Economic Growth & Unemployment ELENA

Economic Growth

• Economic growth happens when there is an increase in the output of goods and services in an economy over a period
• GDP = C + I + G + (X – M) is used to measure the size of the economy
• C, I, G, X, and M stand for consumption expenditure, investment expenditure, government expenditure, exports, and imports respectively
• Economic Growth (%) = X
• During COVID, Australia's economic growth rose to 7.4% due to lockdowns and recession which caused businesses to lay off workers
• Post-COVID boom saw high demand for labour but a shortage of workers because of border closures, migration stopping which led to a low of 3.5% economic growth
• Unemployment is increasing recently due to cyclical and structural reasons, with low economic growth of 0.8%

Unemployment

• Unemployment is a significant economic issue, as it means the economy isn't maximizing its resources
• It is the proportion of people above a specified age who are not in paid employment or self-employment but are available for work
• Unemployment improved substantially after the early stages of the pandemic
• The working age population is people aged 15 and over
• The labour force includes all people aged 15 and over who are employed
• Someone employed has to work for at least 1 hour a week
• Someone unemployed has to be actively seeking work
• Unemployment rate % = x 100
• Particiaption rate % = x 100

Types of Unemployment

• Cyclical unemployment is caused by a contraction in economic activity or aggregate demand
• Cyclical unemployment rose in 2020 to 7.4% due to the Covid recession
• Structural unemployment occurs when there is a mismatch of available and required skills, often due to new technology or changes in consumer demand
• Frictional unemployment happens when workers are moving between jobs
• Seasonal unemployment results from seasonal patterns in some industries, such as fruit picking and ski instruction

Unemployment Rate Trend

• The current unemployment rate is 4.1%
• Underemployment is when people are employed but want more hours; the rate is currently 6%
• Unemployment rose to 7.4% during COVID due to lockdowns and recessions
• After COVID, high labour demand existed, but a border closure-caused worker shortage led to 3.5% unemployment
• Unemployment is now rising due to low economic growth of 0.8% and structural factors like AI replacing jobs

Participation Rate Trend

• Participation rate is currently 67.3%
• Rising because:
  • Women entering the work force, high level of skilled workers (migrants)
  • Low unemployment encouraging people to enter workforce
  • PR rate fell during COVID lockdowns unemployment spiked
  • PR rising due to record high due to cost of living causing higher income

Inflation

• Inflation is a sustained increase in the general level of consumer prices over time
• Rapidly rising prices reduce the purchasing power of money
• CPI measures the percentage change in the price of a basket of goods and services consumed by households and is calculated by the ABS
• Inflation = X

Overview of Inflation Trends

• Inflation has mostly been in the 2-3% target range since 1993
• During COVID, prices fell as consumers couldn't spend
• Post-COVID, rapid inflation was due to supply shortages and high consumer demand, peaking at 7.8% in December 2022
• Due to contractionary monetary policy inflation returned to a target of below 3% between 2024-2025

Causes and Types of Inflation

• Cost-push factors: Caused by rise in cost of inputs into production such as raw materials or labour
• Demand-pull factors: More goods and services are being demanded than the economy can supply, causing prices to rise
• Inflationary expectations: People expect prices to rise, so they buy things now to avoid higher prices
• Overseas factors: Imports become more expensive because overseas inflation or the AUD is weak
• Government policies: Government policies, like increasing taxes, can increase prices
• Excessive increase in the money supply: More money leads to higher prices

Impacts of Inflation

• Households: bring purchasing decisions forward. Purchasing power of wages goes down may demand wage rise. Low income earners have less power to get pay rises. Value of saving goes down. Higher rate for unemployment
• Economy: High unemployment. Lower economic growth due to interest rate rises to stop inflation. Trade deficit exchange rate depreciation
• Business: Wages rise, increasing costs of prices. Lower international competitiveness

Managing Inflation by the RBA

• The main policy to manage inflation is monetary policy
• RBA has responsibility for implementing this policy
• The Inflation target is 2-3%
• Monetary policy influences interest rates in the economy
• If concerned about rising inflation they increase cash rate target which causes market interest rates to also increase
• This dampens economic activity as high interest rates are incentive to save and disincentive to borrowing and spending
• RBA will lower cash rate target if they're concerned that economic growth is sluggish and likely to flow below target
• Lower interest rates encourage borrowing and spending and disincentive to save

Effectiveness of Management

• Moderately effective macroeconomic tool
• Increasing the cash rate 13 times has raised interest rates, discouraging businesses and consumers from borrowing
• This decision increased average mortgage repayments by over $1000 per month, reducing consumption
• In December 2022, inflation peaked at 7.8%; the RBA responded by raising the cash rate from 0.1% to 4.35% by November 2023
• Long 6-18 months time log from implantation of cash rate change to reduce inflation
• Monetary policy is a 'blunt instrument' it impacts whole economy rather than specific sector or items
• Make inequality worse as people with debt are hit harder – paying more on mortgage/debt while people with savings receive high interest rates