
stability of fx rate --> depreciaiton
- increase import prices (intermediate goods), increase COP
- capital outflows "hot money" --> seek more stable economies --> creates swings
- short run worsens BOGS (imports expensive, exports cheaper)
- long run improves BOGS (decrease M C and increase X demand)
- valuation effect = increase debt servicing ratio and worsens NPY
78
TOT
export price index/import price index
79
AUS TOT
- post-mining boom increase in export to asia = e.g china, india, japan growing economies
- asian nations comparative advantage in labour = manufactured goods remain same price
80
int. comp.
PQRS (productivity, quality, retail price, service)
- as int. comp. increases = bogs and cad improves
81
why does aus have high cad/debts
- MAIN STORY: NET IMPORTER OF CAPITAL due to low savings, small population and favourable EG
- globalisation
- low savings gap/small population
- mining boom
- depreciation of AUD
82
why is aus moving toward cas
- mining boom (2011-13) is over (no more investments as mines are made) --> now increase in exports
- move toward CAS
83
specific aus high cad reasons
- NPY (high FDI)
- BOGS: narrow export base, inability to compete with asian nations, agricultural exports struggle due to EU/US protections, increase imports spending (sustained EG), services suffered from narrow base and appreciating AUD
84
CAD effects --> disadvantages
- only problem if BOG or NPY become unsustainable (e.g greece 2008-15 250% of GDP in debt --> gov only focused on ext. stab)
- higher liabilities
- higher capita outflow (hot money to invest in more stable country)
- depreciation (capital outflows and low consumer confidence)
- increased foreign debt (servicing ratio/debt trap) --> (valuation effect from depreciation) --> worsens CAD (NPY)
- downgrading credit rating (AUS to AA from S&P) --> harder to attract capital inflow
- higher interest rates (e.g george soros)
- high interest rates or risk premium --> attract FDI
- vulnerable to financial contagion (IMF assistance--> austerity)
- policy restraints on countries GOV e.g high cash rate
85
debt cycle
increase borrowing = increase debits in CA (NPY worsens) = high CAD = increase K inflows = increase CAD
86
pitchford thesis
CAD is not a problem in australia due to attractiveness of australia for foreign savings
- net importer of capital for productive use to grow economy
- private company borrowing has nothing to do with government --> doesn't affect
87
neutral effect of CAD
- CAD is not a risk (not worthy of gov policy changes --> should focus on internal)
- pitchford thesis
- AAA rating
88
positive effect of CAD
- help industries grow and invest in capital to increase productivity --> generate EG
- beneficial as long as return on investment is higher than cost of borrowing
- pitchford thesis
89
working age population def
those 15 years and older in the population
90
labour force def (hidden u/e)
those 15 and over who are working or actively seeking work
- not in labour force (retirees, given up, stay at home parents, rich, children)
91
employed def
those 15 and over working at least one hour a week paid or unpaid in a family business or are on unpaid leave
92
unemployed def
those 15 and older out of work who are willing, able and actively seeking work
93
u/e rate calculation x100
total unemployment / labour force (unemployed + employed + underemployed)
94
labour force participation rate calculation x100
labour force (unemployed + employed + underemployed) / working age population
95
types of U/E
- cyclical: caused by AD contraction < O = EG decrease = less labour derived demand
- structural: mismatch of skills of u/e vs those needed in economy
- long term: unemployed for more than 12months (out of touch with job)
- hard core: those people incapable of performing well
- hidden: are a part of the 'not in labour force' that can be tempted to join labour force (through policies higher min wage, increase EG, etc.)
- youth: those part of labour force and under 25 who are unemployed (lost opportunity to build human capital)
96
3 types of full employment
- only structural u/e
- NAIRU
- no cyclical u/e (only structural, frictional and seasonal)
97
types of productivity
- single factor productivity: output per single input
- multifactor productivity: output per all input
98
okun's law
the rate of EG must exceed the contribution of productivity growth and workforce growth for u/e rate to fall
99
keynesian function
- gaps: difference between full employment level of output and actual output
- deflationary gap: (spending in economy < all output produced under Yfull) (AS>AD) (Yfull > Ye) = cyclical U/E
- inflationary gap: spending in economy > all output produced under Yfull (AS
100
drawing keynesian function
- expenditure (AD) on y-axis
- national income on x-axis
- AS=Y line at gradient 45
- draw Ye and Yfull
- draw line through Ye as AD
- draw line through Yfull as where it should AD should be
101
how do unions cause structural u/e
create wage floors = labour surplus = firms layoff workers = not accurate due to workers inelasticity
102
phillips curve def
shows the inverse relationship between u/e and inflation
- only one regression line hence strong relationship
103
short run phillips curve drawing
- y-axis is wage growth inflation
- x-axis is unemployment
- downward sloping curve
- when curve touches y-axis = NAIRU point
- left of curve hiring structural u/e increase inflation
- right of curve cyclical u/e decreasing inflation
104
stagflation def
when an economy experiences both high inflation and u/e (e.g oil shock of 1973)
- from supply side issues
105
movement of/in phillips curve
moving along curve = expansion or contraction = from change in u/e
moving of curve = increase or decrease = from change in gov policy, etc.
106
gov policy regarding short run phillips curve
try to move it outwards which sets inflationary expectations = ask for higher wages = high inflation = increase u/e from firms high costs
- cycle repeats
- get long run phillips curve representing NAIRU (vertical)
107
NAIRU definition
unemployment rate which doesn't affect inflation hence labour market contribution to inflation is 0%
108
income def
a flow concept. the flow of funds or money from market and non-market sources.
- wages/salaries (55%) = earned
- rent, profit & interest/dividends - from land/entreprenuership/capital (28%) = unearned
- welfare payments (11%) = unearned
- other transfers (6%) = unearned
109
wealth def
a stock concept. the value of real and financial assets owned by an individual at a particular point in time
- can be measured by reference to type of asset representing the stock (property, cash, shares, etc.)
110
inequality in income distribution def
the unevenness in the way income is dispersed in the economy
- graphically represented through lorenz curve
- calculated through gini coeff (total equality = 0, total inequality = 1)
111
lorenz curve def
a graphical representation of the level of inequality in the distribution in the economy
- take everyones income and rank from lowest to highest
- divide into 5 quintiles and calculate total incomes of each
- cumulative % of household income
- cumulative % of households
112
gini coeff def
the proportion of the area taken by the lorenz curve in relation to the overall area under the line of equality
113
net assets
real+financial assets - liabilities (debt)
114
poverty cycle
- those with low income = low wealth
- wealth generates income = save more = accumulate assets
115
causes on inequality
- economic systems (free market)
- wealth
- life opportunites (human capital)
- taxation and welfare (safety net)
- demographics (proportion under 25)
- institutional factors (gov corruption)
- unearned income growth > earned income growth
116
redistribution of income gov objective
- progressive tax
- means tested welfare payments to low income earners
- social wage (public transport, health, education, etc.)
117
poverty def
an enforced lack of socially perceived necessities to achieve an adequate SOL (absolute and relative)
- poverty line = 50% of median income
118
taxation catergories
- progressive tax: use of varying tax rates for taxing income whereby higher income earners pay progressively more tax than low income earners. This is achieved by dividing income into Tax brackets.
- Proportional tax: fixed single tax rate applied to taxable income
- regressive tax: low income earners pay a higher % of their income in tax than do high income earners --> increase inequality
119
horizontal equity
vertical equity
everyone on same level of income pays the same tax
more tax brackets
120
policy areas for wealth
- inheritance/death/property taxes
- education opportunties (student debt decrease)
- universal healthcare
- remove unfair concessions
121
policy areas for income ineq
- increase welfare payments
- increase minimum wage
- tax reform
122
gender pay gap
- Fewer opportunities for women to acquire education, skills and qualification
- accumulate lower super balance --> paid lower, longer care breaks, maternity leave
123
age wealth and income gap
- older ppl are more wealthy than younger ppl
- 45-54 = maximum income earning 15-19 = minimum income earning
124
factors affects wealth and income
- age (older = more wealth/middle age = more income)
- gender (man = more)
- ethnicity (english speaking/skilled migrant = more)
- family structure (couple without children = more/single parent = less)
125
economic costs of inequality
- diminishing marginal utility (rich people get less utility from wage rises)
- reduce EG (poor ppl have higher MPC --> consume more --> increase AD) (poor ppl have less education --> less human capital and EG)
- creates poverty and social (poverty cycle = decrease labour force participation)
- increases cost of welfare
126
social costs of inequality
- social class divisions = higher crime
- poverty = suicide, disease, reduced life expectancy
127
economic benefits of inequality
- increased human capital
- increased productivity
- increased savings and capital formation
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