Economics HSC Course FULL NOTES - Text.marked

HSC Economics Notes
CONTENTS
m
The Global Economy ......................................................................................................................................................................................................................................................... 2
International Economic Integration .............................................................................................................................................................................................................................. 2
o
Trade, financial flows and investment .......................................................................................................................................................................................................................... 4
. c
Protection ..................................................................................................................................................................................................................................................................... 8
Globalisation and Economic Development ................................................................................................................................................................................................................... 9
s
Case Study: China ........................................................................................................................................................................................................................................................ 13
u
Australia’s Place in the Global Economy ......................................................................................................................................................................................................................... 18
c
Australia’s Trade and Financial Flows ......................................................................................................................................................................................................................... 18
Exchange Rates ........................................................................................................................................................................................................................................................... 21
o
Free Trade and Protection .......................................................................................................................................................................................................................................... 28
F
Economic Issues .............................................................................................................................................................................................................................................................. 31
Economic Growth........................................................................................................................................................................................................................................................ 31
C
Inflation ....................................................................................................................................................................................................................................................................... 33
S
Unemployment ........................................................................................................................................................................................................................................................... 36
External Stability ......................................................................................................................................................................................................................................................... 38
H
Distribution of Income and Wealth ............................................................................................................................................................................................................................ 39
Environmental Sustainability ...................................................................................................................................................................................................................................... 42
Economic Policies and Management .............................................................................................................................................................................................................................. 44
Economic Objectives in Relation to Economic Issues ................................................................................................................................................................................................. 44
1
Macroeconomic Policies ............................................................................................................................................................................................................................................. 47
Policy Responses ......................................................................................................................................................................................................................................................... 72
m
THE GLOBAL ECONOMY
o
INTERNATIONAL ECONOMIC INTEGRATION
c
The Global Economy • The Global Economy refers to the interactions between the economies of individual countries that are now increasingly linked together into
.
one economic unit.
• The Global Economy consists of developing, emerging and advanced economies
• Developing economy:
s
- a nation with a low level of material well-being
- opposite of an advanced economy
u
• Emerging/Transitional economy:
- an economy which is changing from a centrally planned economy to a free market
- undergo economic liberalization, where market forces set prices rather than a central planning organization and trade barriers are
c
removed
- privatization of government-owned enterprises and resources
o
- creation of a financial sector to facilitate macroeconomic stabilization and the movement of private capital
- The transition process is usually characterized by the changing and creating of institutions, particularly private enterprises; changes in
the role of the state, thereby, the creation of fundamentally different governmental institutions and the promotion of private-owned
F
enterprises, markets and independent financial institutions. In essence, transition involves the functional restructuring of state
institutions from being a provider of growth to an enabler, with the private sector its engine.
• Advanced economy:
- countries that have a high level of development according to
C
o income per capita/GDP per capita
o industrialization
o life expectancy and education
S
o national income
o HDI
• Newly industrialized country:
H
- countries whose economies have not yet reached first world status but in a macroeconomic sense have outpaced their developing
counterparts
- nations undergoing rapid economic growth (usually export-oriented)
- Incipient or ongoing industrialization is an important indicator
- social upheaval can occur as primarily rural, or agricultural, populations migrate to the cities, where the growth of manufacturing
concerns and factories can draw many thousands of laborers
- features include:
o Increased social freedoms and civil rights.
2
o A switch from agricultural to industrial economies, especially in the manufacturing sector.
o An increasingly open-market economy, allowing free trade with other nations in the world.
o Large national corporations operating in several continents.
o Strong capital investment from foreign countries.
o Lowered poverty rates.
m
Gross World Product • Gross World Product is the aggregate value of the output of goods and services by all world economies over the course of the business cycle
Globalization • Globalization refers the greater integration between individual economies in the hope for the formation of a single economic unit without
barriers to any forms of trade.
o
• The main indicators of Globalisation are: trade, finance, investment, technology and labour.
Trade in Goods and Services
c
• Trade refers to the exchange of goods and services across national boundaries
.
• Trade has increased rapidly in recent years, increasing from US$8.5 trillion in 1990 to US$26.2 trillion in 2006.
• The volume of world trade has increased 40 times since 1950.
• Annual growth in the value of trade has been twice the level of world GDP growth in the past 20 years.
s
• The great volatility of trade compared with gross world product is highlighted by rapid falls in global trade during economic downturns.
Financial Flows
u
• Finance is the most globalized aspect of the global economy as money can flow around the world quickly.
• Financial deregulation has been the cause of growth in global finance – Australia deregulated financial sector is 1983
• Is evident through increased financial transactions i.e. being able to invest in foreign stock markets and currency volatility
c
• Domestic governments have allowed individuals, firms + financial markets to lend, borrow and speculate on money and financial products
such as currency swaps, derivatives and other forms of financial hedging.
o
Investment and Transnational Corporations
• There has been rapid growth of investment between nations over the last two decades.
• This increase in investment can be separated into two categories: foreign Direct Investment (FDI) and Portfolio Investment.
F
• FDI is the purchase or the movement of funds for the purpose of buying companies + firms or a large proportion of these firms (over 10%).
FDI has increased 7 times since 1990.
• Portfolio investment is the purchase of equity on a smaller scale.
C
Technology, Transport and Communication
• Technology has played a significant role in the increase of trade and investment. The United states receives 48% of all royalties and licence
fees from technology transfers.
International Division of Labour and Migration
S
• Despite tight restrictions, international immigration continues to grow, as does tourism.
• High skilled labour travels to developed nations, leading to the ''brain drain'' in some developing nations.
• Unskilled labour in developing counties also travel to developed countries and newly industrialised economies.
H
• Net world migration was estimated at 19 million people in June 2007. Worker Remittances (payments sent by foreign workers to their
families) reached $91b or 2% of developing nations in GDP in 2005.
The International and • international business cycle refers to the changes in world output or GDP over time. Changes in the international business cycle reflect short
Regional Business term fluctuations around the longer term upward trend in world GDP
Cycles • expansion:
- upturn in demand/output
- increase in demand for resources
3
- increase in demand for labour
- increase in investment
• Peak
- Increase in inflation
- Supply constraints; demand exceeds supply
m
• Downswing
- Falling demand/output
- Increase in unemployment
o
• Trough
- Minimum point in demand reached
. c
TRADE, FINANCIAL FLOWS AND INVESTMENT
The Basis of Free Trade • Free trade is a situation which occurs when there are no artificial barriers to trade imposed my governments between nations for the
s
purpose of shielding domestic producers from foreign competitors allowing for the liquid flow of goods and services.
Advantages
• Countries can obtain G+S they cannot produce themselves or in sufficient quantities to satisfy domestic demand.
u
• Allows for specialisation in the production of goods and services in which they are most efficient. -> Comparative advantage
• Efficient allocation of resources since countries will produce goods in which they have a comparative advantage.
c
• Specialisation leads to economies of scale which would lower average costs of production and increase efficiency and productivity
• Encourages innovation and the spread of technology and production processes throughout the world.
• Better living standards as a result of lower prices, increased quantities and increased variety. The opening up of global markets leads to
o
higher rates of economic growth and increase real incomes.
Disadvantages
• A rise in short term unemployment may be experienced as some domestic businesses find it hard to compete with imports. This corrects
F
itself in the long term is the economy redirects resources to areas of comparative advantage
• New industries may find it more difficult to establish themselves if they are not protected from larger foreign competitors.
• Surplus production may be dumped on the domestic Australian market for sold at unrealistically low prices
C
The Role of World Trade Organization
International • Role/Importance
Organizations - The WTO has the task of monitoring developments in world trade and reviewing barriers to world trade (especially non-tariff barriers
S
such as subsidees). The WTO is based in Geneva and is the most important multilateral trade treaty governing the rules of world trade
- The basic guiding principles of the WTO are:
o Non discrimination which means that trade concessions granted to one member nation must be extended to all member nations
Trade liberalization which involves the WTO working towards the elimination of all tariff and non tariff barriers through a process of
H
o
multilateral negotiation.
o Stability of trading relations where the WTO mechanisms are set up to duscuss and solve trade disputes between countries.
o Transparency of trade agreements – trade preferences between countries are open to scrutiny and discussion in the WTO forum
• Influence/Impact
- In 1947, there have been 9 rounds of negotiations, mainly resulting in cuts to tariffs.
- The WTO has proved effective in resulting disputes between smaller countries, although it has not yet been effective in resolving
disputes between the EU and US
4
International Monetary Fund
• Role/Importance
- The IMF’s role is to maintain international financial stability, particularly in relation to foreign exchange markets through minimizing the
effect of speculator activities.
m
- The IMF’s policies are to support the free trade of goods and services and the free movemet of finance and capital throughout world
markets. The IMF demands that countries change their economic policies and open up their markets before they are entitled to receive
assistance. These policies that the IMF requires countries to adopt are generally known as “structural adjustment” policies. The impact of
o
the IMF’s policy approach is increased by the fact that many international banks and other private tenders require that countries adopt
IMF supported policies before they are willing to lend to these countries.
c
World Bank
• Role/Importance
.
- The World Bank’s role is primarily concerned with helping poorer countries with their economic development. It focuses on a number of
areas of developmental assistance with respond to developing and transition economies:
s
o Reconstruction assistance for countries experiencing natural disasters
o Humanitarian and relief aid to countries experiencing post conflict rehabilitation
Lending funds for social infrastructure projects in the poorest developing countries
u
o
o The alleviation of poverty through aid and development projects in the developing world.
o Debt relief for the poorest countries in the world, and assistance in developing institutions for good governance in these countries.
c
- Millennium Development Goals which have been to reduce the proportion of people living on less than $1 per day to half the 1990 level
by 2015 – from 29% to 14.5% of all people in low and middle income economies. By 2015 it also hopes to achieve universal primary
o
education, reduce child mortality, improve maternal health and the treatment of serious health epidemics like HIV/AIDS aid malaria and
establish measures to preserve the natural environment and improve the status of women.
- Heavily Indebted Poor Countries Initiative (HIPCI), aims to reduce debt by 2/3 in 46 of the world’s poorest countries. By 2005, 27
F
countries were receiving debt relief which is expected to save them more than $US $4 billion over time.
United Nations
Organization for Economic Corporation and Development
C
Influence of G20
Government Economic • Top 20 industrialized nations
Forums G7/8
S
• Top 8 largest economies
Trading Blocs, The role, importance and influence in the global economy of blocs and agreements
Monetary Unions and • Types of trade agreements which exist within the global economy
Free Trade Agreements - Preferential Free Trade Agreements (regional or bilateral).
H
- A bilateral trade agreement is an arrangement between two countries whereby one country exports a given quantity or value of goods
to the other country in exchange for an agreed quantity or value of imports from that other country
- A multilateral (open to all regions) trade agreement is an arrangement between a number of commodities between them. Multilateral
trade agreements are considered to be most effective in achieving trade liberalization on a global basis because the are non-exclusive
and lead to trade creation rather than trade diversion.
- A trading bloc occurs when a number of countries join together in a formal preferential trading arrangement to the exclusion of other
counties – such as the EU and NAFTA.
5
European Union
• Role/Importance
- The formation of the EU in the late 50’s helped to dismantle trade barriers within Europe. A single market for goods and services was
established in 1992 and since that time trade within Europe has grown strongly
- The European Community (EC) countries abolished tariffs between members and erected a common tariff wall called the common
m
external Tariff (CET) against non member counties.
- The EC’s Common Agricultural Policy (CAP) involved the subsidization of EC farm output which led to surplus production and lower world
prices for commodities such as wheat, sugar and dairy products. This policy led to a loss of market share and export income for Aus
o
agricultural producers.
- The EU was also established to provide a common market to allow the mobilization of labor and technology.
c
- The increase in protection has had major implications for non-European countries resulting in retaliation in the form of free-trade
.
agreements such as NAFTA.
- Economic and political integration has led to common policies for member countries who take joint decisions on many economic and
s
political matters.
- The creation of a single European market has led to the free movement of peoples, goods, services and capital between member
countries.
u
- Led to a loss of export income and forced other nations to enter new markets with less demand.
- Through the adoption of a singular currency (EURO), there are reduced transaction costs and other advantages of the monetary union on
c
the EU include greater economic performance with coordinated monetary, exchange rates and other polices.
- The EU accounts for around 20% of world trade and the USA is the EU’s main export market and China being the second biggest supplier
of EU imports
o
North American Free Trade Agreement
• Role/Importance
- NAFTA was created to improve the USA’s competitiveness with the EU and Japan, and to integrate the North American market by
F
elimination tariff and other barriers to trade and investment in creating a market of some 400 million consumers – equivalent to the size
of the EU.
- For the USA and Canada, it provided an opportunity to increase their international competitiveness by exploiting lower production costs
C
in Mexico.
- For Mexico, the advantage of free trade area was greater access for its exports to the large and high income US and Canadian markets.
S
- Opponents of the NAFTA argued that the agreement would divert, rather than create, trade since there would be an incentive for
industries and firms to relocate to Mexico where labor was cheaper and employment and environmental regulations were less stringent.
Therefore it assisted firms in lowering production costs and enabling consumers a higher standard of living.
Closer Economic Relations Trade Agreements
H
• Role/Importance
- Is a trade agreement between Australia and New Zealand
- Strengthen the broader economic relationship between Aus and NZ
- Develop closer economic relations through mutually beneficial expansion of free trade.
- Eliminate Barriers to trade between Australia and NZ in a gradual and progressive manner and with minimal level of disruption
- Develop trade between AUS and NZ under conditions of fair competition.
6
- A review of Tariff regimes in both countries has resulted in a reduction of tariff and non tariff barriers leading to lower consumer prices
and lower levels of inflation
- Greater competition, specialization and lower consumer prices have resulted from trade creation in the trans-Tasman free trade area
under CERTA.
m
- The agreement has also led to the free flow of labor and capital resources between the two countries which has improved the efficiency
of resource allocation in two economies which are now more flexible and open to trade
Asia-Pacific Economic Cooperation
o
• Role/Importance
- As a discussion forum, APEC has pursued common trade policy issues and developed mechanisms for closer trade and investment links in
c
the Asia Pacific region.
- APEC is a powerful organization because its members account for around 50% of world GDP and 60% of world trade.
.
- APEC’s importance to regional trade and economic development is its commitment to four major areas of reform:
o Trade liberalization within the regional supplementary to WTO initiatives.
s
o Trade facilitation in the region through the development of an Asia Pacific investment code; dispute settlement procedures;
macroeconomic policy coordination; mutual recognition of testing and certification arrangements; and close coordination of
competition policy.
u
o Technical cooperation to facilitate the development of physical and human capital resources needed for future economic
development in the region.
c
o Institutionalization of APEC’s role through regular leaders’ meetings and an enhanced role for economic ministers in guiding
the APEC process.
o
- Facilitates the establishment of FTA’s through its forums allowing nations to collaborate together to reduce levels of protection.
- Bogor Declaration seeks to dismantle all tariffs by 2020 (2010 for AIE’s and 2015 for NIE’s)
Association of South East Asian Nations
F
• Role/Importance
- ASEAN promotes economic growth and development, social progress and cultural development amongst member nations.
- ASEAN initiatives include fostering commerce and industry links, consultation on banking and finance and dialogues with other regional
C
groupings such as NAFTA and EU
- By forming the ASEAN FTA (AFTA) this has increased inter regional trade ties, resulting in greater global competitiveness. This would
S
allow for greater regional specialization and economies of scale and attract more foreign investment into the region.
- Through various reforms to labor policies, ASEAN has been able to reduce the level of exploitation of workers in the region, thereby
providing a higher standard of living.
Australia and United State Free Trade Agreement
H
Advantages and Advantages
Disadvantages of Disadvantages
Multilateral and
Bilateral Trade
Agreements
7
PROTECTION
Reasons for Protection Infant Industry Argument
• new industries face difficulties and risks in their early years. They have not had time to establish economies of scale. Therefore they only
need temporary protection from overseas competition. Governments should only provide assistance to those industries have a good chance
m
of receiving a comparative advantage
Prevention of Dumping
• (occurs when foreign firms attempt to sell their goods to another counties market at an unrealistically low price.) Thus foreign firms can then
o
establish a market position in the country. Local firms in the meantime can be forced out of the market. Therefore it is in the economies best
interest to prevent this.
c
Defence
• this is a non economic reason related to the national interest for wanting to retain certain industries. I.e.- to be confident in times of conflict.
.
Counties want to be self sufficient with food supplies even at the expense of specialization and higher standards of living.
Protection of Domestic Employment
s
• creates increased demand for local goods. But it will distort the allocation of resources in the economy. In the long term, it will lead to higher
unemployment + lower growth rates.
Methods of Protection Subsidies
u
and the Effects of • are cash payments from the government to domestic businesses to encourage and assist production of a good or service and to influence the
Protectionist Policies allocation of resources in the economy.
c
on the Domestic and Voluntary Export Restraints
Global Economy • Involve agreements between the national governments and foreign suppliers which effectively restrict the flow of certain imported products
into domestic markets. Governments may enter into such agreements to prevent the local industries from being swamped by foreign
o
competition and to encourage the orderly marketing of products on their domestic markets. Foreign producers enter into such agreements
as a result of threateningly high tariffs or very low quotas which the government may impose. VER's have been primarily used by the USA to
limit the export of Japanese motor vehicles and electronic goods into the US market to protect US manufacturing firms and jobs in this sector
F
Export Incentives and Tax Concessions
• Tax incentives such as an export subsidy or the EXPORT MARKET DEVELOPMENT GRANT (EMDG) Scheme used in Australia, attempt to reduce
costs of production for exporters by allowing tax deductibility of expenditure incurred in developing export markets.
C
• A tax concession is sometimes granted to domestic producers to encourage increased competitiveness with foreign firms. Tax concessions
take two general forms:
- Investment allowances: provide extra tax deductions for firms which purchase new capital equipment.
S
- Accelerated depreciation rates allow firms to write off their capital equipment over a shorter time period
Tariffs
• Government imposed tax on imported goods
• Used to make prices of imported goods higher and make the price of domestic goods more competitive. Encourages consumers to turn to
H
domestically produced substitutes in times of high demand.
Quotas
• a quantitative restriction on certain categories of imported goods. The larger the import quota, the greater the quantity of goods that may be
imported and the less the protection effect. Importers usually apply for an import license to receive a quota. They may lobby the government
for the quota to be increased if local demand is high. Local producers gain from import quotas in a number of ways:
- Assured market share
8
- Reduced foreign supply allows for an increase in price of the imported good  producers increase the price to remain competitive and
gain further profit.
- A quota also encourages consumers to turn to domestically produced substitutes in times of high demand.
The main difference between a quota and tariff is that a quota doesn’t generate revenue for the government and hence a quota does not have a
redistribution of income effect.
m
Local Content Rules
• Refers to government procurement policies and industry plans, where a certain percentage of inputs or outputs must be manufactured
within Australia. Examples include local content rules under the former Button car Plan and local content specifications for government
o
contracts (ABC NETWOK). Local content rules can stimulate domestic output and employment in those industries which produce component
parts (intermediate goods) as well as in those which assemble these components into goods which are ready for sale (final goods) in order to
c
comply with these rules, foreign manufacturers often set up assembly plants in the domestic economy
.
GLOBALISATION AND ECONOMIC DEVELOPMENT
s
Differences between Economic Growth
economic growth and • Refers to increases in real GDP over time. Real GDP is a quantitative concept since it involves increased productive capacity in an economy
economic development which leads to rising national output, incomes and living standards over time. Economic growth can come about from two main sources
u
- The increased use of factors of production due to better technology, management techniques or use of more resources
- The increased productivity of existing resource use though rising labor and capital productivity. Capital widening occurs when the capital
c
stock keeps pace with growth in the labor force. Capital deepening occurs when the capital stock outstrips the growth in the labor force
- Economic growth leads to an outward shift in an economies PPF (Production Possibility Frontier), enabling it to achieve greater national
output, material welfare and rising living standards over time
o
• Economic growth can only occurs if more resources are used, or existing resources are used more productively, causing a shift in the frontier
increasing the amount of consumer and capital goods available (increase in GDP)
Economic Development
F
• Refers to the process of structural change needed in an economy for economic growth to occur. Economic development is a qualitative
process involving the development of an economy’s economic and social infrastructure
- EG: The construction of roads, railways, schools, hospitals, universities, dams, bridges, factors, power stations, ports and airport facilities
C
- The Process of Economic Development
- Economic development is a sustained increase in the economic standard of living of a countries population – normally accomplished by
increasing its stocks of physical and human capital and improving technology
S
Distribution of income • Despite the various benefit of globalization, the rewards are not shared equally.
and wealth • For example, the OECD countries with 19% of the global population have 71% of global trade in goods and services, 58% of FDI and 91% of all
internet users. In the countries of Eastern Europe and CIS, large rises in the Gini Coefficient suggest increased inequality.
• Inequality between the worlds countries has also increased with the income gap between the fifth of the worlds people living in the richest
H
countries and the fifth living in the poorest being 74 to 1 in 1997, up from 60 to 1 in 1990 and 30 to 1 in 1960.
• Further Effects
- Increase in absolute poverty amongst developing countries.
- Loss of individual economic autonomy due to World Bank intervention
Income and quality of • Income Indicators
life indicators - The GNI (Gross National Income) is the total market value of all goods and services produced by domestically owned factors of
production. This does not include the effects of inflation and does not show how income is spread or used.
9
- There are some limitations
o The Exchange Rate (ER) can distort GNI comparisons, thus it is made more accurate by using PPP which adjusts measurements to
reflect the purchasing power of the economy.
o It’s made more accurate by using a GNI per capita figure
- The GNI shows the inequality present between the standards of living between nations. Most of the world’s population is from low and
m
middle income nations, however, only account for 5% of the GNI of high income nations.
- In terms of GNI, the inequality gap is widening as growth in GNI per capita in high income nations is 3 times that of low income nations.
• Quality of Life Indicators
o
- The UN Development Programs (UN DP) uses the HUMAN DEVELOPMENT INDEX (HDI) as the main quality of life indicator. This indicator
takes into account.
c
o Life Expectancy at Birth: This indicates health standards in a country and economic well being.
Level of Educational Attainment: Measures adult literacy and the ratio of people in tertiary education. Importantly, this indicates
.
o
the capability of a nation’s workforce.
o GDP Per Capita: This is used to determine the accessibility people have to goods and services.
s
Developing economies, • Developing economies
emerging economies, - such as India, Brazil, Indonesia and Nigeria deal with the economic problem mainly through a system of markets, although central govt.
advanced economies planning is used in communist nations such as China, North Korea and Cuba. The system of markets in LDC’s often lacks allocative
u
efficiency and the government’s role is vital in overcoming major obstacles to economic growth and development, such as lack of
infrastructure, low technical progress and low productivity
c
• Newly Industrialized Countries (NICS)
- such as Singapore, Hong Kong, Taiwan and South Korea are now classified as developed economies because of their high real per capita
incomes. The NIC model of development is based on the market systems of allocation – but governments have intervened in these
o
economies to encourage the development of high technology export industries, often financed by foreign direct investment (FDI) in the
form of transnational corporations (TNC). NIC’s have also invested heavily in the education and training of their workforces as well as
encouraging high rates of domestic savings and investment.
F
- The disparity in world income levels is further complicated by former communist countries in TRANSITION to market economies and is
now considered LDC’s: EG: Russia, Albania, Kazakhstan and Ukraine. Under socialist planning, resources were state owned and
production, distribution and exchange determined by planning authorities. They are now characterized by the private ownership of
C
resources and market determined production and prices and have opened up to overseas trade.
• Developed countries
- of the world have market economies characterized by the private ownership of resources, production decisions made on the basis of
S
profit motive and the pattern of consumer demand and a price mechanism as the main as the main instrument of allocation and the
distribution of factor incomes. The government’s role is largely confined to the provision of welfare, public goods, economic and social
infrastructure and the conduct of economic policy
Reasons for differences • There is a large contrast in the levels of economic development achieved by developed countries (DC’s) and less developed countries (LDC’s).
H
between nations This is known as the “development gap”
• The development gap leads to significant contrasts in the living standards between DC’s and LDC’s. The income gap between DC’s and LDC’s
is referred to as the “North-South Divide”. Some of the main causes of the development gap between DC’s and LDC’s are:
- Low per capita incomes in LDC’s reduce standards of living relative to the DC’s and increase the extent of poverty. Low per capita
incomes also reduce the ability to save and invest, and reduces the supply of capital for capital widening or deepening. Therefore LDC’s
experience difficulties in achieving high levels of productivity and economic growth relative to DC’s and become trapped in a vicious
cycle of poverty
10
- Low levels of saving in many LDC’s results from low per capita incomes and widespread rural poverty and indebtness. Poorly developed
capital markets in LDC’s discourage savings as does the conspicuous consumption of western luxury consumer goods. Governments in
LDC’s can also drain savings by running budget deficits and funding them through external debt
- A lack of infrastructure and capital formation retards economic growth and development in many LDC’s by hindering the formation of
markets and the efficient utilization of human and capital resources. Unemployment and under employment are also major problems in
m
LDC’s
- Entrepreneurs have little incentive to bear risks and operate businesses in many LDC’s because low incomes reduce purchasing power,
demand, and the development of markets
o
- Low rates of economic growth are achieved in many LDC’s because of low levels of technological progress and productivity
- High population growth rates in many LDC’s leads to high dependency ratio’s and increases the demand for education, health, housing,
c
employment and other transport serves. If population growth outstrips economic growth in LDC’s, living standards can fall and increase
poverty
.
- Demand Pull Inflation arises in many LDC’s when the volume of domestic production does not satisfy the economy’s level of aggregate
demand. Economic growth and progress in human development will fall if inflation reduced real incomes and misallocates resources
s
- The external sectors of LDC’s lack foreign exchange and are bounded with excessive levels of external debt and high debt servicing
costs. Persistent CAD’s are often recorded because of a reliance on agricultural exports and dependence on energy and capital imports
- Economic Dualism is a common feature of LDC’s which have a colonial legacy: an urban elite (who engage in conspicuous consumption)
u
in a formal commercial economy, alongside a less formal or traditional rural economy, dominated by subsistence agriculture and the use
of barter
c
- A major problem in LDC’s is the “demonstration effect” of rural peasant and landless people migrating to cities in search employment,
creating extra demand for public resources and services
- Institutional problems also afflict many LDC’s such as corrupt and inefficient governments which undermine domestic and international
o
confidence that are needed to support and finance the process of economic development. Traditional cultures and institutions in LDC’s
may also impinge the adoption of new technologies needed to sustain economic growth and development
Effects of globalisation • international convergence
F
- There has been a tendency for the various types of world economic systems to converge under globalization. The vast majority of
countries have adopted the market economic systems with limited government intervention of are in the process of transition. This
trend owes to the discredited ideology of socialism. Other forces promoting the convergence include the spread of similar technological
C
and economies of scale in production; the growth of international trade and investment; the customization of products; improvements
in technology and communications; increased levels of migration and travel; and political competition between governments to
implement policies to embrace the benefits of globalization.
S
- International convergence is also supposed to reduce inequality between nations – as LDC’s are connected with DC’s
• economic growth, development and the quality of life
- In the 1990’s, many policies were aimed at boosting economic growth and development. Liberalizing economic reform was particularly
successful in countries such as Korea, China and India. It has increased the standard if living in Korea where life expectancy rose from 54
H
years to 77 years. In addition to this, the national literacy rate has climbed to 98% - one of the highest in the world. China, due to fast
industrialization and the loosening of policy constraints has seen GDP figures consistently above 10%. However, other nations who have
not as successfully managed integration into the global economy have grown at a slower rate (Pakistan, Uganda). Whilst the global
economy has grown as a whole – the progression of industrializing, transitional and advanced economies has been far greater than that
of developing economies. This has increased global inequality.
11
• distribution of income and wealth
- Despite the various benefit of globalization, the rewards are not shared equally. For example, the OECD countries with 19% of the global
population have 71% of global trade in goods and services, 58% of FDI and 91% of all internet users. In the countries of Eastern Europe
and CIS, large rises in the Gini Coefficient suggest increased inequality. Inequality between the worlds countries has also increased with
the income gap between the fifth of the worlds people living in the richest countries and the fifth living in the poorest being 74 to 1 in
m
1997, up from 60 to 1 in 1990 and 30 to 1 in 1960.
- Further Effects
o Increase in absolute poverty amongst developing countries.
o
o Loss of individual economic autonomy due to World Bank intervention.
• financial markets
c
- Globalization has increased the importance of financial markets. The Asian Financial Crisis in 1997 undermined the growing global
interdependence between major financial markets due to capital flight. The instability of financial markets has caused various issues:
.
o Use of regulatory and prudential controls on financial markets
o Capital controls to minimize exposure of developing nations.
s
o Closer policy coordination between central banks to reduce security of financial crisis.
Trade, investment and • Trade in goods and services grew twice as fast as global GDP in the 1990’s and the share attributable to LDC’s rse from 23% to 29%.
transnational
u
Compositional shifts in world trade have occurred with more trade ETM (high technology) goods , services and intellectual property.
corporations • For example, the increase in trade of component parts has created a web of global production facilities which connect subsidiaries within
TNC’s, leading to intra-industry trade.
c
• Underpinning much of the growth in world trade has been the liberalizing of trade regimes through bilateral, multilateral, FTA’s and
investment in international organizations (WTO).
o
• Much of the investment was directed towards Asian emerging economies in need of large capital to assist with economic growth and
development. Further effects:
- Benefits/costs of increased FDI
F
- Adv/Disadvantages of increased Free Trade
Environmental • Economic development has increased as a result of industrialization, it has posed various negative externalities on the environment.
sustainability • Economic development is characterized by an increasing population and the exploitation of natural resources which will cause various short,
medium and long term effects such as ozone depletion, deforestation, increasing pollution levels, loss of biodiversity, etc.
C
• Increased economic development means that TNC’s are developing strategies to minimize the impact of development and less use of natural
resources e.g. – SHELL researching ethanol as an alternative source of fuel for motor vehicles.
• TNC’s are in the process of developing ESD initiatives – such measures are disproportionate to the irreversible effects of globalization on the
S
environment. In the long term the current, rapid economic development will lead to the depletion of non renewable resources – meaning
that economies will be without vital resources which provide a large part of their income: e.g.: oil.
• To prevent environmental degradation, many nations across the world are imposing Emissions Trading Schemes (ETS) where highly polluting
H
industries negotiate to purchase the emissions permits of less polluting industries. The Rudd Government proposes to subsidize losses
incurred though this service in its formative years.
The international • Recession/trough: the lowest point of economic activity, defined as two consecutive quarters of negative growth.
business cycle. • Downswing: the time during which economic growth slows
• Boom: where the economy has growth to its maximum capacity – employment, output and (real) income are at their maximum. Inflation will
also rise, high incomes also raise import prices, causing the CAD to deteriorate
• Upswing: the period after a recession where economic growth recovers
12
• The closer linkages between economies hold benefits and risks. The benefits are
- increased specialization due to higher FTA’s
- Flow on effect of high world economic growth will be greater
- Greater mobility of labor, technology, trade, finance and investment
m
CASE STUDY: CHINA
Model Essay Globalization refers to the increasing economic integration between countries leading to the emergence of a global market place. The globalization
o
phenomenon has seen the liberalization of the international trading environment through the gradual deterioration of protectionist policies to assist
domestic industries. In recent decades, China’s role in the global economy has become increasingly important, with China’s Gross Domestic Product
(GDP) alone contributing to 22% of Gross World Product in 2008. With China’s economy morphing from a centrally planned system that was largely
c
closed to international trade to a more market-orientated economy in the past 30 years the Chinese economy has been able to overtake Japan as the
.
second largest economy with a second quarter nominal GDP of $1.337 trillion. In the past decade China has overtaken the US as the largest
automobile market and Germany as the largest net exporter. China also receives the vast majority of the world’s cumulative FDI inflows. A thorough
s
analysis of China’s various microeconomic and macroeconomic policies, as well as its 5 years plans and welfare policies allows us to study how
globalization has impacted on economic growth and development. The government however still face numerous economic development challenges
including strengthening its social safety net, sustaining adequate job growth for its ever increasing population, reducing corruption to bridge
u
inequality gaps and containing environmental damage and social strife related to the economy’s rapid transformation.
c
In the late 1970’s, the Chinese central government moved to implement various radical reforms to restructure the Chinese economy from centrally
planned to one that was more market orientated. This was done in a gradualist or piecemeal fashion. Consequently, there has been sizable
improvements in China’s economic development, This can be quantified by China’s increasing Human Development Index (HDI) levels from 0.368 in
o
1980 to almost a double of 0.663 in 2010. The central government has undertake reforms to phase out collectivized agriculture, to move towards
gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the
development of stock markets, the rapid growth of the non-state sector and the opening to foreign trade and investment. China’s “Open Door” policy
F
through special economic zones (SEZ’s) has been a force driving investment and trade flows. Since the implementation of SEZ’s in southern and
eastern coastal provinces in 1980, China has attracted foreign investment and enterprises through a range of incentives such as low tax rates, cheap
labor and power, exemption from import duties and less stringent government regulation. By embracing globalization, this policy has been effective in
C
promoting economic development through export growth and foreign direct investment (FDI) flows by reducing unemployment from 4.3% in January
2004 to 4% in January 2009. In the short term, this has lead to rising incomes and domestic consumption, whilst in the long term, this has contributed
to high HDI levels – and therefore living standards- in these regions, and the fact that GDP growth in China has averaged 10% over the past decade.
However, this policy has also come at the expense of a degraded environment as these regions have high population densities and a higher GNI
S
coefficient as rural members of China are more disadvantaged than those living in the coastal, urban regions. Thus welfare and environmental policies
play a significant role in making China’s economic growth sustainable, and making sure that living standards improve in all areas of China.
H
Recently, China has intensified its efforts to minimize environment damage as major concerns in China include water contamination, depletion of
grasslands, forests and topsoil, and water shortages. China continues to lose arable land because of t erosion and economic development. China is the
nd
world’s 2 largest carbon gas emitter per capita, and has thus implemented goals to reduce their energy consumption and shift away from oil and
th
coal fired power generation. For example, a quantitative target in the 11 5 year plan from 2006-2010 is to reduce the energy consumption per unit
of GDP by 20%, whilst legislation was passed in 2008 preventing water pollution and promoting recycling. The Chinese government have have also
announced that by 2010 energy intensity would by decreased by 20% from 2005 levels and by 2020 there will be 40% reduction in carbon intensity
from 2005 levels. Addressing environmental concerns is vital in promoting economic development because it will improve health standards through
13
reduced rates of pollution and carbon emissions. This will lead to an increase in life expectancy in the long term and presumably strengthen and
diversify the Chinese labor force. As such, the argument can be made that increasing rates of economic development are directly conducive of higher
rates of economic growth. China needs to balance its economic growth with economic development sustainably to ensure the nations progression
from being a ’developing economy’ to ‘industrialized economy’
m
Moreover, China’s recent focus on narrowing inequalities is also significant in its economic development. Measured on a purchasing power parity
(PPP) basis that adjusts for price differences, China in 2009 stood as the second-largest economy in the world after the US, although in per capita
terms the country is still lower middle-income. Managing the various inequalities within the Chinese economy – particularly income distribution –
o
presents a sizable challenge to the Chinese government, which recognises that the development of a fully functioning welfare system is vital to the
welfare of Chinese citizens. China’s social “one child” policy exemplifies the focus of the Chinese economy on managing population growth so
c
sustainable development can be achieved. Also, in an attempt to lesson unemployment and bridge the income distribution gap, a social security
system has been created which includes benefits for the elderly, orphans, the disabled, social relief and housing services. However, as it is estimated
.
that China’s current social welfare system can only meet 5% of the demand, the central government implemented a major welfare policy in 2008
which will create a safety net including minimum living allowances and pensions for all urban and rural residents. This is to ensure the sustainability
s
and stability of the social welfare system in the long run. This is very important as it will help reallocate income to the more disadvantaged, therefore
lessening income inequality whilst also encouraging the pursuit of investment opportunities and risk taking in an increasingly market orientated
economy because of the assurance of a safety net. Subsequently, this will help generate economic growth and therefore assist the process of
u
economic development. However, the lower rates of disposable income in China may act as a barrier to most people when pursuing investment
opportunities. Hence, China needs to become an increasingly services based economy and needs to seek value adding industries to significantly
c
increase peoples incomes. This has been a major microeconomic objective of Chinese economic policy.
Another key policy of the Chinese government has been to set a specific program for the exchange rate of the Renminbi. This system has yielded a
o
result of the Chinese government adopting the policy of a pegged exchange rate in which 8.28 Yuan equals 1 US dollar. Through doing this, the Big
Mac index estimates that the currency has been undervalued by 48%. This has resulted in making the Chinese market much more competitive in the
international arena in order to fuel its export-driven market. However, in 2007 this peg system was removed for a more market orientated floating
F
exchange rate with the currency appreciating since then by 20% in comparison to the American dollar. Chinas move to embrace an exchange rate
mechanism that references a basket of currencies (Trade Weighted Index) is indicative of how the globalisation process has forced the Chinese
economy to maintain pace with the economic demands of the global marketplace. Regardless, the impacts Global Financial Crisis, saw the value of the
C
Chinese Yuan decrease to ______. This ensured that China maintained a healthy terms of trade, as reflected by China’s continued reliance on export
revenue to fuel economic growth. This reliance however, makes the Chinese economy particularly susceptible to severe fluctuations in the
international business cycle. As such, the challenge for the Chinese central government is to manage its floating exchange rate in such a way that
S
domestic consumption is encouraged in the medium to long run.
China’s microeconomic policies are often implemented with the aim of making the Chinese economy more responsive, productive and competitive in
a global economic environment. However, as China’s economy is so reliant on generating economic growth through exports, this has rendered China
H
highly vulnerable to external shocks. Hence, China needs more radical economic reforms that focus on transforming its export driven economy to one
led by domestic demand to truly maximize economic growth, and hence economic development. Nonetheless, China’s major financial system reform
has helped encourage investment and meet consumer credit needs, therefore raising living standards of individuals in the short-term, whilst
potentially increasing income levels in the long term. Also, China’s closure of many state owned enterprises and encouragement of small businesses
has helped make the economy become more competitive in the long term, despite having the immediate effect of increasing unemployment. This it is
clear that China’s microeconomic policies have a major focus on maximizing economic growth through reforming the economy.
14
Contrastingly, china’s macroeconomic policies have a counter cyclical function. Recently, because of the Global Financial Crisis (GFC), China has cut
interest rates 5 times and has relaxed reserve requirements for major financial institutions 3 times, hence freeing up more credit. This has helped
provide a sound financial environment for investors and consumers, helping maintain economic growth by reducing interest repayments. This,
coupled with the US$585 billion fiscal stimulus policy in November 2008 which has helped stimulate domestic consumption, develop infrastructure in
farming villages and build housing for middle and lower income earners has significantly helped China’s recovery during the GFC. In fact, the GFC has
m
been a great opportunity for China to restructure to a more market orientated economy. Not only that, but since the global economic downturn in
2009 for the first time in decades demands for Chinese exports fell. For this reason, China needs to focus on ways of increasing domestic consumption
rates to improve its balance of payments performance, and further increase economic growth rates in order to promote economic development even
o
further.
c
Conclusively, China has made sizable progress towards raising living standards and promoting economic development due to its consistently high
rates of economic growth, and by embracing globalization through increased export growth and FDI flows. However, the future challenge for China is
.
to change its export driven model to an economy led by domestic consumption, through more radical economic reforms. In particular, it is essential
that the Chinese central government encourages the creation of more service based, value adding industries.
s
Statistics GDP (purchasing power parity):
$8.767 trillion (2009 est.)
GDP (official exchange rate):
u
GDP - real growth rate:
c
8.4% (2009 est.)
GDP - real growth rate:
8.4% (2009 est.)
o
GDP - per capita (PPP):
$6,500 (2009 est.)
GDP - composition by sector:
F
agriculture: 10.9%
industry: 48.6%
services: 40.5% (2009 est.)
C
Labor force:
812.7 million (2009 est.)
Labor force - by occupation:
S
agriculture: 39.5%
industry: 27.2%
services: 33.2% (2006 est.)
Unemployment rate:
H
4.3% (September 2009 est.)
Population below poverty line:
2.8% (2006 est.)
Household income or consumption by percentage share:
lowest 10%: 3.5%
highest 10%: 15%
Investment (gross fixed):
15
42.6% of GDP (2009 est.)
Budget:
revenues: $972.3 billion
expenditures: $1.137 trillion (2009 est.)
Public debt:
m
18.2% of GDP (2009 est.)
15.6% of GDP (2008 est.)
Inflation rate (consumer prices):
o
-0.8% (2009 est.)
5.9% (2008 est.)
c
Commercial bank prime lending rate:
5.31% (31 December 2008)
.
Agriculture - products:
rice, wheat, potatoes, corn, peanuts, tea, millet, barley, apples, cotton, oilseed; pork; fish
s
Industries:
mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement;
chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including
u
automobiles, rail cars and locomotives, ships, and aircraft; telecommunications equipment, commercial space launch vehicles, satellites
Industrial production growth rate:
c
8.1% (2009 est.)
Current account balance:
$296.2 billion (2009 est.)
o
$426.1 billion (2008 est.)
Exports:
F
Exports - commodities:
electrical and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment
C
Exports - partners:
US 17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.2%, Germany 4.1% (2008)
Imports:
S
$921.5 billion (2009 est.)
Imports - commodities:
electrical and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics, organic chemicals
H
Imports - partners:
Japan 13.3%, South Korea 9.9%, US 7.2%, Germany 4.9% (2008)
Debt - external:
$347.1 billion (31 December 2009 est.)
$400.6 billion (31 December 2008 est.)
16
Articles
China Overtakes Japan as World's Second-Biggest Economy
Mon Aug 16 11:40:01 GMT 2010
China is on course to overtake the U.S. as the world’s largest economy around 2020. Japan’s nominal gross domestic product for the second quarter
totaled $1.288 trillion, less than China’s $1.337 trillion.
m
China overtook the U.S. last year as the biggest automotive market and Germany as the largest exporter. Photographer: Nelson Ching/Bloomberg
o
China surpassed Japan as the world’s second-largest economy last quarter, capping the nation’s three- decade rise from Communist isolation to
emerging superpower.
c
Japan’s nominal gross domestic product for the second quarter totaled $1.288 trillion, less than China’s $1.337 trillion, the Japanese Cabinet Office
.
said today. Japan remained bigger in the first half of 2010, the government agency said. Japan’s annual GDP is $5.07 trillion, while China’s is more
than $4.9 trillion.
s
China led the world out of last year’s global recession with an economy that’s more than 90-times bigger than when leader Deng Xiaoping ditched
hard-line Communist policies in favor of free-market reforms in 1978. The country of 1.3 billion people will overtake the U.S., where annual GDP is
u
about $14 trillion, as the world’s largest economy by 2027, according to Goldman Sachs Group Inc. chief economist Jim O’Neill.
China’s surpassing of Japan “is a marker of its increasingly dominant role in the global economy,” said Eswar Prasad, a senior fellow at the Brookings
c
Institution and former head of the China division at the International Monetary Fund. “The resilience of China’s growth during the crisis enabled a
number of other countries, particularly commodity-exporting economies, to ride on its coattails.”
o
The benchmark Shanghai stock index rose 2.1 percent at the 3 p.m. close today, climbing the most this month. China overtook the U.S. last year as the
biggest automobile market and Germany as the largest exporter. The nation is the world’s No. 1 buyer of iron ore and copper and the second- biggest
importer of crude oil, and has underpinned demand for exports by its Asian neighbors.
F
While China’s output was also larger in the fourth quarter of 2009, Japan’s GDP rebounded to exceed China’s in the first quarter, according to data
compiled by Bloomberg News. According to IMF data using purchasing-power-parity calculations to adjust for exchange-rate differences, China
overtook Japan in 2001.
C
Quarterly comparisons between China and Japan are “a little tricky because they do not take account of different seasonal patterns between the two
countries,” said David Cohen, head of Asian forecasting at Action Economics in Singapore.
S
China’s economy is cooling as the government trims credit growth from last year’s record $1.4 trillion and discourages multiple-home purchases to
cool surging property prices. July industrial output rose the least in 11 months, retail sales growth eased and new loans climbed less than estimated.
H
China Petroleum & Chemical Corp. said last month that its crude-oil processing increased at a slower pace in the second quarter as fuel demand
faltered.
Still, China is on course to overtake the U.S. as the world’s largest economy around 2020, PricewaterhouseCoopers said in a January report.
With China’s growth surging 10.3 percent in the second quarter from a year earlier and Japan expanding 2 percent, the “gap is going to widen” in
future, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “It is not likely that Japan will retake the No. 2 spot given the
likely growth rates.” Four of the world’s top 10 companies by market capitalization are from China, including PetroChina Co., Industrial & Commercial
Bank of China Ltd., China Mobile Ltd. and China Construction Bank Corp.
17
Since introducing free-market policies, China has lifted 300 million citizens out of poverty, according to the United Nations. The country remains a
developing nation, with its per capita gross national income ranked 127th in the world at $2,940 at the end of 2008, behind Angola and Azerbaijan,
according to the World Bank.
m
China’s future influence on the global economy will increase, said Shen at Mizuho. The country’s “double-digit” expansion will contribute a third of
global growth this year, the Organization for Economic Cooperation and Development said in March. “Japan had a huge impact on the global
commodities market and foreign direct investment flows in the 1980s” as China is doing now, Shen said. “The major difference is that China’s
o
population is 10-times bigger than Japan’s, its economy is still growing at above 9 percent per year, and Chinese investors are just beginning to invest
abroad. You can imagine that China’s impact will be so much bigger.”
c
AUSTRALIA’S PLACE IN THE GLOBAL ECONOMY
AUSTRALIA’S TRADE AND FINANCIAL FLOWS

Value, composition and •
s .
Globalisation has increased at a more rapid rate than the growth of GDP – in response to government policy attempts to integrate Australia
u
direction of Australia’s into the global economy
trade and financial • Being linked to other countries through trade, all Australian sectors are affected by changes in the overseas sector
flows Trends in Australia’s trade pattern
c
• Trade refers to the exchange of goods and services across national boundaries
• Australia’s trade flows increased from $61 billion (15.6% GDP) to $310 billion (39% GDP)
o
• Exports
- Exports are the sale of goods and services in the global economy for profit motive
- From 1992 to 2006, value of exports rose from $60000 million to $154000 million (153% increase in nominal value)
F
- From 2003 to 2004, export growth fell due to drought and lower global growth
- In 2005 to 2006 was the Resources Boom in which China bought large quantities of our minerals
- Australia prior to the 1960’s relied on agricultural commodities for their export income
- Export of primary goods have declined from 67% of all exports to less than %50
C
- Export of minerals and fuels assumed much greater importance and accounted for 37% of export income in 2000
- Manufactured items rose from 11% of exports to 24% between 1950 to 2000
- Australia’s largest commodities exports are iron ore, coal and alluminium. This change in the composition of exports occurred because
S
Australia realized that they didn’t have a comparative advantage in agricultural exports and therefore specialized in minerals
• Imports
- Imports refer to the purchase of goods and services from international markets
H
- From 1992 to 2006, value of imports rose from -%60000 million to -$170000 million (183% increase in nominal value
- ETM goods are the major imports
- Capital equipment has been the area of fastest growth and accounted for over 23% of all imports in 1999 to 2000
• Direction of Trade
- In the 1950’s most exports went to the UK and Europe, whereas today they are sent to Asia (61% in 2000) and North America
- The Asian crisis in the late 1990’s affected the Australian economy, but Australia was able to expand its markets in Europe and USA
- In the 1980s vast trade occurred with the Asian Tigers (Singapore, South Korea, Hong Kong etc.)
18
- These changes occurred because the UK joined the EU which raised protection against all other nations including Australia (we lost
preferential trade as a colony of Britain) and thus sought to trade to geographically proximate countries like China and Japan
- Recently China has emerged as a significant export partner for Australia due to their demand for mineral resources
Trends in financial flows – debt and equity
• Debt refers to money that is owed
m
• Equity refers to the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc.
• Foreign liabilities are Australia’s foreign obligations to the rest of the world.
o
- Net foreign liabilities = net foreign debt + net foreign equity
• Australia has always been a net capital importer which means that more investment comes in that goes out. Levels of foreign investment
have remained close to twice that of Australian investment abroad.
c
• As a resource-rich country with a stable political climate, Australia has always been able to attract high levels of foreign investment. Financial
.
flows easily exceed the value of trade flows in foreign exchange markets
• Since the 1950s the source of investment has changed from Britain to Japan and the USA.
s
• In 1990 net foreign liabilities stood at approximately 45% of GDP. By 1999 it had risen to 60% of GDP
• Since 2000, net investment inflows averaged $29 billion a year compared to $18 billion in the 1990s
• Investment flows are more volatile than trade flows and has substantial fluctuations
u
- 2001 to 2002: net foreign investment inflow of $11.4 billion
- 2003 to 2004: net foreign investment inflow of $ 62.6 billion
c
- In 2006, $1 trillion was invested into Australia
• Reasons for upsurge of investments abroad
- Australia businesses attempting to secure new export markets and expand their market shares in other countries
o
- Australian businesses basing operations overseas to avoid tariffs and import restrictions
- Australian businesses seeking higher rates of return
- Some Australian superannuation funds are invested overseas
F
Australia’s Balance of • The Balance of Payments is the record of transactions between Australia and the Global Economy over the course of the Business Cycle. It is
Payments composed of the Current Account and the Capital and Financial Account
• Debit refers to any payment leaving the Australian Economy
C
• Credit refers to any income into the Australian Economy
Structure
• Current Account, debits and credits
S
- The Current Account shows the money flow from all exports and imports of goods and services, income and current transfers over the
period of one year
- These transactions are non reversible
- The components of the current account are:
H
o Net goods
o Net services
o Balance of goods and services (BOGS = net goods + net services)
o Net income (NI)
o Net current transfers (NCT)
o Balance on the current account = BOGS + NI + NCT
19
- Australia’s current account has been in deficit for the past 33 years, in which time it has fluctuated from approx. 3-6%. In December 2004
however it reached its peak at 7%, nevertheless it has remained at closer to 5% over the past few years. The IMF believes an acceptable
level to be 4% of GDP.
• Capital and Financial Account
- The capital account consists of capital transfers with three main elements:
m
o Capital transfers from people migrating in or out of Australia
o Capital transfers in the form of foreign aid to other countries to build their infrastructure and capital stocks
o Entry for the purchase and sale of non-produced, non-financial assets – mainly intellectual property rights (patents, copyrights,
o
trademarks and franchises)
- The financial account shows Australia’s interactions in foreign assets and liabilities
c
- It is more volatile than the current account
- The size of the financial account can change substantially from one period to another due to the large financial flows involved in the
.
balance of the financial account
- Credit entries in the financial account represent financial inflows and come about due to increases in foreign investment into Australia or
s
decreases in Australian investment overseas.
- Debit entries represent net outflows
- Australia draws on the savings of the rest of the world to finance a deficit on its current account
u
- Four main categories of investment:
o Foreign direct investment (FDI)
c
o Portfolio investment (PI)
o Other investment
o Reserve Assets
o
Links between Key Balance of Payments categories
• Current account + Capital and Financial account = 0
OR
F
CA + KAFA = 0 ( minus net errors and omissions )
• There is an inverse relationship between the current account and the capital and financial account
- For example: a current account deficit of -$26 billion means a KAFA surplus of $26 billion (assuming there are no net errors or omissions)
C
- A CAD of -$26 billion may be complimented by a KAFA surplus of $27 billion leaving net errors and omissions at $1 billion.
• Larger financial account surplus results in larger deficit on the net income account
Trends in the size and composition of Australia’s Balance of Payments
S
• Reported a current account deficit equivalent to 7419 Million AUD in the second quarter of 2011
• Main trading partners are: Japan, China, The United States and New Zealand
• Changes in the patterns of trade are key drivers in the current accounts of most of the world's economies
H
Current Account Influences (Demand for exports and imports)
• Inflation Differentials [International Competitiveness]
- Relative inflation rate differentials affect the relative prices and thus international competitiveness
- Demand for AUD
o A rise in relative inflation will make Australian products seem more expensive and thus reduce Australia’s export
competitiveness (reduce demand for its exports)
o A fall in relative inflation will make Australian products seem less expensive and thus improve Australia’s export
competitiveness (increase demand for its exports)
20
- Supply of AUD
o A rise in relative inflation will make foreign products seem less expensive and thus reduce Australia’s domestic competitiveness
(increase imports)
o A fall in relative inflation will make foreign products seem more expensive and thus improve Aus’s domestic competitiveness
• Movements in Terms of Trade [Fluctuations in Commodity Prices]
m
- Terms of Trade measures the price of exports compared to imports
- Demand for AUD
o Improvements in Terms of Trade could mean higher prices for Australian products increasing the demand for AUD
o
(More AUD required to pay for the same volume of exports)
o Deteriorations in Terms of Trade could mean lower prices for Australian products decreasing the demand for AUD
c
(Less AUD required to pay for the same volume of exports)
- Supply of AUD
.
o Improvements in Terms of Trade could mean lower prices for foreign products increasing the volume of imports (since it is
cheaper to import) and thus increase the supply of AUD (through increased spending on imports)
s
o Deteriorations in Terms of Trade could mean higher prices for foreign products decreasing the volume of imports (since it is
more expensive to import) and thus decrease the supply of AUD (through decreased spending on imports)
• Global Economic Conditions [Economic Growth]
u
- Relative rates of domestic and world growth can affect the demand for exports and imports and thus the demand and supply of AUD
- Demand for AUD
c
o Strong world growth usually leads to increased demand for Australian exports and AUDs [Will also affect the Terms of Trade]
o Weak world growth usually leads to decreased demand for Australian exports and AUDs [Will also affect the Terms of Trade]
- Supply of AUD
o
o Strong domestic growth usually leads to increased demand for foreign imports and thus increase the supply of AUDs
o Weak domestic growth usually leads to decreased demand for foreign imports and thus decrease the supply of AUDs
• Tastes and Preferences
F
- Tastes and preferences of local and foreign products will affect exports and imports
- Demand for AUD
o If foreigners like Australian goods, then exports (hence demand for AUD) will increase
C
- Supply of AUD
o If Australians prefer overseas goods, then imports (hence supply of AUD) will increase
S
EXCHANGE RATES
Measurement of • An exchange rate refers to the rate at which a unit of domestic currency is exchanged for a given amount of a foreign currency. Simply put, it
relative exchange rates is the price of one currency quoted in terms of another and is a measure of relative value or purchasing power.
H
• ER’s are important because they provide a basis for the conversion of domestic and foreign currencies of nations, for their exporters and
importers who engage in international trade. The ER is also an asset price since international investors and speculators trade in various
currencies at a higher ER than they bought them for
To other individual currencies
• These measure the value of a unit of domestic currency relative to another currency, usually that of a major trading partner (Aus  US). A
rise in purchasing power is called an APPRECIATION in the $AUD, whilst a fall in purchasing power is known as a DEPRECIATION of the AUD.
21
Trade Weighted Index
• measures movements in AUD against a basket of currencies of Aus trading partners, weighted according to their importance in Aus’s trade.
• includes 23 currencies of countries that account for about 99% of Aus’s aggregate trade. The TWI is therefore a more accurate and important
measure of the AUD’s purchasing power then bilateral or cross exchange rates because it is trade weighted, and related to changes in
Australia’s BOP performance over time. It reflects the general trends in the value of the AUD rather than its relationship with one currency
m
• one limitation is that it is weighted according to volumes of trade regardless of what currency export and import contracts are involved or
how important it is.
Factors affecting the • Demand for Australian exports – traders who buy Australia’s exports need to convert their currency into AUD
o
demand for and supply • Demand for Aus Assets – this would lead to capital inflow
of Australian dollars • Interest rate differentials and changes in investment expectations – a rise in interest rates would lead to capital inflow (increased demand
c
for AUD). A decrease in interest rates would lead to capital outflow (increased supply of AUD)
.
• Exchange rate expectations – if speculators predict an appreciation in the value of AUD, they will buy. If they predict depreciation, they’ll sell
• Relative inflation rate differentials – Rise inflation would reduce export competitiveness. A fall in relative inflation would lead to greater
export competitiveness
s
• Movement’s in AUS TOT – greater terms of trade = greater exports = greater demand for AUD. Weaker TOT = lesser exports and decreased
demand for AUD
u
• The demand for foreign assets – dependent upon the level of domestic IR in relation to overseas IR. If domestic IR is low, people will sell
their currency and increase supply of AUD relative to the other currency
• Domestic economic growth – high levels of domestic growth will lead to high import demand which will increase the supply of the AUD
c
• Inflation Rate: a rise in inflation will lower competitiveness of exports and increase demand for imports, increasing supply of AUD
o
Changes in exchange • Appreciation:
rates – - An increase in Australian interest rates
appreciation/depreciat  A decrease in global interest rates
F
ion - Improved investment opportunities in Australia
 Deterioration in foreign investment opportunities
- A rise in commodity prices
 An improvement in Australia’s terms of trade
C
- An improvement in Australia’s international competitiveness
- Lower inflation in Australia
- Increased demand for Australia’s exported goods and services
S
- Increased inflow of foreign investment
- Expectations of a currency appreciation based on forecasts of one of the above factors
• Depreciation
H
- A decrease in Australian interest rates
 Increase in global interest rates
- Deterioration in investment opportunities in Australia
 Improvement in foreign investment opportunities
- A fall in commodity prices
 A deterioration in Australia’s terms of trade
- A deterioration in Australia’s international competitiveness
- Higher inflation in Australia
22
- Increased demand for foreign imported goods and services
- Decreased inflow of foreign investment
Expectations of a currency depreciation based on forecasts of one of the above factors
Determination of Fixed Exchange Rate
exchange rates • Under a fixed exchange rate system, the Central Bank (RBA) would officially set the exchange rate (will not be left to the forces of the
m
including fixed, flexible market)
and managed rates • This rate is usually pegged to a specific value of another currency. i.e The $A will move with the currency that it is pegged to maintain a fixed
o
exchange with that currency [The exchange rate will still change against other currencies, but movements will be parallel to those of the peg]
• The fixed rate will be either above or below the equilibrium exchange rate
• This involves having sufficient reserve assets (eg foreign currencies and gold) to keep the exchange rate fixed
c
• China and Hong Kong had fixed currencies (before moving to a managed exchange rate system in 2005)
.
• $A was fixed before 1976
- First pegged to the UK in 1950s
s
- Then pegged the US in 1960s
• The fixed exchange rates in Europe in the 1980s eventually led to the development of the Euro
• Advantages
u
- Provides near immediate certainty in the short term value of the exchange
- Assists importers and exporters with their decision making
c
- Allows the Central Bank to conduct a monetary policy very similar to the country to which its currency is pegged
• Disadvantages
- Speculations increase, since there will be greater movements in the market due to the Central Bank adjusting the equilibrium
o
- Destabilizes the exchange rate
- The authorities eventually revalue the currency in future
- Central Bank must hold large foreign exchange reserves to keep the exchange rate at its predetermined value
F
- Runs the risk of exhausting foreign exchange holdings, which could lead to a complete collapse of trade in the currency
- Country does not react to external structural changes since the exchange rates do not respond directly to changes in market forces or
external real or financial shocks
C
- Balance of payments impacts on the domestic currency
- Current account surpluses increase money supply and can cause inflation
- Current account surpluses can cause a fall in the money supply lowering economic growth and raising unemployment
- Currency crises inevitably lead to devaluation or revaluation and policy adjustments
S
- This involves policy readjustments to facilitate structural change
Managed Flexible Peg
• Variation of the fixed exchange rate
H
• Under this system, the currency is ‘pegged’ (adjusted) to variations in a major trade partner’s currency
- RBA would ‘peg’ (adjust) the $A to a price in the morning and would intervene to keep the price within a ‘target band’ (eg: $US0.70 –
$US0.80)
• Provides more flexibility than the fully fixed rate
- official rate to drift within a certain range
- But range may lie outside the equilibrium produced under pure market forces
• Graph would look like the one used for fixed exchange rate, except there would be a target zone instead of just a single fixed rate
23
• Australia adopted ‘managed flexible peg’ from 1976 – 1983
- Pre-1960s : $A fixed peg to UK pound sterling (major trade partner)
- 1960s : $A fixed peg to $US (international reserve currency)
- 1978-1982 : $A managed peg to TWI
Free Floating (Flexible) Exchange Rate
m
• Under this exchange system, the demand for a country’s currency is a derived demand (and the supply is a derived supply)
- Demand for $A is a derived from the demand for Australian goods, services, and assets by foreigners
- Supply of $A is derived from Australian demand for foreign goods, services and assets
o
• The exchange rate is determined solely by the forces of supply and demand (under a clean float)
• The Forex market is just like any other market and the forces of demand and supply (including increases and decreases) operate as usual
c
• Equilibrium exists where demand intercepts supply  which is the exchange rate
.
• At a price below this equilibrium:
- It becomes cheaper to buy foreign currency (and goods, services, assets etc associated with the currency)
- This leads to an expansion of supply as Australians sell $A to buy $US
s
- At the same time, it becomes more expensive to buy the domestic currency (and goods, services, assets etc associated with the
currency)
u
- This results in a contraction in demand as less people buy $A with $US
• The reverse occurs at a price above the equilibrium
- It becomes more expensive to buy foreign currency (and goods, services, assets etc associated with the currency)
c
- This leads to a contraction of supply as Australians buy less $US with $A
- At the same time, it becomes cheaper to buy the domestic currency (and goods, services, assets etc associated with the currency)
o
- This results in an appreciation in demand as more people buy $A with $US
• The Australian government floated the Australian Dollar (AUD) on December 1983, which means that we now have a floating/flexible
exchange rate system
F
• Advantages for Australia
- Provides realistic and market price for the currency that reflects the fundamentals of the Australian economy (trends in: inflation,
unemployment economic growth, balance of payments etc) since buyers and sellers factor these into account as they trade in $A
- Discourages destabilising speculations about the future of the $A
C
- Eg: the crawling peg system used from 1976 – 1983 resulted in excessive destabilising speculations
- Absorbs changes in the balance of payments outcomes, helping to correct disequilibria in the balance of payments
- Eg: A rising CAD suggests increased overseas spending, which increases the supply of $A, leading to a depreciation. Depreciation
S
discourages overseas spending (since it costs more) and thus reduce the CAD
- Provides some insulation from external real and financial shocks by moving to new equilibrium positions
- Changes in the exchange rate would provide signals to exporters, importers and the government. Will suggests structural change to
H
maintain competitiveness
- Allows for greater global capital integration, greater capital mobility and the co-ordination of international monetary policies
- Allows the Central Bank (RBA) to conduct the monetary policy properly
- RBA would not have to change the domestic money supply to maintain a specific exchange rate
- Changing the supply may conflict with stance on monetary policy
- (RBA buying $A to appreciate the exchange, will decrease $A supply will increase interest rates)
24
• Disadvantages for Australia
- Increase the volatility of the exchange over time due to:
o Changes in exchange rate expectations
o Changes in foreigner’s perceptions of the domestic economy’s fundamentals
o Reactions of foreigners to short term economic and political events
m
- Lead to uncertainty in saving and investment decisions (due to the volatility)
- Lead to exchange rate ‘overshooting’ (another contributor to volatility) caused by
o Bandwagon effect of speculators following trends resulting in misalignments of the currency
o
o “Speculative Bubbles” where market participants have certain expectations and these expectations become self-fulfilling
(participants have a certain expectation and act upon it to make the expectation true)  Such overshooting occurred in 2000
c
when $A fell below $US0.50
• Factors affecting the AUD
.
- The Forex market is just like any other market. The movements in supply and demand will determine the exchange rate (price of AUD)
- Demand
s
o An increase in the demand for AUD will cause the $A to appreciate
o A decrease in the demand for AUD will cause the $A to depreciate
- Supply
u
o An increase in the supply for AUD will cause the $A to depreciate
o A decrease in the demand for AUD will cause the $A to appreciate
c
• Supply and demand of the AUD
- Demand for AUD is derived from foreign demand for Australian goods, services and assets
- Supply of AUD is derived from Australian demand for foreign goods, services and assets
o
- Factors affecting the demand and supply of AUD involve both the current and the capital and financial accounts
- Factors affecting demand
o Demand for Australian exports (recorded credits on BOGS)
F
o Demand for Australian assets (recorded as credits in KAFA)
- Factory affecting supply
o Demand for foreign imports (recorded as debits on BOGS)
C
o Demand for foreign assets (recorded as debits in KAFA)
The influence of the Dirtying the Float
Reserve Bank of • Is where the Reserve Bank intervenes (monetary policy) in the economy by buying and selling AUSD in foreign exchange markets to influence
S
Australia on exchange the value of the exchange rate. In order to curb rapid decreases or increases but this is limited by the amount of foreign reserves or assets
rates • The central bank needs to buy or sell foreign currency to keep the exchange rate at the predetermined level
- Buying increases demand and raises the market equilibrium
- Selling increases supply and lowers the market equilibrium
H
• Dirty Float: is an exchange rate system where the value of the currency in mainly determined by demand and supply in foreign exchange
markets, but the Reserve Bank occasionally intervenes to stabilize the value of the Australia dollar during periods of excessive volatility
• Reasons for Dirtying the Float
- Maintain the long term equilibrium of the exchange rate
o RBA needs to prevent the exchange rate from deviating from its long term equilibrium path
o Misalignment of the currency may have adverse effects on macroeconomic variables such as inflation, unemployment and GDP
o EG: 1986 – Depreciation by 40% caused a significant rise in the domestic inflation rate
25
- Prevent an excessive depreciation and appreciation of the exchange rate
o Excessive depreciation may lead to higher import prices and inflation
o Excessive appreciation may lead to higher export prices and a loss of international competitiveness
o RBA would fix this problem by buying or selling $A
- Smooth out exchange rate volatility
m
o Excessive speculation can cause overshooting or undershooting of the currency resulting in excessive volatility
o RBA may intervene as a buyer or seller to ‘smooth’ the volatility
- ‘Testing’ the foreign exchange market
o
o Occasionally buys and sells on the Forex just to make sure that the market is responding correctly
Policies used by RBA to Influence the Exchange Rate
c
• Official Intervention
- RBA directly intervenes by buying or selling AUD
.
• Monetary Policy Settings [Not Used]
- RBA intervenes indirectly by setting the interest rates
s
- This alters the interest differentials between Australia and the rest of the world
- An increase in interest rates will increase capital inflow and hence demand for AUD
[A decrease has the reverse effect]
u
- Policy however, is not used since the RBA uses monetary policy mainly to control inflation
• Making Public Statements [Jawboning]
c
- RBA can make public statements to affect the speculators
- If the RBA wants to appreciate the $A, it will announce that the AUD is undervalued so that investors and speculators buy $A in hope of
making a (capital gain) profit
o
- As investors and speculators buy $A, they increase demand, and as a result, appreciate the $A
- Alternatively, the RBA can announce the $A to be overvalued so that investors and speculators sell $A to minimise their losses
- As they sell they increase supply and hence depreciate the dollar
F
The effects of Appreciation
fluctuations in • Negative Effects
exchange rates on the - Decrease International Competitiveness
C
Australian economy o Exports seem relatively more expensive to overseas markets
o Imports also appear relatively cheaper to the domestic market
- Deterioration of CAD in the Long Term
S
o Increasing the value of AUD will increase imports and decrease exports as Australian goods ands services appear more
expensive relative to the world
- Reduce Australia’s Growth Rate in the Long Term
o A deteriorating CAD will create economic growth constraints
H
- Lower Financial Inflows
o It becomes more expensive to invest in Australia and thus investment may fall
o May not fall if investors expect the $A to continue rising
- Reduce the Value of Foreign Assets [Valuation Effect]
o Price of foreign assets falls relative to AUD
- Reduce the Value of Foreign Income [Valuation Effect]
o Price of foreign income earned on Australian assets abroad falls relative to AUD
26
- Higher Unemployment
o In an attempt to become more internationally competitive, industries may restructure themselves and cut labour input
o Wages may also fall
• Positive effects
- Consumers Enjoy Increased “Purchasing Power”
m
o Appreciation of $A allows Australians to buy more imports with the same amount of $A
- Improve Living Standards
o Through buying more and greater variety of imports with the same amount of $A
o
- Lower Domestic Inflation
o Through lower import prices which may lead to rise in real income
c
- Lower Interest Rates
o As inflation falls, RBA may reduce interest rates
.
o Enjoy all the benefits of having a low interest rate
- Improvements of CAD in the Short Run
s
o Through higher earnings from exports plus lower cost of imports
o However, imports will rise in volume in the long term and deteriorate the CAD
- Reduce the Value of Foreign Debt [Valuation Effect]
u
o Immediate impact where foreign currencies cost less compared to $A
- Reduce Debt Servicing Ratio (And Improve CAD)
c
o With the reduction of value of foreign debt also comes reduction in servicing costs
o Can result in a lower net income deficit and thus decrease the size of the CAD
Depreciation
o
• Negative Effects
- Reduced “Purchasing Power”
o Depreciation of $A allows Australians to buy less imports with the same amount of $A
F
- Higher Domestic Inflation
o Through higher import prices which may lead to falls in real income
- Higher Interest Rates
C
o As inflation rises, RBA may increase interest rates
o Suffer all the consequences of having a high interest rate
- Deterioration of CAD in the Short Run
S
o Through lower earnings from exports plus higher cost of imports
o However, imports will rise in volume in the long term and deteriorate the CAD
- Increase the Value of Foreign Debt [Valuation Effect]
o Immediate impact where foreign currencies cost more compared to $A
H
o Significant increase since around 60% of debt is denoted in foreign currencies
- Increase Debt Servicing Ratio (And Deteriorate CAD)
o With the increase in value of foreign debt also comes the increase in servicing costs
o Can result in a higher net income deficit leading to an increase in the size of the CAD
27
• Positive effects
- Decrease International Competitiveness
o Exports seem relatively cheaper to overseas markets
o Imports also appear relatively more expensive to the domestic market
- Improvement of CAD in the Long Term
m
o Depreciation of AUD will decrease imports and increase exports as Australian goods ands services appear cheaper relative to
the world
- Increase Australia’s Growth Rate in the Long Term
o
o An improving CAD will reduce economic growth constraints
- Greater Financial Inflows
c
o It becomes cheaper to invest in Australia and thus investment may increase
o May not increase if investors expect the $A to continue falling
.
- Increase the Value of Foreign Assets [Valuation Effect]
o Price of foreign assets rises relative to AUD
s
- Increase the Value of Foreign Income [Valuation Effect]
o Price of foreign income earned on Australian assets abroad increases relative to AUD
- Lower Unemployment
u
o Export industries prosper as exports increase since they are relatively cheaper overseas
o Benefits of the prospering industries are passed on to their employees through increased employment and better wages
c
- Structural Adjustments
o Exporting industries prosper
o
FREE TRADE AND PROTECTION
Australia’s policies • The Australian economy has benefitted from the gradual removal of trade barriers. Historically, Australia was one of the most highly
F
regarding free trade protectionist countries in the world.
and protection • Governments felt it necessary to protect Aus manufactures, who for many years found it difficult to compete because of the relatively small
population and low production runs in Australia. Much of this protection was put in place after 1901 when Aus governments used a policy of
C
protection from imports to develop the manufacturing sector through creating infant industries and domestic employment.
• A centralized wage fixing system was also adapted to set minimum or award wages for workers in this sector.
• Levels of protection were increased during the Great Depression of the 1930’s to protect domestic employment levels, with the British
S
Preferential Tariff reaching over 30% and the General Tariff Rate for non- Commonwealth countries rising over 60%.
• These high levels of protection from import competition for manufacturing remained in force until the early 70’s with the effect of forcing up
the domestic cost structure and the price of domestic and imported manufactured goods
• The nominal rate of assistance measures the % difference between the price the domestic producer receives with protection and the price
H
the producer would receive without protection.
• The effective rate of assistance is the amount of protection as a % of the domestic value added to production and is a more accurate
measure of the protection of domestic industries against imports.
• Australia’s Policies Towards Free Trade
- Since the 1988 Industry statement, Australia’s governments have accelerated the process of dismantling the protection of domestic
manufacturing in the belief that more was to be gained from free trade than from protection
28
- This was a unilateral decision to open up the Aus domestic market to international competition from imports helping to promote free
trade. Aus hoped to increase industry efficiency and export competitiveness through the adoption of free trade.
- On a bilateral basis, Aus has also renegotiated numerous trade agreements with its major trading partners such as Japan, the USA,
Britain, most Asian countries and many EU nations, in an attempt to increase exports and gain greater market access for Aus exporters.
- Under the Howard Government, greater emphasis was placed on bilateral trade agreements (FTA’s with Thailand in 2003 and USA in
m
2004) and this has led to a shift in trade policy towards Europe and North America, unlike previous labor governments that pursued the
Asia Pacific region.
- At a regional and multi lateral level, Aus helped with the establishment of the APEC form in 1989. Aus also helped to form the Cairns
o
Group of free traders in agriculture in 1986
Australia’s multilateral CERTA
c
and bilateral free trade ASEAN REFER TO PAGE 6 AND 7
agreements APEC
.
The implications of A REDUCTION IN PROTECTION
Australia’s policies for Individuals Firms Governments
s
individuals, firms and Structural Unemployment Individual firms that operate in marginal, Reduction in government revenue
governments import competing industries will shrink through cutting tariffs, since they
u
unless they are able to improve their provide indirect tax revenue. Only
competitiveness. In some cases, sectors comprised 1.5% of total tax revenue in
of the economy may also die out: EG – 08/09
c
production of consumer electronics in
Aus is all but nonexistent.
Import competing industries most Some businesses will respond by May impact on government spending.
o
affected are spatially concentrated in restructuring operations with the aim of Government may be required to finance
the manufacturing areas of VIC and SA staying in business or perhaps putting structural change through increased
F
where other forms of employment are their focus on one particular aspect of expenditure on employment benefits
scarce. production and retraining programs.
Most jobs lost in manufacturing sectors Restructuring may lead to firms Political consequences: cutting
– low skilled workers find it hard to consolidating their manufacturing protection is unpopular amongst voters.
C
attain employment elsewhere process down to a single plant, Short term effects of restructuring are
eliminating less profitable product lines, more visible than medium to long term
finding opportunities for exporting in economic benefits. Unknowing voters
S
response to the decline in their share of may be swayed by seemingly blatant
domestic market, adopting new political instability.
production tech to reduce production
costs, reducing staffing levels.
H
1990’s Aus government funded various Forces firms to increase innovation and CAD is likely to worsen as imports rise
retraining programs to address efficiency, with the aim of attracting because they will be cheaper or better
structural unemployment increased investment quality than local products. Lower
Lost employment should be recouped if Lower Tariffs mean lower input costs for protection should improve international
sectors with comparative advantage are many firms. Reducing these input costs competitiveness and reduce the CAD
maximized in terms of their potential will make exporting firms more over the longer term as exports grow. It
internationally competitive  access to take 2 decades for reductions to have
29
lucrative markets. full impacts.
Structural shift has promoted
employment in commodities  Australia
now has a strong commodities export
base.
m
Substantial employment in this area, has
allowed for overall growth in export
volumes suggesting that Australia’s
o
becoming increasingly integrated with
the global economy.
c
Implications for • Just as domestic policies to protect Aus industries have an impact on the Aus economy, so do the policies of other nations to protect their
.
Australia of industries. When other countries put tariffs on Aus goods and services, Aus exports become less competitive and will struggle to penetrate
protectionist policies of foreign markets. When other countries subsidize their exports, they raise the supply and reduce the price of these goods and services on
other countries and global markets, hence resulting in competing countries having their income reduced. Overall, international protectionism reduced the size of
s
trading blocs Australia’s economy.
• As a small economy with a high level of agricultural trade, Australia suffers particular disadvantages as a result of the protectionist policies of
u
other nations and trading blocs. The EU has, for several decades, heavily subsidized agricultural production through the COMMON
AGRICULTURAL POLICY, which absorbs almost 1/3 of the European Commission’s budget and supplies 32$ of European Farmers Income.
Farmers also receive significant subsidies in the US, Japan, Korea and Switzerland. Aus farmers are thus competing in global markets at a
c
significant disadvantage to their counterparts in the rest of the industrialized world.
• Progress towards reducing agricultural protection has proved disappointing in recent years. Many of the most highly protectionist
o
agricultural nations have taken advantage of complex loopholes in the WTO regulations to avoid genuinely freeing up agricultural trade. The
breakdown in the WTO’s Doha Round of Trade negotiations in 2006 cost Aus farmers between $1-1.5 billion AUD in lost export revenue each
year according to National Farmers Federation. Agricultural protection in industrialized nations is not different from its level in the late 80’s
F
• Aus firms exporting non-agricultural goods generally face fewer barriers to trade compared with the agricultural sector. The mining and
resources sector, whose exports contribute the largest share of Aus’s exports face very few barriers to trade, and the producers from this
sector are in very high demand worldwide. As a result, mining companies are more likely to face export restrictions from an Aus government
that might want to secure energy supplies for the domestic economy. From another perspective, the countries importing Aus energy and
C
mineral resources often simply do not have their own resources to produce domestic alternatives. If a foreign government was to impose
tariffs on Aus resource exports, it would simply raise costs for consumers and business but would not encourage the discovery or exploration
of energy resources that the country does not have.
S
• Likewise, Aus’s manufacturing industries generally face few barriers to trade because of the substantial reduction in industrial tariffs in
recent decades that have been negotiated through multilateral trade agreements.
• Aus’s services industries which account for ¾ of the Aus economy, but less than ¼ of our exports, face the most prohibitive barriers to
H
international trade. This is mainly due to the natural barriers caused by geography and transport costs, language and cultural differences and
local tastes and preferences.
• Some factors are natural barriers to services trends but protectionism also plays a role in reducing services trade in the global economy.
Many countries banking and communications sectors are protected from forieng completion through regulations or foreign ownership
restrictions because of government concerns about competing interest of the nation’s families and businesses against those of global
corporations. Government’s protect service sectors through a range of licensing laws such as only recognizing educational qualifications
obtained in their own country. Governments can also protect domestic producers through rules relating to government procurement such as
only buying naval ships and military hardware that is manufactured locally
30
ECONOMIC ISSUES
ECONOMIC GROWTH
Aggregate demand • Economic growth involves an increase in the volume of goods and services that an economy can produce over a period of time. It is
m
and its components: Y measured by the annual rate of change in real GDP.
= C+I+G+X–M • Aim for economic growth
o
- No sudden fluctuations
- Increase in real GDP
- Stable prices/low unemployment
c
- Excess capacity (supply)
.
- A growth rate which does not detriment our external stability therefore there is no increase in the CAD
• Aggregate demand is the sum of consumption by households, investment expenditure, government expenditure and exports less imports.
AD = C +I + G + (X – M)
s
• Aggregate supply is the total level of income in the economy over a given period of time. Part of the national income is collected by the
government through taxation and the rest is either spent on consumption or saved.
u
Y = C + S +T
AS acts as a constraint on economy growth but doesn’t act as a driver of economic growth. If an economy has supply constraints business’s
cannot produce g+s efficiently.
c
• Influences on consumption
- Consumer expectations – about future inflation, real incomes and general availability of goods
o
- The level of interest rates – an increase in interest rates will discourage spending and encourage saving. With high IR, MPC decreases
- The distribution of income – a more even distribution of income will generally encourage a higher rate of spending
• Influences on investment
F
- Cost of capital equipment – interest rates, government policies and price/productivity of labour
- Business expectations – demand for their products, economic outlook, inflation and new resources/increase in technology
• Influences on Government
- Makes up 0.2-0.25 of AD while taxation is equal to between 0.2-0.25 of Y/income in the economy
C
- Reduce taxation/increase spending to increase AD and economic growth
- Increase taxation/reduce spending to decrease AD and economic growth
• Influences on exports and imports
S
- When X=M trade balance occurs and has no effect on the AD
- Australia’s trade balance is usually a deficit
- Net exports are influence by levels of overseas and domestic income – rise in overseas income will increase imports, rise in domestic
H
income will increase imports
- Exchange rates – weaker exchange rates increase exports and decreases imports and vice versa for stronger exchange rates
- Level of international competitiveness – low domestic costs of production will decrease our prices and thus increase exports
injections and • The economy is equilibrium when:
withdrawals/leakages Aggregate supply = aggregate demand (national income = national expenditure)
(I+G+X; S+T+M) S + T + M (leakages) = I + G + X (injections)
31
S – savings
T – taxation
M – imports
I – investment
G – government spending
m
X – exports
• Leakages > injections the economy will face a downturn in growth
• Injections > leakages the economy will experience an upturn in growth
o
The simple multiplier: k • The multiplier is the number of times an increase in national income exceeds the increase in aggregate demand that caused it
1 1
= 1/(1–MPC) Multiplier (k) = /MPS or /1 – MPC
c
The total increase in income generated: ∆Y = K x ∆AD
.
• A small increase in AD will lead to multiplied increase in national income (use income expenditure model)
• The larger the MPS the smaller the value of the multiplier. i.e if individuals save proportionately more of their income, they will spend less
and therefore generate less additional income
s
• Marginal propensity to consume (MPC): the proportion of each extra dollar of income that is spent on consumer products
Marginal propensity to spend (MPS): proportion of each extra dollar of income that is saved – causes the amount of income generated by
u
each successive wave of spending to decrease.
MPC + MPS = 1
Measurement of • Economic growth =
c
growth through Real GDPcy – Real GDPpy x 100
changes in real Gross Real GDPpy 1
o
Domestic Product • GDP is the percentage increase in the value of goods and services produced in the economy in a year
• Nominal GDP is the total value of domestic production at current prices
• Real GDP is GDP which has been adjusted to take account of inflation which erodes the value of money
F
= nominal GDP x Real GDPpy - inflation.
Real GDPcy
- When nominal GDP increases at a higher rate than inflation, real GDP increases
- When nominal GDP increases at a slower rate than inflation, real GDP decreases
C
Sources and effects of • Factors that have contributed to Australia’s economic growth have been:
economic growth in - Strong focus on maintaining low inflation
Australia - Low inflatoin
S
- Productivity levels due to micro-economic reforms
- Business and consumer confidence
- Large increase in asset prices
H
- The strong performance of the US and China and due to the Resource Boom
- New technologies helped to raise productivity and efficiency levels (economies of scale – total optimum)
- Keeping economic growth as a sustainable level
• Effects of economic growth
- Living standards: increase in growth means that there will increase in wages causing an increase in material living standards
- Employment: growth creates jobs, which will cause a decrease in the level of unemployment
32
- Inflation: high economic growth can cause an increase in inflation, due to larger wage claims. Government policies are aimed at
increasing economic growth to a level that doesn’t cause a significant increase in inflation.
- External stability: higher economic growth will cause an increase in the CAD which poses a severe problem. The CAD is the speed limit
for an economy
- Income distribution: higher economic growth will cause an increase in living standards, but more for the high-income earners who are
m
able to raise a higher percentage of their salaries
- Environmental impacts: economic growth can potentially have a negative effect on the environment. It can result in pollution, a
depletion of resources and damage to the local environment.
o
• Government micro-economic policies are designed to minimize the fluctuations so that the economy can have low inflation, low rate of
unemployment and stable economic growth
c
Increases in aggregate • AS is neither a stimulus nor a driver of economic growth but act as a constraint in an economy. An increase in AS can lead to an increase in
supply – improvements
.
total output (economic growth) and reduction in general price level (inflation)
in efficiency and • AS can increase through:
technology - Workers acquiring new skills and becoming more productive
s
- The adoption of new technology
- Measure to improve efficiency
u
o There has been increasing focus to expand AS as Australia has reached capacity constraints as the economy’s productive resources being
almost fully utilized.
o Main constraints on AS expansion are:
c
- Skill shortages
o Shortage of engineers for mining projects
o Estimation of a shortage of 24000 skilled workers by 2006
o
o Federal government has been increasing its investment in apprenticeships and training including a 10 year plan to provide new
facilities for trade skill training for every high school.
- Infrastructure bottlenecks
F
o Are the physical constraints on increasing output
o Australia’s infrastructure bottlenecks are at coastal ports where there are long queues of ships waiting offshore to receive loads
of coal or iron ore exports. Ports have a limited capacity
C
o The MCA called for large investments in infrastructure including railways, water and energy supplies, high speed broadband,
regional housing and hospitals
Trends in business cycle • Recession/trough: the lowest point of economic activity, defined as two consecutive quarters of negative growth.
S
• Downswing: the time during which economic growth slows
• Boom: where the economy has growth to its maximum capacity – employment, output and (real) income are at their maximum. Inflation will
also rise, high incomes also raise import prices, causing the CAD to deteriorate
H
• Upswing: the period after a recession where economic growth recovers
INFLATION
Measurement – • Consumer Price Index (CPI): summarises the movement in prices of a basket of goods and services according to their significance for the
headline and average Australian household. It is used to measure inflation in Australia
underlying • Inflation: is a sustained increase in the general level of price in an economy. The best known and most widely used measure of inflation in
Australia is the percentage change in the CPI.
33
Inflation Rate(%) = CPICY – CPIPY / CPIPY x 100/1
CPICY = the value of the CPI in the current year
CPIPY = the value of the CPI in the previous year
Headline Inflation
• The CPI is sometimes called the headline inflation because it accounts for all price fluctuations in the prices of a weighted basket of common
m
household goods. The CPI figures are collected and published every quarter by the ABS and inflation rate is usually calculated yearly. Quaterly
figures are important for policy makers. The headline rate can fluctuate as a result of one off events like natural disasters and tax changes.
Underlying Inflation
o
• The RBA however uses a different measure called the underlying rate of inflation. This measure discounts one off or temporary prices
changes and instead concentrates on long term trends. This measure sometimes called the core-rate of inflation, while not an accurate
c
measure of the current cost of living offers a better indication of medium to long term inflationary trends.
.
Trends • Structural change: the process by which the pattern of production in an economy is altered over time, and certain products, processes of
production, and even disappear while other emerge
• Productivity: refers to the quauntity of goods and services the economy can produce with a given amount of inputs such as capital and
s
labour. Main objective is to lower prices through producing more with the same amount of resources.
• Regulated labour market  less productive
u
• A rise in the exchange rate  decrease in inflation
• Increased levels of competition  decrease in inflation
• Discounting  increase in consumption
c
• Increased productivity  decrease in prices
• Increase in interest rates leads to slowing down growth in demand and curb inflationary pressures
o
• Recently Australia has embarked upon structural change and productivity has expanded. This has allowed for the cost of living to decrease.
Its current low rate of inflation is assisted by a decrease in import prices through strong ToT and low imported inflation.
Causes Demand-pull inflation
F
• Occurs when aggregate demand on spending is growing while the economy is nearing its supply capacity, so that higher demand leads to
higher prices rather than more input.
• Nomally when demand rises, prices remain stable because producers can expand their output. When the economy nears is prodctuctive
capacity however, aggregate supply may be constratined. Demand pulls prices up as consumers compete for limited goods. This is sometimes
C
called “too much money, chasing too few goods
Cost-push inflation
• Occurs when there is an increase in production costs (such as oil price or wage increases) that producers pass on as a form of higher prices
S
thus rising the rate of inflation.
Imported inflation
• This is cause by increases in the price of products imported into Australia. It may be caused by price rises in exporting countries or by
H
depreciation in the AUSD. If the product is used as a component in local manufacturing, it may feature as part of cost-push inflation.
Inflationary expectations
• Refers to the expectation that prices are likely to rise in the near future – which is the hardest type of inflation to control.
• Because inflation erodes purchasing power, consumers may feel that spending now because a price hike will maximize their money. This
however fuels demand inflation and so inflationary expectations become a self-fulfilling prophecy. At the same time workers may demand
higher wages in order to maintain real wages but this adds to cost-push inflation which in turn feeds into consumer prices. And hence the
cycle continues.
34
Other Causes
• Government policies:
e.g the 25% increase in tobacco in 2010 temporality raised the rate of inflation. Other things include the deregulation of an industry,
changing tariff rates, imposing price controls or price monitoring and increasing charges for goods and services produced by the government.
• Excessive increase in the money supply:
m
When the increase in the money supply outstrips the growth rate of the economy, an increased volume of money chases the same amount
of goods and services and prices are likely to rise. Sometimes called “monetary inflation”
Positive and negative Positive Effects
o
effects • Inflation is generally regarded as negative, however low manageable inflation is regarded as beneficial; particularly for borrowers with loans
of fixed interest rates. As inflation rises real interest rates fall, asset prices may rise and people are effectively paying less interest.
c
Negative Effects
.
• Productions cost rises for firms who in turn either absorbs the costs which reduces profit or raise prices and lose competitiveness.
International competitiveness for exporters is at risk which in turn discourages business investment. Efficiency and productive capacity are
both harmed which only prolongs the suffering.
s
• For individuals the extent of wages keeping pace with inflation will determine the position of real wages. If wages don’t keep pace with
inflation, real wages decline as does the standard of living. The fall of household purchasing power, spending becomes more unequal and
u
incomes are likely to be redistributed away from wage earners to those who earn dividends and profits. The divide between rich and poor
grows and the government may be under pressure to address welfare indexation.
• For government fiscal position will be weakened because tax revenue declines while welfare payments rise. The government is also forces to
c
adopt contractionary macro-policies which is designed to dampen growth and so pulls in inflation. These policies further hamper business
investment which in turn constrains innovation, efficiency and productivity. Thus cost-push inflation then becomes inevitable. Inflation also
o
harms external stability via fallen exports. International competitiveness and a worsening of the CAD. Overtime the exchange rate will
depreciate as both FDI and PI become less attractive and as exports fall. A sharp depreciation in the AUSD is economically harmful.
Deflation
F
• Deflation is the opposite of inflation. When there is a sustained fall in prices, inflation falls below zero (-ve inflation). During a decline
deflation is more damaging then high inflation. Expecting even lower prices consumer delay spending, demand falls, businesses refuse to
invest, economic growth falls and the economy heads towards a recession.
Policies to lower inflation
C
• The main policy for lowering inflation is monetary policy. Fiscal is also helpful and they are both geared for the short-term. Micro-economic
reform will produce lower inflation in the long-term.
• Monetary policy which is aimed at decreasing economic activity lowers demand and demand pull and possibly imported inflation.
S
• Fiscal policy is where governments reduce spending and increasing taxes will dampen economic activity by lowering consumer spending and
business investment. Through this inflation falls.
• Micro-economics is focused on the supply side of the economy and aims to boost productive capacity by reducing supply constraints. It
H
allows supply to rise with growing demand, thereby dampening upward pressure of prices. In turn it chokes off cost push inflation.
Inflation impacts of 5 major aspects:
• Economic Growth and Uncertainty
- Inflation is the main constraint of economic growth
- Excessive economy growth raises inflationary pressure through
o Increased wage demands
o Strong consumer demand
35
- Higher inflation distorts economic decision as the priority is to deflect the effects of inflation through buying assets rather than investing
in income-producing activities
- Lower inflation allows for economic growth without promoting growth through higher interest rates
- Sustained low inflation since 1990 has allowed for a long period of relatively high economic growth
- Lower inflation removes the distortion to investments and savings decisions
m
- Businesses have incentive to invest in long term productive assets rather than short term speculative investments during lower inflation
- High inflation discourages business investment because it make producers uncertain about future prices and costs, therefore future
profit levels
o
• Wages
- Nominal Wage: is the pay received by employees in dollar terms for their contribution to the production process, not adjusted for
c
inflation
- During higher inflation, employees seek higher nominal wage
.
- Wage-price inflationary spiral: where wage increases lead to price increase and then once again to wage rises to accommodate for price
increases. This cycle is very hard to break.
s
• Income redistribution
- High inflation has a negative impact on income redistribution
- Wages of low income earners don’t rise as fast as prices
u
- Low-income earners face higher rates on their borrowing if inflation rises
• Unemployment
c
- Generally low inflation will mean high growth, which causes a decrease in unemployment. Stagflation is when both inflation and
unemployment are increasing at the same time.
• International competitiveness
o
- Low inflation should mean that Australia would be more internationally competitive. This should help to decrease its imports and
increase exports, thus improving the CAD.
F
• Exchange rates
- High inflation can cause a depreciation of the AUSD over time. Low inflation can stabilize a volatile AUSD
• Interest rates
- Will cause an increase as the RBA tries to stabilize the rate of inflation
C
UNEMPLOYMENT
S
Measurement Labour force
• The portion of the population over 15 years old who are working or actively seeking work
Working age population
• Anyone over the age of 15 and can participate in the labour force
H
Labour force participation rate
• Is the percentage of the working age population who are in the labour force
Labour Force x 100
Working age population 1
Unemployment rate
No. of persons unemployed x 100
Total labour force 1
36
• Unemployment: refers to the situation where individuals want to work but are unable to find a job
Trends • Australia began experiencing high unemployment rates in the mid 1970’s which peaked in 1990 (10.7%) since the great depressions (1930)
• Following the 1991 recession, there was a steady decline in Australia’s unemployment rate
• Unemployment fell to its lowest in 34 years at 3.9% in 2008; during this period, sustained low unemployment and shortages of skilled
workers became a problem
m
• Unemployment lowest in WA and QLD where it is resource rich that benefits directly from commodity prices
• Australia needs economic growth rates 3.5% or higher to continue reducing unemployment
Types and causes Types
o
• Cyclical - Occurs in relation to the business cycle
• Structural - Occurs because of structural change within the economy
c
• Frictional - Represents the people who are temporarily unemployed because they are in between jobs
.
• Seasonal- Occurs because of the seasonal nature of some jobs (e.g. more casual workers during Christmas)
• Underemployment - Refers to people who are working less than full-time hours but would like to work longer
s
• Hidden - Includes those that do not fit into the ABS definition of unemployment and are not reflected in the unemployment statistics
• Long term - Are people who have been unemployed for longer than 12 months
• Hard-core - Are people who are unemployed due to their personal, mental or physical characteristics
u
Causes
• Economic growth
c
The labour market is a derived demand market – that is the demand for labour will be determined by the level of goods and services sold in
an economy, a decline in AD will cause an increase in unemployment
• The stance of macro-economic policies
o
- Expansionary would cause an increase in economic activity, causing unemployment to drop
- Tightening policies will cause a slowdown in growth and increase in unemployment
• Constraints on economic growth
F
- High economic growth will cause a decrease in u/e but will also put pressure on inflation which is a bigger concern for governments
o Rising participation rate
o Structural change
C
o Technological change
o Productivity
Non-accelerating • Is the natural rate of unemployment is the rate of unemployment that is consistent with full employment in the labour market. The natural
inflation rate of
S
rate of unemployment doesn’t include cyclical unemployment. It is the level of unemployment that the government aims to achieve
unemployment • The NAIRU is the projected level of unemployment that is to be expected in any market economy
(NAIRU)
Main groups affected • Ethnics
H
by unemployment • Indigenous and Aboriginal Torres Strait Islanders
• Uneducated
Effects of • Economic costs
unemployment – - Unemployment means that resources are not being used efficiently which will cause higher prices and lower living standards
economic and social - Unemployment leads to a decline in the skills of the labour force
costs - The government must pay for unemployment benefits and retraining, which makes further growth harder
- Lower wage growth
37
- Lower living standards
- Increased inequality
• Social costs
- Increased inequality
- Crime
m
- Poverty
- Loss of work skills
- Poor health
o
• Policies
- Expansionary macroeconomic policy
c
- Microeconomic and labour market reform
.
EXTERNAL STABILITY
s
Measurement • External stability refers to the sustainability on Australia’s external accounts so that Australia can service foreign liabilities in the medium to
long run and avoid currency volatility. It is one of the key economic objectives of the government.
• Is measured through three components: the CAD, level of foreign liabilities (particularly foreign debt) and the exchange rates
u
• Involves maintaining the size of Australia’s CAD and the sustainability of the level of foreign debt and equity. It also involves ensuring that
Australia is able to service its foreign liabilities and stabilizing dramatic movements of the Australian dollar
c
• The debt servicing ratio measures the percentage of export revenue needed to be spent on interest payments
Current Account Deficit (CAD) as a percentage of Gross Domestic Product
• CAD x 100
o
GDP
Net foreign debt as a percentage of Gross Domestic Product
• Net Foreign Debt x 100
F
GDP
• Reflects the total liabilities of Australians to foreigners minus the liabilities of foreigners to Australians
Net foreign liabilities as a percentage of Gross Domestic Product
C
• Net Foreign Liabilities x 100
GDP
• Reflects the total value of Australian assets in foreign ownership minus total value of overseas assets owned by Australians
S
• Net foreign liabilities = net foreign debt + equity
Terms of trade
• Export prices in relation to import prices
Export price index
H
Import price index
• An improvement in the ToT means that export price index is increasing greater to the import price index
- Means that the AUSD is depreciating but an increase in exports will have the cyclical effect of appreciating the AUSD again
- Causes inflationary pressure
- Monetary policy is then implemented
38
Exchange rate
• Can be measured against another currency
• Through a trade weighted index in which the AUSD is compared against a basket of currencies with its closest trading partners
International competitiveness
• The CAD usually indicates a nations international competitiveness
m
trends • When CAD first became a problem, many economists saw this as a problem of Australia’s trade performance and lack of export
competitiveness. The problem with running consistent CAD’s is that the servicing costs also increase, which cause further worsen the CAD
• Aus’s CAD is mainly generated by the private sector rather than the government, which mean that Australia’s CAD isn’t as bad as it seems.
o
• Equity doesn’t add directly to Australia’s foreign debt, but Australia does have to repay the price of purchasing the assets unless the assets
are sold back to Australia. Borrowing does add directly to Australia’s foreign debt, the initial borrowed amount must be repaid back with
c
interest. In the long-term the growth of Australia’s foreign debt can lead to a debt sustainability problem. This reduces Australia’s standard of
.
living and the economic growth potential.
• Policies
- Tightening of fiscal and monetary policy to cut spending on consumption and investment to reduce the CAD
s
- Micro-economic reform to lift the efficiency and international competitiveness of Australian businesses
- Maintaining a fiscal balance over the medium to long run
u
positive and negative • Causes:
causes and effects - Terms of trade: as ToT fall, we need to sell more exports to fund imports costs
- $AU: increase in value of AUD encourages import purchasing, leading to worsening CAD
c
- Economic growth: increase in growth leads to increase in imports
- Foreign debt: increase in debt means increase in servicing leading to worsening CAD
o
- Inflation: increased inflation lowers international competitiveness
• Effects:
- CAD: increase foreign debt
F
- Government: higher interest rates, run a surplus budget to restrain economy
- Debt: increase debt leads to increased servicing, could lead to ‘debt trap scenario’
DISTRIBUTION OF INCOME AND WEALTH
C
measurement – Lorenz • Mean Income: the average level of income. It is calculated by dividing the total income of a group by the number of income recipients in that
curve and Gini group
S
coefficient • Median Income: that level of income that divides the income recipients in a group into two halves, one half having incomes above the
median and the other having income below the median
• When measuring income it is split into quintiles (each 20%)
• Income inequality refers to the degree to which income is unevenly distributed among people in the economy. It can be measured by the
H
share of total income received by different groups.
• The Lorenz Curve
- Is constructed by plotting the cumulative percentage of total income received (vertical axis) against the cumulative percentage of
income recipients (horizontal axis)
- If income was distributed equally the line would be a 45degree diagonal through the origin. The further Lorenz curve is away from this
line, the greater the degree of income inequality in society
39
• The Gini co-efficient is a single statistic that summarises the distribution of income A/A+B
• The Gini Coefficient ranges between 0 when all incomes are equal and 1, when a single household receives all the income. Thus a smaller Gini
coefficient denotes more even distribution of income
Recent trends in Income and wealth inequality in the Australian economy
• Wealth
m
- Between 1915 and 1967, wealth inequality in Australia improved dramatically as a result of urbanization and industrialization
- Those with investment properties get increased income with an increase
sources of income as a • Wages from the sale of labour
o
percentage of - This is the main source of income for consumers. It comes in the form of wages or salary payment for labour when consumers
household income participate in the labour market. It also includes non-wage incomes such as fringe benefits, employer contributions to superannuation
c
and workers compensation payments.
.
• Rent from land
- Many consumers own land that becomes a source of income when it is rented
• Earnings from capital
s
- This is returns from the ownership of capital. For most consumers, their ownership of capital occurs indirectly through superannuation
and other investment funds or through the ownership of shares. They may earn interest on savings held in cash management accounts
u
or bonds. Many Australians now own shares in companies and these individuals earn dividends each year.
taxation, transfer • Social welfare
payments and other - A significant proportion of household’s income in Australia is received by way of social security or social welfare, known as transfer
c
assistance payments or government benefits.
- This is income collected through taxation and then transferred from governments to consumers.
o
- Over a third of total income tax that is collected is used to pay unemployment and sickness benefits, ages and disability pensions, family
allowances and similar social security payments.
sources of wealth • Meaning and relationship to income:
F
- Wealth is the value of accumulated assets over time. Wealth is a stock that can represented in an accounting balance sheet meaning that
it is a total accumulation over time that can been seen in a snapshot. Income is a flow, meaning it is a rate of change.
• Net value of real financial assets (property shares, bond, bank deposits, cash, consumer durables) owned by individuals at a particular point
of time. I.E: total assets minus total liabilities
C
• Share investment and superannuation are growing sources of wealth in Australia. Also, property is another increasing source of wealth
• Savings and ownership of business assets are decreasing in contribution to wealth.
• ABS measures household net worth
S
• The largest source of household liabilities is property loans which constitutes 83.6% of household liability
dimensions and trends, • Ages and Education
according to gender, - Income varies throughout life with 15-24 year olds earning the least at a mean weekly income of $440
H
age, occupation, ethnic - Income is maximum at around 35-54 with mean weekly income being $920
background and family - Income levels decline as people get older because they tend to work fewer hours and move into retirement
structure - Those with higher education qualifications (tertiary degree and diplomas) also earn higher wages that those with only vocational training
• Gender
- Males earn considerably more than females – even in same occupational categories
o Male earnings (2006) averaged $950
o female earnings (2006) averaged $650
40
- There has been relatively little change in proportion of women’s incomes to men’s incomes since 1990
- Suggests discrimination in the workplace
• Occupation
- Highly skilled occupations award higher salaries
o Managers, administrators and professionals (2006) averaged $1250
m
o Labourers, clerks and salesperons (2006) averaged $400
• Ethnicity
- Migrants from non-english speaking backgrounds earn less than those from English speaking backgrounds. Migrants from developed
o
nations earn higher incomes than those from developing nation.
- Migrants residing in Australia for longer periods earn higher incomes similar to those of Australians
c
- Aboriginals are among the lowest income earners in Australia are very reliant on government welfare. Disparities between Aboriginals
and Australians have increased drastically
.
• Family structure
- Couples have higher incomes within household structures
s
- Those with dependent children tend to earn less income because they need to work less in order to look after their children
- Couple + children = $500
Couple (no children) = $510
u
Single parent = $350
Single = $400
c
• Geography
- Income tends to be higher in major cities than in regional and remote areas
economic and social •
o
Economic costs
costs and benefits of - Reduction in overall utility
inequality - Reduce aggregate demand
F
- Reduce economic growth
- Increases the cost of welfare support
• Social costs
- Social tension through division in class
C
- Poverty
- Poverty trap
- Promotes materialistic culture (conspicuous consumption)
S
- Other costs (same as unemployment)
• Economic benefits
- Incentive to achieve higher
H
- Increase education
- Efficient allocation of resources (labour mobility)
- National savings
- Entrepreneurial development
- Higher tax revenue
• Social benefits
- High income earners benefits
- Promotes a desirable social structure
41
ENVIRONMENTAL SUSTAINABILITY
ecologically • The natural environment is the whole interaction of the climate, soil and plants and animal life
sustainable • Ecologically sustainable development (ESD) involves the pursuing of a level of economic growth which is compatible with the long-term
development preservation of the environment, rather than pursuing the maximum rate of growth possible
m
• Intergenerational equity is the concept of ESD between the current generations and the future generations
• Key principals
- Integrating economic and environmental goals
o
- Environmental assets
- Intergenerational development
c
- Managing environmental risks
- Global effects of environmental issues
.
private and social costs • Market failure occurs because the price mechanism and markets fail to take into account the social costs of their production. They don’t take
and benefits – into account the environment.
s
externalities, market • Costs and benefits of production the price mechanism ignores:
failure - While costs of additional production include the marginal costs of production (extra cost of inputs required to produce more output),
doesn’t take account of additional social/environmental costs as these are not borne by individual producers or consumers
u
- Doesn’t account for future demand for goods and services that may not be satisfies as a resource has been used up/destroyed
- Main problem behind market failure: in an economy system based on private ownership, no general property rights associated with
c
environmental ‘goods’ and the price mechanism can’t determine a value for them so impacts of production on environment are ignored
- Environment and other common resources can be destroyed through overuse
- Price mechanism can protect the environment by limiting sale of depleted resources. Scarce resources  increased cost of natural
o
resources  decreased number of resources. Lower supply  higher price such that only a few will be able to afford them. Higher
prices > consumers/produces developing alternative inputs to production.
public and private Public goods
F
goods – free riders • are non-excludable; the producer cannot exclude certain consumers. They are non-rival; the consumption by one person doesn’t reduce the
quality of other consumers
• Free riding occurs when a good is used by a consumer without having to pay for it
C
Private goods
•
environmental issues: preservation of natural environments
S
• Is the most important issue in the context of managing the economy. In the long run, an economy can’t keep growing if the environment is
continuously degraded (e.g. human health is affected via air pollution)
• Aim of government in preserving environment is to avoid social problems that arise when the environment is not actively preserved.
H
Preservation measures include:
- Restrictions on development in environmentally sensitive areas e.g. mining in national parks
- Waste emission controls
- Requiring new plantation in logging areas
- Protecting the environment from threats e.g. non-native plants/animals
• Problems governments face in preserving natural environment
- Short term: intervention can result in reduction in economic growth and distortion of the price mechanism  greater inefficiency.
Long term: government action may encourage growth of new industries e.g. solar/wind power stations in place of coal burning stations
42
- Higher costs to industries: have to comply with rigorous environmental standards. These standards make us less competitive as a place
to produce compare to countries with weaker environmental safeguards. Result: Australia may miss out on opportunities that would
raise economic growth and exports. Special interest groups may impede environmental protection e.g. mining industry lobby groups
- Cost of repairing environmental damage borne by tax payers, not those who cause the damage. E.g. government’s national heritage
trust scheme (aims to conserve Australian land, vegetarian coasts and oceans) received $300 million from 2004-05 budget.
m
pollution, climate change
• Occurs where the natural environment is degrade e.g. harmful chemical substance, noise, untreated rubbish. Effects atmosphere, water
resources and land. All human activity contributes to the problem
o
• Impact of pollution is not only experienced at the original source. E.g. sulphur emissions into the atmosphere from industrial regions in
Europe and US has damages lakes and forests throughout Europe and North America via acid rain. Outbreak of fire in Indonesia 1999 (logging
c
companies seeking to clear land) spread smog across Singapore and Malaysia
.
• Montreal Protocol: signed 1987, committed members to phasing out the production of ozone depleting products by 2000. Collevtive action
necessary as individual nations could not stop depletion of ozone
• Kyoto Protocol: December 1997, 60 nations agreed in Japan to limit emission of CO2 and other greenhouse gases. It requires industrialized
s
nations to reduce their average national emission by approx. 5% below 1990 levels between 2008-12. Australia refuses to ratify protocol.
Australia lobbied against rule forcing industry to cut gas emissions. Australia’s is the largest producer of greenhouse gas (twice Japan’s level
u
and 3 times Sweden’s). It was however recently ratified by the Rudd Government (08-09 budget) which “includes measure totaling $2.3b
over 5 years to help reduce Australia’s greenhouse emissions, adapt to climate change, and ensure we show global leadership in the
transition to low emissions.
c
• 2001 Doha Ministerial Conference: WTO members agreed to include environmental standards on the negotiation table for the Doha trade
round. This would allow countries to impose import restrictions on goods and produced using environmentally damaging practices.
Developing nations argue that such standards are disguised trade protection to reduce international competitors. It would affect Australia as
o
we are highly export based and reliant on the mining/agricultural industries.
• Taxes are favourable: reduce consumption, production, raise revenue which can be used to repair the environment. E.g. Australia raise taxes
F
on imported 4WD from 5-15% which raised government revenue by $1b over 8 years to pay for cost of CO2 emissions from heavy vehicles
depletion of renewable and non-renewable resources
• Renewable resource: can naturally replace themselves in a short period of time. The problem faced is that depletion of these resources cause
them to become non-renewable, e.g. fishing
C
• Non-renewable resources: natural resources which exist in limited supply as they can’t be recreated in a short time frame. Consumption of
these resources must be closely managed. E.g. oil, coal, gas
• Depletion impacts most on future resources and the aim of sustainable resource management is that the present generation doesn’t overuse
S
consumer stocks of renewable resources, minimises depletion of non-renewable resources and ensures new technology is available to make
alternative source possible.
• Since Australia is extremely reliant on natural resources, preserving environment is a major economic/social concern. Large concentrations of
H
resources e.g. coal, gold, iron ore and large agricultural sector make up a large proportion of Australia’s exports, whereby any damage to
these resources may have a devastating impact upon the BOP, significantly leading to a decline in the BOGS as export revenue falls steeply
couple with large import values.
43
ECONOMIC POLICIES AND MANAGEMENT
ECONOMIC OBJECTIVES IN RELATION TO ECONOMIC ISSUES

economic growth and • Economic growth involves increasing the economy’s production of goods and services over time and is measured by increases in real GDP,
m
quality of life which is nominal’s GDP (or GDP at current prices) adjusted for inflation
• Sustaining economic growth is important for a number of reasons;
o
- Increases in economic growth lead to rising real per capita incomes and higher standards of living for Australians
- Economic growth is accompanied by an expansion in the economy’s productive capacity and the creation of employment opportunities
to accommodate the increases in the size of the potential workforce, thus reducing the rate of unemployment.
c
- Economic growth is consistent with more opportunities for investment in private infrastructure (e.g. new plant and equipment), and
.
public infrastructure (e.g. transport, health educational facilities) and technology, which add to the economy’s productive capacity and
improve the quality of life
- Economic growth leads to more opportunities to realize the gains from international trade and investment through specialization or
s
production according to comparative advantage. Higher economic growth should be associated with increased exports and more
employment in export industries.
u
- Australia historically achieved a 3% annual growth rate between the 1960’s and 1980’s, however the target has been placed at 4%.
However economic growth averaged nearly 4% per annum between 96-07, helping reduce the unemployment rate to around 4% in 07.
full employment • Full employment is defined as that level of employment where the demand for labour is equal to the supply of labour
c
• Full employment refers to achievement of the objective of full employment of the economy’s resources of land, labour, capital and
enterprise. Usually economists interpret this as full employment of the labour force. If the labour force is fully employed, then it is assumed
o
that the other factors of production will be fully employed.
• Full employment does not mean that the unemployment rate will be zero, as some unemployment will still exist due to frictional and
structural factors in the labour market. This level of unemployment is known as the natural rate of unemployment or the non accelerating
F
inflation rate of unemployment (NAIRU), meaning if inflation is not increasing, frictional, structural, seasonal and hard core unemployment
would maintain their original level. The natural rate of unemployment is the level of u/e that remains after the elimination of cyclical u/e
• The government can reduce unemployment to its natural rate through successful macroeconomic, microeconomic policies and reform in the
labour market (such as enterprise bargaining) and by increasing flexibility, efficiency and productivity of labour.
C
• An important relationship that exists between economic growth and the rate of unemployment is known as Okun’s law. Okun’s law states
that the rate of economic growth must not exceed the sum of productivity growth and the growth in the workforce for unemployment to fall.
Economic growth  productivity growth + labour force growth
S
This is why the government is pursuing a growth rate of least 4% in real GDP to reduce unemployment
• The main benefits of reducing the rate of unemployment include:
- Increasing the economy’s productive potential and living standards
H
- Minimizing the economic and social costs of unemployment (ie: loss of the workforce, skills, greater equality etc.)
price stability • Price stability or low inflation is a major government objective because rising inflation
- reduces real incomes and living standards
- cause distortions in the economy such as misallocation of resources and a loss of international competitiveness
- lead to higher inflationary expectations (i.e. excessive wage and price demands) which can cause a wage-price spiral to develop, leading
to an acceleration in the rate of inflation
44
• The Australian government and RBA have made a commitment to sustaining the average rate of inflation at 2-3% over the course of the
business cycle. Between 1996 and 2007, inflation averaged about 2.6% per annum
• The CPI (consumer price index) is used to measure price stability as its more accurate since it is not distorted by changes in interest rates
• Inflation is seen as a problem because of its economic consequences. A high level of inflation may:
- Reduce the real value of income and wealth
m
- Reduce our international competitiveness due to rising costs of production
- Cause a depreciation in the ER, due to reduced demand
- Create uncertainty about future costs and distort economic decision making
o
- Distort the pattern of resource allocation
external stability • External stability refers to the goal of Australia meeting its short term and long term financial obligations with the test of the world. External
c
balance has 3 main dimensions:
.
- Ensuring that the CA in the COP is in equilibrium and is sustainable
- Maintaining stability of the ER in currency markets through international confidence in the Australian economy’s performance and the
conduct of the government economic policy
s
- Ensuring that the levels of net foreign liabilities (NFL) and net external debt are sustainable as a percentage of the GDP. i.e CAD must be
kept under -5% of GDP to stabilize net external liabilities and the level of net FDI measure by the debt servicing ratio. FDI is currently 56%
u
of the GDP. The CAD = -5.8% GDP
environmental • In the process of achieving society’s economic objectives, economic activity may create side effects such as pollution and the depletion of
sustainability natural resources. Thus, ecologically sustainable development (ESD) means that current levels of growth development should meet the
c
needs of the present generation without compromising the ability of future generations to meet their own needs. This involves maintaining
environmental quality through adherence to a set of environmental standards and the preservation and conservation of both renewable and
o
non-renewable natural resources.
• It also commits the government to honouring its obligations under the Montreal Protocol to reduce CFC emissions: the Kyoto Protocol to
reduce greenhouse gas emission in the various UN environmental treaties (such as the Antartic Treaty and the Law of the Sea) and other
F
global conventions (such as World Heritage and Protection of the Ozone Layer and Biological Diversity) to preserve natural environments
distribution of income • The government has a social responsibility to redistribute income from the rice to poor to make the distribution of income fairer and to
alleviate the extent of absolute and relative poverty in society The objective is not to create a perfectly equal distribution of income, but to
reduce the extent of inequality by:
C
- Providing transfer payments to disadvantaged social groups unable to earn market income
- Making the taxation revenue to finance spending on elements of the social wage such as public education, health transport and housing
- Reducing the incidence of poverty traps through the selective targeting of welfare assistance and by providing tax relief through the tax-
S
transfer system for low income households.
Potential conflicts • In seeking to achieve its economic objectives simultaneously, the government may experience conflicts or trade-offs between the main goals
among objectives of economic policy in both short and long run
H
• Price stability and full employment may conflict in the short run because if the government pursues policies to promote economic growth
and full employment (such as budget deficits or cuts in interest rates), growh may become unsustainalble and lead to inflationary pressures
and a lack of price stability. Alternatively, government policies (e.g. budget surpluses) designed to reduce the rate of economic growth and
inflation may lead to rising unemployment and an inability to achieve full employment.
- High inflation = increasing unemployment
 Contractionary monetary policy
 Cost of production increases for business
45
- In the short run high inflation doesn’t have an effect on unemployment until the RBA employs monetary policy
• Economic growth and full employment may conflict with external balance in the short run because unsustainable rates of economic growth
lead to rising import spending (because of excess aggregate demand) and a deterioration in the CA of the BOP. An unsustainable CAD
imposes and external constraint to domestic economic growth and may lead to a depreciation in the ER? which can raise inflation through
higher import prices
m
• The pursuit of microeconomic efficiency (protection) to raise domestic economic growth may conflict in the short term with full
employment as some structural unemployment will result from structural changes induced by such microeconomic reform measures. These
measures may also conflict with the achievement of a more equal distribution of income if displaced workers suffer a loss of income.
o
• Economic growth may conflict with environmental quality in the long run and if economic growth is ecologically unsustainable and leads to
a depletion of renewable and non renewable resources, and increases in externalities such as pollution, land degradation and a loss of
c
biodiversity.
.
• Usually governments are more focused on short term objectives because of political considerations such as the desire to be re-elected rather
than the long term objectives
Relationships between • Economy expanding/contracting
s
objectives - The two economic objects that are improved if the government expands the economy are:
o Economic growth
u
o Employment
- The two economic objects that are improved if the government contracts the economy are:
o External stability
c
o Price stability
• Higher/lower economic growth
o
- When economic growth increases:
o Employment increases
o External instability worsens – higher CAD (due to higher imports)
F
o AUSD value down (assuming that interest rates do not rise)
o Price stability worsens (higher inflation)
o Environment worsens
o Inequality in the distribution of income rises (worsens)
C
- When economic growth decreases:
o Employment decreases
o External stability improves – lower CAD, AUSD up (assuming that interest rates do not fall)
S
o Price stability improves (lower inflation)
o Environment improves
• Higher/lower employment
H
- When employment increases:
o Economic growth increases
o External instability worsens – higher CAD , AUSD down (assuming that interest don’t rise)
o Price stability worsens (higher inflation)
- When employment decreases
o Economic growth decreases
o External stability improves – lower CAD, AUSD up (assuming that interest rates don’t fall)
o Price stability improves (lower inflation)
46
• Higher/lower inflation
- When inflation increases (worsens)
o Employment is strong (higher inflation usually occurs when there is low unemployment)
o External stability worsens – high CAD, AUSD down
o Economic growth is high (higher inflation didn’t cause the rise in growth, higher inflation usually occurs when there is rising
m
economic growth)
- When inflation decreases (improves)
o Employment worsens (weak employment is usually caused by low inflation)
o
o External stability improves – lower CAD, AUSD up
o Economic growth is low
c
• Higher/lower CAD
- When the CAD increases (worsens)
.
o AUSD worsens
o Employment improves (due to the expansionary impact of a depreciation of the AUSD)
s
o Economic growth improves (due to the depreciation of the AUSD)
- When the CAD decreases (improves)
o AUSD improves
u
o Employment worsens (due to the contractionary impact of appreciation of the AUSD)
o Economic growth worsens (due to the appreciation of the AUSD)
c
MACROECONOMIC POLICIES
o
rationale for • Also known as:
macroeconomic - Demand-management policies
policies - Counter-cyclical policies
F
- Stabilisation policies
• Definition: policies aimed at stabilizing the short-term aggregate level of economic activity or output
• Main tools of macroeconomic management are monetary and fiscal policy
C
stabilisation and shifts in aggregate demand
• Macroeconomics is concerned with shifting aggregate demand through:
- Tax rates
S
- Government spending
- Interest rates
• AD determines the level of economic activity (output (GDP), employment and prices). Thus macroeconomic policies are used to determine
the level of economic activity.
H
• Rationale
- Minimises the fluctuations of the business cycle and stabilize the economy
o During a boom policies can be implemented to reduce AD and thus lower output, the rate of economic growth and problems
associated with this growth (inflation)
o During a recession policies can be implemented to increase AD and thus increase output, economic growth and employment
- Policies are used to shift AD so as to close inflationary/deflationary gaps
47
Fiscal policy • Fiscal policy refers to the federal government’s use of its annual budget
• Fiscal policy is used to influence:
- Economic activity
- Resource allocation
- Income distribution
m
• The budget strategy can be used to achieve the government objectives of:
- Internal balance
- Economic growth
o
• The 2 main instruments of the fiscal policy are: taxation and spending
• These are used to influence:
c
- AD = C + I + G + (X-M) and thus economic activity (economic growth, inflation, unemployment, CAD)
.
- Pattern of resource allocation (G spending on certain sectors)
- Distribution of income (transfer payments)
• Government spending can be used to target certain industries or social groups
s
• Within the policy mix, fiscal policy plays a less important role than monetary policy
• Fiscal policy has a large time lag as implementation is slow (passing bills through parliament) but the impact is almost immediate.
u
Federal Government budgets and budget outcomes
st th
• The budget is an annual statement of expected government revenue and expenditure for the forthcoming financial year (1 July – 30 June)
• Budget estimates may change as economic conditions change. Actual budget outcomes may differ from original estimates
c
• Revenue:
- Government funding is received from
o
o Direct tax (personal/business)
o Indirect tax (customs and excise duty/GST
o Other revenue (dividends from public trading enterprises)
F
• Expenditure:
- The major components of expenditure are:
o Welfare payments – 42%
o Health – 18%
C
o Defense – 8%
o Education – 7.5%
o Public administration – 6%
S
• Budget (fiscal) outcomes
- The budget outcome is the net government budgetary position in terms of spending and revenue
- There are three possible outcome:
H
o Fiscal/budget balance – revenue = expenditure
o Fiscal/budget deficit – negative balance where expenditure > revenue
o Fiscal/budget surplus – positive balance where revenue > expenditure
• Measures of Budget Outcomes
- The fiscal outcome
o Calculated as: total revenue – total expenses – net capital investment
48
o This measure excludes one-off transactions, e.g. sales of fixed assets (Telstra). Such transactions distort the Budget outcome
from the long term trends
o Is calculated using the accrual accounting method.
o Fiscal outcome is regarded as the most accurate long term indicator
- The underlying cash outcome
m
o Calculated as: total revenue – total expenses – net capital investment
o This measure excludes one-off transactions
o Calculated using the cash accounting method – where accounts are settled when the transactions are made
o
o This outcome gives the best indicator of the impact of fiscal policy on the level of economic activity in the year
- Headline cash budget outcome
c
o Shows all cash transactions including one-off transactions, which isn’t regarded as a useful indicator of fiscal policy
o This is because sales of government assets simply transfer ownership of productive resources from the public sector to the
.
private sector without generating any income in the process
o Also such transactions are not regular and thus cause the outcomes to show larger fluctuations from year to year
s
• Components of the Budget Outcome
- The budget consists of two components – structural and cyclical
- Structural (discretionary) component
u
o Refers to deliberate changes in government spending and/or taxations policies used to affect budget outcome
o E.g. increase revenue was partially offset by the government’s decision to make cuts in personal tax income
c
- Cyclical (non-discretionary) component
o Refers to changes in government spending/revenue which are caused by changes in the level of economic activity or national
income – changes are caused by automatic stabilizers rather than government decisions
o
o E.g. total revenue for 2006-07 was revised because of the global resources boom leading to an increase in company tax revenue
- Automatic stabilizers
o Assuming that discretionary government spending doesn’t change, the budget outcome will change due to change in economy.
F
Such changes are due to the automatic stabilizer effects of taxation and welfare payments.
o Progressive taxation:
 In a boom, national income rises and thus taxation in all sectors rise
C
 The reverse occurs in a recession
o Expenditure on unemployment benefits
 In a boom, more production occurs, thus more factor of production (including labour) are required, leading to
S
decreased unemployment. This results in decreased spending on unemployment benefits and job search programs
 The reverse occurs in a recession
o Automatic stabilizers are the cyclical components of the budget outcome. They play a counter-cyclical role.
o However, they are rarely strong enough to counter the full effects of the business cycle (discretionary policies are still required)
H
• Stances of fiscal policy
- The stances of fiscal policy refers to the overall effect of the budget outcome on economic activity.
- Stances are best measured by the structural component of the budget outcome.
- There are 3 possible stances: expansionary, contractionary and neutral
- Expansionary (Fiscal) Stance
o Government increases net expenditure compared to the previous year
o Can be through lower taxation, higher government spending or both – results in larger deficit or a smaller surplus
49
o Expansionary stance effectively acts as an injection – multiplier effect still applies
o Thus this increase the level economic activity, this stance is used to boost aggregate demand to close a deflationary gap
- Contractionary (fiscal) stance
o Government decreases net expenditure compared to the previous year
o Can be through higher taxes, lower government spending or both – results in a smaller deficit or a larger surplus
m
o Contractionary spending effectively acts as a leakage – multiplier effect still applies
o Thus this decreases the level of economic activity, this stance is used to reduce aggregate demand and close an inflationary gap
- Neutral (fiscal) stance
o
o Government maintains the same level of net expenditure as in the previous year
o Effectively, this is neither a leakage nor an injection since the net spending is the same as the previous year
c
o This budget would have no effect on the economy
effects of budgetary changes on resource use, income distribution and economic activity
.
• Economic activity
- Changes in the stance of fiscal policy can impact on the level of economic activity through changes in the budget outcome
s
- Effects on the economic activity are based on stances
• Resource Allocation
- Fiscal policy can influence the allocation of resources either directly or indirectly
u
- Direct measures
o Direct influence is through selective government spending. E.g. direct spending on infrastructure
c
o Governments are more likely to use direct measure if they expect that markets will not provide the resources quickly enough
without government intervention
o May also provide public goods, which private sectors don’t provide. E.g. national defense, environmental protection
o
- Indirect measures
o Indirect influence is through tax and spending policies, which influence the prices of goods, which affects levels of consumption
and the amount of resources allocated into the sector. E.g. lower tax on ethanol to encourage its use
F
o Indirect measures are used to influence spending patterns. E.g. higher tax on tobacco to discourage smoking, which reduces the
costs on health care in the longer term
- Examples
C
o Direct measures
 Co-contributions to superannuation encourages further savings
 Government spending is focused on families, health and defense to focus resources into those areas
S
o Indirect measures
 The introduction of the GST in 2000 removes previous indirect taxes
 Previous taxes penalized the production of certain goods and did not tax services (despite contributing to 80% of GDP)
 This distorted resource allocation in favour of service production
H
 The GST removes this inefficiency by applying a broad based indirect tax at a uniform rate to most G+S – raise revenue
while increasing efficiency
 In 2001-02, the company tax rate was cut to 30% and some state taxes such as Financial Institutions Duty (FID) were
abolished to improve resource allocation
 In recent years Australia has encourages savings into superannuation through tax deductions and cuts in tax surcharge
50
• Income Distribution
- The fiscal policy plays the most important role in influencing the distribution of income. Income distribution is affected by the budget
through changes to the taxation, social security and welfare systems.
- Through the commitment to the progressive tax system, income is redistributed from high income earners to low income earners
through transfer payments (family allowance, pensions, dole etc.)
m
- Tax arrangements:
o Changes in tax arrangements can significantly affect income distribution. A reduction in tax rates at the upper end of the
income scale would make the tax system less progressive and create more inequality.
o
o And increase of regressive tax (GST) would further create more inequality
- Budgetary spending
c
o Reductions in spending on government services would affect lower income earners more since they tend to be more reliant on
government services
.
o This would create more inequality as low income earners would need to spend more on services that were previously free
- Examples
s
o Tax cuts worth $12b plus 4% increase in ages and invalid pensions were introduced in 2000 to counter the effects of the GST
o Continuous tax cuts (every year) from 2003 were made possible due to strong performance of the economy
o These cuts tended to be in the top three tax thresholds, making the tax system less progressive, as low income earners received
u
no reduction in their tax benefits while higher income earners did
o In the 06-07 budget, tax thresholds were increased in the top 4 thresholds, while marginal tax rates were decreased in the top 2
c
o These tax cuts were inequitable since high income earners received more tax benefits than low tax income earners
o This was used so as to stem the “brain drain” of top Australia professionals going overseas for better work opportunities or
lower tax rates. However low income earners and the elderly also received other tax benefits
o
• Governments Impact on Savings and CAD
- When governments run large deficits they borrow money from the private sector
- This could increase interest rates as available funds are used by the government causing a ‘crowding out’ effect where private
F
investment is deterred due to the high interest rates
- If the level of savings is lower than the level of demanded for investment, investors then borrow from overseas increasing our net debt
and contributing to our CAD.
C
- To reduce our CAD problem, Australia has been running budget surpluses for most of the past decade
methods of financing deficits
• Debt financing – the commonwealth government borrows from the private sector by selling government securities which is returned with
S
greater interest
- The selling of treasury bonds occurs under a tender system
- A government can issue a promissory note to any business at anytime because the business can be confident with the AAA rating that
the government will pay them back
H
- Government can always finance a deficit
- Rate of interest is determined by the market
- costs: crowding out effect and potential accumulation of debt
• Borrowing from overseas
- Government can borrow from overseas (through the Reserve Bank)
- This was so the government can reduce its share of foreign debt to improve the CAD
- The government could borrow at any time if overseas options are less expensive than domestic borrowing
51
- Benefits: doesn’t effect the domestic demand for funds therefore there are never going to be increases in interest rates likewise there is
no threat of the crowding out effect as well.
- Cost: contributes to foreign debt adding to debt servicing and CAD
• Monetary financing – borrowing money from the RBA
- If the RBA is being borrowed from, they are automatically using monetary policy
m
- Benefits: doesn’t create government debt and doesn’t accumulate foreign debt either
- Costs: increasing the money supply creating inflation as RBA is implementing loose monetary policy; leads to higher interest rates; leads
to loss of business and consumer confidence if used too often
o
• Selling government assets
- Involves selling Commonwealth land or share in businesses, used in conjunction with debt financing
c
- Benefits: requires no debit financing
- Costs: losing assets
.
Use of a surplus
• Reduce public sector debt (national debt)
s
- This is preferred method of using a budget surplus
- Involves the purchase of old government securities previously sold to the private sector
- The Howard government eliminated the $96b (17.6% of GDP) Commonwealth debt of 1996 to reach savings of $22b (2.2% of GDP) in 06
u
- The surpluses were invested into the Future Fund, which will be used to pay for the Australian government’s large ($96b)
superannuation liabilities to public servants
c
- Earnings from Future Fund are reinvested and can’t be used until the superannuation liability is met
- Benefits:
o Repays past public borrowings to reduce future debt obligations
o
o Reduces debt interest, which is a significant item of recurrent expenditure in the budget
• Repaying foreign debt
- Repay government debt with overseas lenders
F
- Reduces the CAD
• Funding tax cuts
- Surpluses can be used to fund tax cuts
C
- Benefits:
o More money for consumers to spend, creating AD and increasing economic activity
o Politically popular
S
- Costs:
o May contribute to inflation if full employment is achieved
• Increasing government assets
- Purchase of productive assets such as infrastructure
H
- Has not occurred in recent years due to trend towards privatizations
Monetary policy • Monetary policy refers to actions by the RBA to influence the supply and cost of credit in the economy – the RBA is the federal government’s
Principal monetary authority
purpose of monetary policy
• To affect the interest rates and in turn affect levels of:
- Spending
- Inflation
52
- Output
- Employment
• Main tool of monetary policy is RBA’s use of Domestic Market Operations (DMO)
- Involves buy and selling of Commonwealth Government Securities (CGS)
- Influences the cash rate (interest rate paid on overnight loans) in the cash market (short-term money market)
m
• Function
- Used as a counter-cyclical policy to maintain a sustainable rate of economic growth
- Monetary Policy is conducted by the RBA on behalf of the government however is not controlled or influenced by the government
o
• Position policy mix
- Predominant policy in controlling short term economic growth
c
- Affects the economy on the whole rather than specific sectors and thus is a blunt instrument
.
• Time Lags
- Fast implementation (can be changed at any time)
- Slow impact 6-18 months (takes time for the economy to respond to changes)
s
- Monetary policy needs to be used preemptively
- RBA focuses on the economic conditions of the upcoming 12-18 months
Objectives of monetary policy
u
• Formal objectives
- Maintain low inflation: currency stability
c
- Reduce unemployment: full employment
- Sustain long term economic growth: prosperity and welfare
• Objective targets
o
- Price stability: CPI inflation between 2-3%
- Full employment: NAIRU of 5-6%
F
- Economic growth: 3-4%
• Aspects of Australia’s monetary policy
- When assigned a number of simultaneous goals in the past, monetary policy was fairly unsuccessful of achieving any of them
- Monetary policy is particularly suited to fighting inflation, which is often related to monetary factors
C
- Where central banks are given responsibility of inflation targeting, low inflation can be achieved without necessarily incurring the cost of
increasing unemployment
• Indicators used by the RBA
S
- Current inflation rate
- Inflationary expectations
- Wages growth
H
- Exchange rates
- Rate of unemployment
- Rates of economic growth
- Interest rates
- Balance of payments
• Interpreting indicators
- Inflation
o RBA will raise interest rates if inflation outlook for the next 15 months is high
53
- Inflationary Expectations
o When people expect inflation to be high (meaning their money decreases in value), they would increase spending to maximize
the value of their money
o As spending increases, inflation increases
- Wages growth
m
o If wages grow faster than productivity, businesses will pass on the additional costs to consumers
o Higher prices on products means higher inflation
o RBA regards wage growth in excess of 4.5% as a threat to low inflation
o
- Exchange rates
o A depreciation in exchange rates will cause imported inflation
c
o Imports cost more because AUSD is worth less
- Unemployment
.
o If economy approaches full employment, any growth in demand will result in inflation (since demand will be > supply)
- Economic growth
s
o High levels of economic growth is a threat to inflation
o Demand tends to outstrip supply during booms
• Inflation targeting:
u
- RBA focuses mostly on price stability rather than the other two formal objectives
- Involves the targeting of underlying inflation (inflation without one-off volatile factors) to a band of 2-3%
c
- Rationale:
o Sustaining low inflation would avoid higher interest rates (and higher u/e) in the future
o Adopting a credible inflation targeting regime would reduce inflationary expectations of consumers and businesses
o
o Promotes co-ordination amongst countries to reduce global inflation
- Advantages
o Anchors people’s inflationary expectations
F
o Makes the conduct of monetary policy credible if target is achieved over time
o Provides an operational basis for the conduct of monetary policy
o Potential co-ordination amongst countries to reduce global inflation
C
• Full employment
- RBA objective to minimize unemployment to NAIRU (5-6%)
- Expansionary monetary policy from 1991-93; 1996-99; 2001 helped reduce unemployment from 11% in 1992 to 5% in 2006
S
• Sustainable economic growth
- Achieving a rate of growth that is consistent with rising real incomes and employment opportunities, without increase in inflation of
deterioration in CAD
- This success of RBA keeping inflation low in the 1990s has allowed government to raise Australia’s growth rate from 3% to 4%
H
• Conflict in objectives
- Inflation conflicts with full employment and economic growth
o Easing monetary policy promotes economic growth and employment at the cost of inflation
o Tightening monetary policy controls inflation at the cost of economic growth and employment
- RBA favours inflation over full employment and economic growth due to inflation targeting
54
• Factors that affect monetary stance
- Low inflation objective
o When inflation moves too far out of the 2-3% target band, the RBA will change monetary policy
- Inflation Expectations
o RBA enforces expectations of sustained low inflation
m
o If inflationary expectations remain low, then businesses plan lower price increases and unions push for lower wage increases
o RBA will raise interest rates if the market feels inflationary pressure to reduce inflationary expectations
- Wages Growth
o
o Wages growth is one of the most significant determinants of inflation
o Wages growth must be below 4.5% in order to be consistent with its inflation target
c
o Threatens unions with raising interest rates to lower wage demands
- Economic Growth and Lower Unemployment
.
o These two factors are related because strong economic growth results in lower unemployment
o Growth and unemployment are important indicators of whether the economy is close to a supply constraint
s
o When and economy is operating near full capacity, continued growth in spending will not lead to higher output and
employment, but will instead spill over into higher prices
o If RBA feels unemployment is reaching its natural rate, it will raise interest rates to prevent excessive feeding into higher prices
u
- External factors
o Interest rate differentials
c
 Australia sometimes needs to maintain an interest rate differential with the world to attract foreign investment (due to
our low national savings)
 If world IR’s were rising, RBA may consider raising interest rates to attract foreign funds for economic development
o
 However, RBA focuses on domestic price stability over interest rate differential
o Exchange rates
 A depreciating AUSD would increase the costs of imports, contributing to imported inflation
F
 Would influence RBA to raise interest rates
implementation of monetary policy by the Reserve Bank of Australia
• Implemented through the manipulation of interest rates. RBA can’t directly control market interest rates of banks (due to deregulated
C
financial sector) but can influence the cash rate.
• Exchange Settlement Accounts
- Banks and other financial institutes must hold ESA’s with the RBA
S
o To meet financial obligations with their depositors, a certain amount of money is required to be kept in these ESA’s
- ESA’s are sued to settle debts amongst financial institutions as depositors move money from one institute to another as they do business
- Institutes with a surplus will lend money to those that are short of funds on the “cash money market” or “overnight money market”
• Cash Market
H
- Banks, financial institutions and large companies deposit and borrow money on the cash market for 24 hour periods
- The interest in this market is determined by the supply and demand
- The supply in the money market can be affected by government through taxes (decreases supply) and social payments (increases supply)
• Domestic Market Operations
- DMO involves the buying and selling of Commonwealth governments securities (CGS) on the cash market
- This affects the supply in the cash market
- This supply determines the cash rate
55
- The RBA sets a cash rate target each day and adjusts the supply so that the cash rate doesn’t change (unless RBA decides to change the
stance on the monetary policy)
• Monetary stances and effect on interest rates
- DMO:
o Tightening: sell CGS
m
o Loosening: buy CGS
- Response of banks and other large institutions
o Tightening: Pay money to RBA in exchange for buying CGS from banks
o
o Loosening: Receive money from RBA in exchange for selling CGS to RBA
- Outcome on cash market
c
o Tightening: Outflow of funds to RBA – supply decreases
o Loosening: Inflow of funds from the RBA – supply increases
.
- Cash rate
o Tightening: rises (due to shortage of funds)
s
o Loosening: falls (dues to excess of funds)
- Market interest rate
o Tightening: Rises (to maintain interest rate margin on cash rate)
u
o Loosening: Falls (to maintain interest rate margin on cash rate)
impact of changes in interest rates on economic activity and the exchange rate
c
• Transmission mechanism
- The impact of changes in interest rates on the economy is known as the transmission mechanism of monetary policy
- Changes in the case rate will first impact short term interest rates
o
- Medium to long term interest rates would then move proportionally as banks maintain their interest rate margins
- This alters the costs of borrowing and returns on savings
• Flowchart of Transmission mechanism – changes occur in this order:
F
- Cash rate
- General interest rates and expectations
- Exchange rates
C
- AD (domestic expenditure of foreign demand)
- Output
- Employment, prices and inflation expectations
S
• Effects of transmission mechanism
- Higher interest rates:
o Contractionary monetary policy
o Reduces AD
H
o Reduces output
o Reduces the rate of economic growth
o Wages and inflation fall
o Exchange rate rises
o Reduces export competitiveness
o Thus, higher interest rates have a contractionary effect on the economy
56
- Lower interest rates:
o Expansionary monetary policy
o Reverse of above
• Channels of Transmission Mechanisms
- These changes operate through 6 channels (examples are given on higher interest rates, reverse occurs for lower interest rates)
m
- Investment, Savings and Consumption
o More saving (higher return on saving)
o Less spending and investment (costs more for businesses and consumers to borrow, higher returns by saving instead – OC)
o
o Reduces AD and lowers output
- Cash flow
c
o Reduce cash flow for households, businesses and government
o More cash is used to service existing debts
.
o Not as much cash can be moved around the economy (used for any reason)
o Reduces AD and reduces output
s
- Cost of credit
o Raise the cost of credit borrowing and purchase made on credit (interest is the cost of borrowing)
o Deters credit use
u
o Reduces AD and output
- Asset prices
c
o Discourages borrowing and spending on acquiring assets
o Lowers the price of assets (due to less demand)
o People with assets feel less wealth and reduce their spending
o
o Reduces AD and output
- Exchange rates
o Encourage capital inflow (higher returns)
F
o Increases demand for AUSD leading to an appreciation of AUSD
o Raises the cost of exports
o Reduces AD (from foreign sector) reducing output
C
- Inflationary expectations
o Higher interest rates reduce inflationary expectations (since people generally associate high interest rates with low inflation)
o Reduces wage and price increase demands
S
o Reduces AD
Microeconomic policies • Microeconomic reform policies: are policies designed to raise the economy’s long-term level of efficiency, productivity and international
competitiveness through a reduction in prices and increase in quantity of goods and services
- They target specific areas of the economy unlike macroeconomic policies which affects the whole economy.
H
- Is directly linked to specialization, comparative advantage, economies of scale and production possibility frontier
- Fundamental goal is to increase efficiency while reducing costs and increasing output
- Protection is a form of microeconomic policy which causes misallocation of resources through artificial barriers, thus reducing efficiency
- Objective is to achieve economies of scale through the lowest possible price and sustainable output (total optimum)
- Aimed at increasing the economy’s long run aggregate supply curve (productive capacity)
- NTS: whenever talking about protection, bring in micro reform.
57
• Implementation
- Through government reforms
- Complementary with macroeconomic policies (work best if the government can achieve internal and external balance in the short run)
• Aims to improve the efficient operations of markets by:
- Strengthening market competition
m
- Encouraging the use of the latest technology
- Improve productivity, flexibility and responsiveness to change
- Encouraging more efficient work practices
o
• Are used to address specific structural problems in markets, such as a lack of competition and efficiency
- They are selective policy measure that target certain aspects of the economy (e.g. labour market reforms to raise labour productivity)
c
- Such supply related problems are not affected by macroeconomic policies
.
rationale for microeconomic policies including shifts in aggregate supply, efficiency
• Microeconomic policies target specific parts of the economy with the rationale to improve the productive capacity in the long term.
• Whereas macroeconomic policies aim to boost demand, microeconomic policies aim to reduce government intervention and thus increase
s
aggregate supply – so that price level for consumers are reduced
• In order to shift AS we need to increase productivity levels by pushing our production possibility frontier outwards
u
- In 2005-06, full employment was achieved in the labour market and infrastructure was fully utilized
- Constraints must be removed such as CAD and inflation
- This would lead to higher economic growth and lower prices
c
• Raises national income and living standards
• Increases economy’s ability to absorb shocks transmitted by the global economy
o
• Key Features:
- Directed at supply (output) side of economy
- Improve allocation of resources in the long run
F
- Directed at product (final goods and services) market and factor (land, labour, capital and enterprise) market
- Impacts tradeable (export and import competing firms) and non-tradable (domestic public sector enterprise) sector
- Targets government and privately owned businesses
Productivity
C
• Measurements of Productivity
- Labour productivity = output .
Labour inputs/time
S
- Capital productivity = output .
capital inputs/time
- Multifactor productivity = output .
H
All factor inputs/time
• Productivity history
- Labour, capital and multifactor productivity were highest in 1960’s and 1970’s
- Declined in 1980’s and then recovered in 1990’s
- Labour productivity averaged 2.2% in 1990’s due to:
o Capital deepening (increase in capital per worker)
o Education and training (improvements in quality of labour)
o Improvements in efficiency (labour used more effectively)
58
Efficiency
• Microeconomic policies aim to encourage the efficient operation of markets to lift productivity in the economy’s use of labour, capital and
human resources.
• There are 3 types of efficiency which the labour market aims to maximize:
- Allocative
m
- Technical
- Dynamic
• Allocative efficiency
o
- shifting resources to where they’re most valued and can be used most efficiently – allocated resources to the most efficient firms
- involves firms changing prices at the marginal cost of production
c
- achieved through greater competition (competition policy)
.
- SPECIALISATION
• Technical efficiency
- the ability of an economy to achieve the maximum level of output for a given quantity of inputs.
s
- Firms producing at minimum costs thus conserves resources scarce resources for other areas of production
- Achieved through promotion of a “market economy”
u
- LONG RUN AVERAGE COST CURVE  firms producing at the technical optimum
• Dynamic efficiency and innovation
- the economy’s ability to shift resources between industries in response to changing patterns of domestic and global consumer demands
c
- ensures that resources are only used on what is demands
- achieved through the adoption of latest technology and innovative business practices
• Okun’s Law  to maintain employment, economic growth = the % increase in the labour force + the % increase in productivity of labour
o
Structural change
• Structural change is the change in the patter of production within the economy to alter the composition of production
F
• Major structural changes occurred in 1980-1990’s as a result of market and technological influences as well as the Hawke and Keating
government policies which opened Australia up to global trade
• Structural changes include:
- Decline of agriculture and manufacturing industries
C
- Increasing importance of services sector (%GDP and %employment)
- Reduction in production costs through technological change
- Increasing integration of Australian economy into global economy: exports and imports rose from 12%GDP in 1990 to 20%GDP in 2006
S
- Growing influence of East Asian market (esp. China) on production patterns
- Changing composition and distribution of workforce
- Changing consumption patterns: more disposable income spent on services relative to goods
H
• Importance of Structural change
- Importance of remaining competitive in a fast-changing global economy
- And economy must change to meet global demands
- In the long run an economy must undergo structural change to promote productivity growth, economic growth, real incomes growth,
increased competition, lower inflation, lower external liabilities and higher standards of living
• Structural Problems
- Many persistent problems in the Australian economy are structural problems (e.g. high net incomes deficit in CAD)
- Such problems can not be fixed with macroeconomic policies, which focus on cyclical problems - positive structural change is required
59
• Causes of Structural Change
- Market change (changes in the pattern of consumer demand)
o As consumer tastes and preferences change, production changes to satisfy consumer demand
o New products may emerge while old products become obsolete
o Rising levels of income also affect spending habits – higher incomes result in higher spending leading to change in production
m
- Technological change
o Technology can affect consumer tastes by introducing new products
o Innovation and technological progress also leads to more efficient processes of production that change the way goods and
o
services are produced and delivered to consumers
- Government
c
o The government can cause structural change by implementing policies
o These are known as microeconomic policies
.
effects of microeconomic policies on individual product and factor markets, individual industries and the economy
• The main microeconomic policies are targeted at specific sectors of the economy and target:
s
- Deregulation (removal of government controls over a sector)
- Privatisation (the sales of state owned enterprises)
- Legislation designed to increase economic liberalization
u
• Some microeconomic policies are:
- Deregulation
c
- Reforms to public trading enterprises
- Competition policy
- Innovation and industry policy
o
- Environment management
- Lowering protection
- Tax policy
F
- Labour market policy
• Microeconomic reform is directed towards both product and factor markets and has flow on effects.
• Product markets – where finished products are bought and sold.
C
- Microeconomic reform increases efficiency and competition which drives down prices for consumers. Competition policy is an example
of Product Market microeconomic reform. E.g. workplace reform – airlines, transport, communication etc.
• Factor markets – deal with the buying and selling of the factors of production (e.g. land labour capital enterprise)
S
- Microeconomic reform tends to focus on factor markets because they can benefit many sectors of the economy. Whereas Product
Market microeconomic reform effects only the targeted industries.
- Factor markets are important in:
o Improving productive capacity and ability to compete
H
o Lowering inflation rates
o Lowering interest rates
- Factor Markets are critical; flows throughout the economy. Factor Market reforms are effective because they concern inputs to
production which are across many industries.
• Labour Market reforms lead to greater efficiency/productivity and lower prices. Failure in this front however leads to an inability to compete,
higher unemployment, cost-push inflation, IR rises and appreciation of the AUSD, making Australia’s export industries more uncompetitive.
60
regulation and deregulation – competition policy
• Regulation is government influence on markets through rules and regulations restricting certain prices
• Deregulation involves the simplification or removal or rules and regulations that constrain the operation of market forces
• Agricultural Industries
- Deregulated in 1989
m
- Total farm production is increasing; total number of farms is falling
- Shows more efficient farms as regulations are being removed
- Agricultural productivity has grown faster than the average for the rest of the economy for the past 2 decades
o
• Aviation
- Deregulated in 1990
c
- However, Australia as struggled to sustain more than 2 airlines
.
- Qantas dominates the aviation industry: strong competition from Virgin Blue
- Competition is limited
• Rail
s
- A range of reforms (including establishment of National Rail Corporation) have improved the efficiency of the rail industry
- Government owned freight businesses were privatized in 2001
u
- Making rail transport more competitive and reducing rail transportation costs
• Telecommunications Industry
c
- Important contributor to business productivity: contributes 3% of economic output
- Until 1990’s, sector was dominated by Telecom (Telstra) as the monopoly provider
o
- Optus entered the industry in 1992
- The Australian sector is now one of the most deregulated in the world
- Has reduced telecommunication costs dramatically
F
- Telstra however still operates as a virtual monopoly
- Is now privatized
- ACCC wanted strong regulatory powers to prevent Telstra abusing its powers and overcharging consumers
• Continuing Regulation
C
- Supervision is still required
- Help prevent market failure
- Collapse of HIH (largest business failure in Australia history)
S
- Only 4 major banks dominate banking sector resulting in high bank fees
• National Competition Policy
- Most extensive microeconomic reform package in recent Australian history
H
- Established in 1995
- Agreement between Commonwealth and State governments
- Policies apply to all industries (government and private)
- Enforced by Australia Competition and Consumer Commission (ACCC)
- Key Features
o Limiting anti-competitive conduct of firms: competitive rules of Trade Practices Act apply to all businesses
o Reforming regulation that restricts competition: deregulation of aviation and telecommunication industries
o Reforming public monopolies to facilitate competition: restructuring energy utilities (gas and electricity) in most states
61
rd
o Providing 3 party access to essential infrastructure: telecommunication networks (electricity grids)
o Restraining monopoly pricing behaviour: price surveillance by the ACCC
o Fostering ‘competitive neutrality’ between private and government businesses: PTE’s are required to pay taxes and dividends
- Benefits
o 5.5% increase in real GDP
m
o $5.9b boost to Commonwealth revenues
o 3% rise in real wages
o $9b gain to consumers through lower prices
o
o Lower input costs to businesses (water, power and transport)
Microeconomic reform
c
• Microeconomic reforms are actions taken by the government to improve resource allocation between firms and industries, in order to
maximize output
.
• Is central to the government’s long-term aim of increasing the level of sustainable growth in Australia
• Involves a range of policies varying aimed to encourage the efficient operation of markets – lift productivity, improve flexibility and
s
responsiveness to change
• Key Reform Policies
u
- National Competition Policy 1995: increase competition in markets to raise efficiency and lower consumer prices
- Tariff Reforms 1998 & 1991: reduce levels of industry assistance to increase competitiveness of Australia industries with global industries
- Deregulation; Privatisation; Corporatisation; Commercialisation: increase efficiency of PTE’s
c
- Productivity Based Wage Bargaining (Labour Market Reform): increases productivity of labour
- Financial Deregulation (Capital Market Reform): increase competition on capital markets
- The New Tax System 2000 (Tax Reform): strengthen incentives to work, save and invest
o
• Gains from Microeconomic Reform
- Lower inflation outcomes
F
o Increased competition
o Creates a system of more competitive domestic markets
- Lower unemployment
o Labour Market Reforms
C
o More efficient work and management practices and greater flexibility in the mobility and allocation of labour
- Higher national savings
o Compulsory superannuation
S
o Tax reforms – tax cut incentives for public savings
- Reduction in CAD
o Tariff reform
o Raise export competitiveness and improve Australia’s trade performance
H
- Increase productivity
o Labour Market Reform
o Support rise in Australia’s long term sustainable rate of economic growth
• “The New Tax System”
st
- Introduced 1 July 2000
- Broaden the tax base (with GST) to 10% on most goods and services
- Cost reduction by abolition of ineffective indirect taxes (e.g. sales taxes)
62
- Less distortion of prices = increased allocative efficiency (GST is not a cascading tax, registered businesses can claim GST tax credits at
each stage of production)
- Promote exports with GST exemption on exporters
- States and territories receive all revenue from GST  abolition of state taxes
- Simpler PAYG tax to replace several other taxes
m
- Lower marginal tax rates (MTR’s) on personal income to raise incentives to work
- Lower company tax (cut from 36% to 30% over 2002-04) to promote business activity
- Abolition of superannuation tax on those retiring after 60
o
• Reforms to Public Trading Enterprises (PTE)
- Corporatisation
c
o Encourages PTEs to operate as if they were private businesses
o Eliminates political influences
.
o Attempt to achieve a rate of return on assets (profit motive)  more market based incentives
o Subject to competition but often still operate as regulated monopolies
s
o Includes: Australia Post, Energy Australia, Sydney Water Corporation
- Privatisation
o Sell PTEs so they actually become private enterprises
u
o Extensive privatisation in recent years
o Total value of privatisation amongst highest in the world
c
o Increases competition and efficiency  market driven decisions
o Includes: Qantas, GIO, Commonwealth Bank, Telstra
• Environmental Management Reforms
o
- Land management
- Introduction of fishing licences in NSW
• Reform of Industry Assistance (reduction of industry protection)
F
- Announced in 1988 and 1991 Industry Statement
- Promote exports and trade
o Promote import competition
C
o Raise industry efficiency
o Increase volume of Australian exports
- Dismantling of industry protection – reduce quotas and tariffs
S
- General tariff levels are not only 5%
- Reforms:
o Manufacturing – reduction of tariffs to 5% by 1996
o PMV – abolition of quotas; reduction of tariffs to 15% by 2000
H
o TCF – abolition of quotas; reduction of tariffs to 25% by 2000
o Review the monopoly in the wheat market
o Exporters are GST exempt – lowering export production costs
- Benefits
o $4billion gain in GDP through additional export volumes
o Higher rate of economic growth
63
• Free Trade Negotiations
- Uruguay Round (GATT); Doha Round (WTO)
- APEC deliberations
- Global Agreement; WTO
- Regional Agreement; APEC forum
m
- Bilateral Agreements; US, Thailand, Singapore, NZ
• Industry Research and Development
- $4.5billion spent on business research and development (R&D) in 2001
o
- Innovation investment fund (IIF) provides venture capital to small technology based companies which commercialise R&D (make prodits
on their research)
c
- Increase attractiveness of Australia for foreign investment
.
• General Industry Assistance
- Export market development grants: provided $170million 2005-06 to help develop overseas markets
- Strategic industry policy to develop certain industries
s
o Passenger motor vehicle industry (PMV)
o Textiles, clothing and footwear (TCF)
o Ethanol industry [environmental benefits]
u
o High-tech industries [potential future contributions]
• Exchange rate policy
c
- Indirect instrument of trade policy
- Government stabilizes fluctuations
- Potential global confidence on the AUSD
o
Costs and benefits of microeconomic reform
• Benefits
F
- Long-term benefits
- Greater competition
- Technical, allocative and dynamic efficiency
- Rising productivity
C
- Competitive advantage to exports – more internationally competitive
- Increase government revenue from more efficient PTEs and asset sales
• Costs
S
- PTEs service costs may rise as subsidies are removed
- Structural unemployment
o Industry contractions (of inefficient industries)
o Major structural adjustments in the manufacturing sector
H
- Labour shedding: those with traditional/low skills are no longer required
- Increase cost of re-location and re-training of displaced workers
Labour market policies role of national and state systems
• The Australian constitution doesn’t give the Commonwealth government the power to legislate directly over industrial relations however
they have the power to resolve industrial disputes that cross boundaries
• There are 6 separate state industrial relations systems and a federal system. These set up industrial awards for employees
64
• The system was too complicated because there was no clear rationale on whether an industry or occupation was regulated by a state or
federal award
• In 2005, the Howard government announced that it would legislate to override the states and establish a single national industrial relations
system by using its constitutional powers to regulate companies
• The Workplace Relations Amendment (Work Choices) Act 2005 opposed state governments and reduced existing minimum employment
m
standards
• The legislation excluded 15% of employees in state systems – state government employees, local council workers and employees of sole
o
traders
• Work Choices was abolished by the Rudd government in 2007 and replaced by the Fair Work Act 2009. The government negotiated with the
c
States for the establishment of a unified national industrial relations system for the private sector
.
• The new system came into operation from 2010. The establishment of a single national workplace relations system for the private sector is
estimated to reduce compliance costs by $4.8 billion over a 10 year period
• One of the major economic reforms achieved through the Fair Work Act is the modernization of the award system. 4300 state and federal
s
awards were replaced by a system of 122 modern awards that apply at a national level.
• The Commonwealth established a national system of OH&S legislation. State and Territory regulation of the labour market is now limited
u
mostly to state government employees and to smaller range of specific issues such as the regulation of worker’s compensation, public
holidays and long service leave.
c
role of institutions influencing current system
• Federal government
- Workplace Relations Act 1996 increased federal government power over industrial relations
o
- Government supports employers
- Confronts union power by implementing changes to work practices
- Workplace legislation transferred power of industrial relations to executive (prime minister and cabinet) and parliament.
F
- Minimum labour standards are now determined by Parliament (executive and senate); instead of independent judicial institutions (AIRC)
the national system for determining
• The Fair Work system establishes 3 main streams in the labour market that determine the pay and conditions of employees – industrial
C
awards, collective agreements and individual employment contracts
• Statistics (2008)
- 39% of employees are covered by an individual agreement (either a common law contract or an AWA)
S
- 40% of employees are covered by some kind of collective agreement
- 17% of employees are covered only by industrial awards
• minimum employment standards
H
- There are 10 guaranteed employment conditions which are outlined in the National Employment Standards document.
- These include:
o Maximum weekly hours of work: full time employees cannot exceed 38 hours per week
o Right to request flexible working arrangements: employers can only refuse on “reasonable business grounds”
o Leave: entitled to paid annual leave, public holidays and carers and compassionate leave
o Notice of termination and redundancy pay: a 1-4 week notice of job termination must be given
65
• minimum wages
- a national minimum wage provides a safety net for any employee not covered by an award.
- Fair Work Australia is responsible for setting minimum wages and casual loadings.
- Economic conditions and social objectives are taken into account when determining minimum wage
m
- The needs of both unemployed people and low paid workers must be balanced, reflecting the belief that high minimum wages can
discourage employers from hiring additional employees
- FWA decided to increase the national minimum wage and all modern award minimum wages by $26, raising the minimum wage to $15
o
per hour of $569.90 per week
- The reasoning for this decision was to protect the standard of living of low-paid workers
c
• Awards
.
- Are a set of pay and conditions that are specific to an employee’s work or industry sector. Provide a safety net of minimum wages and
conditions
s
- This means that there are different minimum pay rates across Australia. FWA also sets these minimum award wage rates and casual
loadings
- There are now 122 modern awards
u
- Modern awards extend the protections of the National Employment Standards, with provisions tailored to the needs of the specific
industry or occupation
c
- Modern awards include a flexibility clause which enables an employee and employer to vary the effect of an award to meet their
individual needs without negotiating a separate agreement. Is only applicable to some award terms and is conditional upon their being
no overall reduction in conditions of employment
o
• enterprise agreements
- The most common method of wage determination in Australia is a workplace agreement that is negotiated collectively between an
F
employer and employees, usually represented by unions; known as enterprise agreements
- FWA has introduced a right for employees to engage in enterprise bargaining with employers. Under the Fair Work Act, employers can
be required to engage in bargaining discussions if a majority of employees vote in favour of seeking a collective agreement
C
- All agreements must comply with the National Employment Standards and must also pass the “Better Off Overall Test (BOOT)
- Collective enterprise agreements usually cover all of the workers up to management level in a company or workplace. Unions usually
negotiate these agreements on behalf of all of the employees in a workplace
S
- Since the early 1990’s, collective agreements have generally produced annual wage increases averaging around 4%
• employment contracts for high income earners
- FWA abolished individual contracts (Australian Workplace Agreements) which removed bargaining power of employees
H
- Individual contracts of employment for high income earners can however still be made. Under the Act, modern awards don’t apply
where an employee is earning in excess of a threshold (in 2010 at $113800). These employees are covered by common law contracts and
NES.
- These contracts are enforced through ordinary law courts, rather than through industrial tribunals, and therefore not categorized as
being part of the formal industrial relations system
66
dispute resolution
• Conciliation – dispute resolution where both parties agree to use the services of a conciliator who works to resolve the differences between
the two. The resolution is not imposed
• Arbitration – Dispute resolution where parties present their view to a neutral third party who enforces a resolution
• Collective bargaining – negotiation between employer and a union over wages and employment conditions. Agreement covers all employees
m
participating in the negotiation
• The costs of dispute resolution
- Disputes arise over wages, working conditions and specific actions that people consider unfair (decisions to sack employees etc)
o
- Such actions disrupt work through industrial actions such as
o Strikes – employees refuse to work
c
o Work bans – employees refuse to perform certain tasks
.
o Lockouts – employers refuse to hire certain people
• Aim of Industrial Relations System
- The Australian Industrial Relations Commission (AIRC) helps resolve disputes through
s
o Collective bargaining – employers and employees negotiate disputes directly without external interference
o Conciliation – tribunal helps the parties reach a mutual agreement, allowing the parties to formalize the agreement themselves
u
o Arbitration – tribunal makes a legally binding decision on both parties, occurs when conciliation in unsuccessful
- Such practices were used to eliminate unproductive working practices caused by disputes leading to loss of working hours
• Change in Procedure of Dispute Resolution
c
- Upto the 1990’s, parties of industrial disputes became reliant on Federal and State industrial tribunals to resolve their disputes – became
inefficient as everyone relied on the AIRC
o
- Since 1990’s, the shift towards enterprise bargaining shifted the responsibility to employers and employees to resolve their own disputes
- Roles of the AIRC reduced to special circumstances, where disputes had potential to affect the entire economy
- Industrial disputes shifted towards civil court systems
F
• Legal restrictions on disputes
- Under the Workplace Relations Act, industrial actions must comply to specific rules:
o Employees must notify employers of industrial action 72 hours beforehand
o A secret ballot must be passed where majority of workers agree on taking a strike
C
- Fines apply to those not complying with requirements
• Effectiveness of dispute resolution
- The number of working days lost has dramatically declined since the 1980’s following the introduction of the Price and Incomes Accord:
S
from over 4000 to around 1500
- Introduction of enterprise bargaining and the establishment of the legal restrictions further reduced the number of working days lost to
industrial disputes from 1500 to only about 200
H
- These statistics clearly reflect the reduction in workplace disputes following the reforms to the industrial relations system
arguments for and against the use of centralised, decentralised and individualised methods of determining employment contracts
• Centralised wage determination – where wage rises and other labour market outcomes are primarily determined by the government or
government related bodies (Australian Fair Pay Commission and Australian Industrial Relations Commission)
- Advantages:
o Addresses the aims of the Prices and Incomes Accord
o Wage justice – increasing costs of living adjustments made to award wages
o Can compliment other government policies – e.g. trade tax cuts for lower wage growths
67
- Disadvantages
o Lower productivity growths – less incentive for workers to work harder if their incomes are fixed
o Slow structural change – wagers are similar across all industries making it difficult for prospering industries to attract more
labour to change the composition of industries
o Higher levels of inflation – inflation may be locked in as wage rises are tied to inflation, thus maintaining the level of inflation
m
o Wage-price spiral:
 Demands on wage increases not related to productivity
 Higher labour costs passed on to consumer in form of higher prices
o
 The increase in cost of living due to higher prices results in further demands on wages
 Process keeps on repeating
c
• Decentralised wage determination – where wages and work conditions were negotiated between employers and employees, the role of
central government tribunal and agencies are reduced.
.
- Advantages:
o Wage flexibility – wage increases change between firms and industries (and not across the economy) to reflect the performance
s
of those firms and industries
o Maintain lower unemployment – during economic slowdowns, flexible system allow wages to fall rather in remain in order to
maintain employment levels
u
o More efficient allocation of resources allowing for structural change – encourages labour resrouces to move more profitable
thus higher paying firms
c
o Encourages productivity – individuals are rewarded for their productivity improvements
o Reduction in inflation – wages rises are offset by increase productivity thus aggregate supply increases
- Disadvantages:
o
o Greater inequality – people doing the same job in different industries have different pay and work conditions
o Wages ten to reflect the bargaining power of the employees rather than their productivity
o May lead to more disputes if less productive workers find it unfair that they are paid less
F
o Federal government doesn’t have formal control over wage outcomes and must rely on monetary policy to control wage growth
education, training and employment programs
• Changes in work practices
C
- The objective of increasing flexibility is to change the nature of work practices to boost productivity and human capital formation
- More efficient allocation of labour can be achieved through
o Encouragement of multi-skilling where workers acquire skills to perform a variety of tasks – increasing their resourcefulness
S
o Development of specialist labour skills so workers become extremely efficient at performing their specialities
o Development of career paths using prospect of professional development and higher wages to encourage the development of a
variety of specialist labour skills
o Development of key job competencies (e.g. teamwork skills) that can be transferred and applied to a variety of occupations
H
• Employment: Education and Training programs
- These programs are used to create structural change and reach economic objectives
- Such programs facilitate the entry of new members of the work-force into jobs
- Also retrain those left without work due to structural change
- Current focus:
o The current focus is on training which targets trade and skills shortages
o Heavy focus on apprenticeships
68
- Government support: $16.6billion in 2006-07 budget to restructure higher education
- Education and training programs:
o Australia has shifted to a national system of vocational and industry training qualifications that allow skilled workers to move
between states
o The New Apprentices Scheme provides apprenticeship and traineeships opportunities, particularly with young people
m
o Government encourages such programs through incentives for employers such as wage subsidies
o Stronger links have also been forged between schools, TAFE and employers
o Such initiatives are used to address skills shortages and youth unemployment
o
• Labour Market programs
- Government delivers a range of labour market assistance programs that aim to help unemployed and individuals into jobs
c
- Employment services: the Job Network involves Government paying charitable and private sector organizations for training and placing
unemployed people in work. The employment service providers are paid on the basis of their performance.
.
- Mutual Obligations Policies: strategy involves income support to genuine efforts to finding paid work
- Labour Market Assistance:
s
o Centrelink oversees these income support payments
o Payments are linked to assistance with finding work, emphasizing the need to move individuals off welfare and into work
u
- “Work for Dole” Scheme:
o Intended to reduce incentives for people to choose to stay on welfare rather than finding work
c
o Intended for the young long-term unemployed
o Expected to work on various community projects to exchange financial assistance for community service
o Also teaches relevant skills and work ethics that would improve their likelihood of obtaining work
o
- Welfare to Work (2004)
o ‘Carrot and stick’ approach for increasing employment: increased incentives for finding work and loss of benefits for those not
genuinely seeking paid work
F
o Encourages people to seek at least part-time employment
o These measures were required due to the long term costs of having 20% of working age Australians relying on welfare for their
income – this is as opposed to 5% 3 decades ago
C
o Government has emphasized on returning the unemployed, disabled and single parents back to the workforce
o These people are made to seek work as a condition for receiving financial support
o Government offers wage subsidies to employers employing the ‘very long term unemployed’
S
Evaluating labour market outcomes in Australia
• The wage determination is reliant on market forces (enterprise bargaining) but still retains some role for non-market forces (institutions such
as Fair Work Australia)
• Under enterprise bargaining Australia has sustained moderate wage increases, low inflation and relatively strong employment growth.
H
• Wages growth and inflation:
- A key objective of industrial relations is to control wage growth at a level that doesn’t contribute to cost-push inflation.
- The flexibility of the decentralized system allows larger wage rises in specific areas where strong wage pressures exist, without this
spilling over to wage increases across the board.
• Work practices and productivity:
- The deregulation since the 1990’s has changed work practices because negotiations are based on the specific conditions of individual
workplaces, they have encourages employers and employees to trade off specific productivity improvements for wage increases
69
- Australia experienced its best sustained productivity growth performance on record during the 1990’s, as enterprise agreements
eliminated outdated work practices
- Annual labour productivity growth averaged 3% per year during the growth cycle in the 1980’s
- Recently annual productivity growth has fallen back to around 1%, suggesting that there may be a limit to the extent to which enterprise
agreements can lift productivity once employers and employees have removed restrictive work practices
m
• Unemployment
- The reforms have provided workplaces with greater flexibility to adjust to variations in the business cycle
- Australia has been successful in combing lower unemployment with rising wages and productivity sine the early 1990’s
o
- During the GFC Australian firms exercised alternatives to dismissal including job sharing and reducing work hours and wage increases.
• Income inequality
c
- One of the main effects of decentralized wage determination is an increase in income inequality
- Workers with greater skills and who belong to stronger unions tend to receive larger wage increases under enterprise agreements
.
National and global Regulations
context for market-based policies
s
environmental targets
management international agreements
Limitations of Effectiveness economic policy
u
economic policies • Impact on economic growth:
- Australia has achieved relatively strong economic growth since the early 1990’s
c
- At the time of the GFC, unlike most industrial economics, Australia only experienced a mild downturn. This can be attributed to
successful macroeconomic policy and the reliance of the commodity prices that underpinned export revenue
• Impact on inflation:
o
- Australia has seen a significant drop in inflation i.e. 10% in 1970’s, 8% in 1980’s. Inflation has averaged 2.6% since 1990’s.
- This can be attributed to successful framework for monetary policy, lower tariff barriers, increased competition across many industry
F
sectors, price reductions resulting from new technologies and cheaper imports, moderate wage outcomes and a period of strong
productivity growth in the 1990’s has sustained low inflation
• Impact on unemployment:
- Australia has lower unemployment than most industrialsed nations, experiencing only a mild increase during the 2009 GFC.
C
- There are over 850000 people who are underemployed – a structural problem that is greater in Australia than many other countries
o Attributed from high levels of part-time and casual jobs
• Impact on external stability
S
- Australia continues to experience large external imbalances
- Cyclical factors and movements in the dollar can help generate downward cycles in the size of the CAD, there has only been limited
structural improvement.
H
- Heavy reliance on commodity exports and constant inflow of overseas borrowing attributes to the average of the CAD in 2010-11 is
forecast to be 4.5% of GDP, one of the highest levels for any industrialized economy. As a result, Australia’s foreign debt has grown over
50% of GDP which in the long-term have the potential to constrain economic growth and make Australia volatile to overseas shifts.
• Impact on distribution of income and wealth
- There is a high level on inequality compared to other advanced economies because while income levels for poorer socio-economic
groups have been boosted by rising government benefits and lower levels of unemployment during the past decade, incomes for higher
groups have generally grown at a faster rate.
- Largely effects indigenous Australians and non-English speaking migrants
70
• Impacts on environment
- Australia has a poor record in preserving biodiversity, protection natural environments, managing scare water resources and overusing
agricultural land.
- Face the challenge in responding to climate change because it is one of the world’s highest emitters of greenhouse gas and it is heavily
endowed with fossil fuel minerals such as coal and gas, on which Australia has become increasingly reliant for export revenue.
m
Effects on Economy
• Australia’s microeconomic policies have been crucial to lifting productivity growth because they have provided businesses with greater
flexibility and incentives to improve production processes and business management.
o
• Productivity Commission cites that high productivity growth in sectors affected by microeconomic reform such as telecommunications and
electricity as evidence of the importance of promoting competition and reducing regulations.
c
• Higher productivity growth from microeconomic policies has contributed to an increase in economic output and lower unemployment.
.
• Benefits:
- Greater efficiency and productivity growth
- New business and job opportunities
s
- Higher economic growth and living standards
- Lower inflation
u
• Costs
- Higher unemployment in the short term
- Closure of inefficient businesses
c
- Greater work intensity
- Less equal distribution of income
o
time lags
• This refers to how long it takes for the desired policy action to take effect
• Monetary Policy
F
- This has a medium action lag between 6-18 months for the full effect of changes in interest rates to be transmitted through the economy
- This can make economic management difficult because the RBA may over compensate for changes in inflation
- Highlights the need for pre-emptive monetary policy
• Fiscal Policy
C
- This has the shortest time lag with only a few months to take effect, particularly for expansionary fiscal policy
- Doesn’t work quite as well for contractionary fiscal policy
• Micro-economic Reform
S
- These have the longest time lags between 10-15 years to have visible effects
- The big problem is the short-term negative effects (e.g. unemployment), and the consequent political difficulties of forcing through
reforms for the long term gain
H
global influences
• Policy making and economic management are affected by international economic conditions which are beyond the government’s control.
Even if domestic macro-economic management is used precisely, international economic conditions such as the global recession, may not
protect Australia itself from recession.
• Economic conditions may also effect the cyclical component of the budget which may in turn limit the government’s fiscal policy options.
• International Convergence - Globalisation
71
political constraints
• Economic management is often frustrated by political realities which are rarely based on economic theory and too often are based on
spending programs designed to win voters rather than achieve real economic gains.
• This significantly diminishes the effectiveness of fiscal policy and microeconomic reform.
• Fortunately monetary policy is administered by an independent RBA and has no political influence
m
• Conflicting goals
- Achieving a sustainable rate of economic growth
- Sustaining a low level of inflation
o
- Reducing the level of unemployment
- Maintaining external balance – keeping the CAD and net foreign debt at a sustainable level
c
- Ensuring a fair distribution of income and wealth
.
- Preserving the environment for future generations
POLICY RESPONSES
s
economic growth and • Has been sustained for 17 years – the longest period of growth on record
quality of life • Compared to the last two decades it has remained relatively stable due to the lack of inflationary bursts of economic growth
u
• Averaged 3.4% in the 1990’s. Has averaged 3% since 2000
full employment • Australia reduces its u/e rate to 4.1% in March 2008, its lowest level over 30years and well below the average for industrialized nations
c
• However, Australia suffers from a problem of underemployment which some argue can be fixed by labour market reforms while others argue
far greater investment in education and training
price stability • Averaged 10% during the 1970’s, 8% in 1980’s and just above 2% since early 1990’s.
o
• This is due to effective MP, lower tariff barriers, increase competition, price reductions from new technology and cheap imports, moderate
wage outcomes and high productivity growth
F
external stability • Limited structural improvement as net incomes deficit grows, CAD at 17459.0 million, which has the potential to constrain economic growth
and make Australia vulnerable to shifts in overseas sentiment
distribution of income • Still high levels of inequality compared with other AIE’s due to the increase in government benefits being matched by higher incomes for
higher skilled workers
C
environmental • Australia faces challenges such as restoring its inland water supply, dealing with rising salinity levels that threaten agricultural productivity
sustainability and biodiversity of flora and fauna.
• Australia has one of the worst greenhouse gas emissions rankings and has been criticized in the past for not signing the Kyoto protocol
S
• The Gillard governments is currently in the process of legislating the Carbon Tax
H 72

Economics HSC Course FULL NOTES - Text.marked

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Economics HSC Course FULL NOTES - Text.marked

Transféré par

Droits d'auteur :

Formats disponibles

HSC Economics Notes

International Economic Integration .............................................................................................................................................................................................................................. 2

Globalisation and Economic Development ................................................................................................................................................................................................................... 9

Exchange Rates ........................................................................................................................................................................................................................................................... 21

External Stability ......................................................................................................................................................................................................................................................... 38

Environmental Sustainability ...................................................................................................................................................................................................................................... 42

Economic Policies and Management .............................................................................................................................................................................................................................. 44

Economic Objectives in Relation to Economic Issues ................................................................................................................................................................................................. 44

Policy Responses ......................................................................................................................................................................................................................................................... 72

AUSTRALIA’S TRADE AND FINANCIAL FLOWS

DISTRIBUTION OF INCOME AND WEALTH

ECONOMIC OBJECTIVES IN RELATION TO ECONOMIC ISSUES

Vous aimerez peut-être aussi