Unemployment and Inflation Flashcards

Questions and Answers

What does NAIRU stand for?

Non-Accelerating Inflationary Rate of Unemployment.

What are the implications of full employment on the economy?

Inflation, skills shortage, wage inflation, higher demand for imports, new businesses struggle to succeed, further pressure on natural resources, and environmental damage.

What does the Phillips Curve show?

The inverse relationship between unemployment and inflation.

What is the logic behind the Phillips Curve?

As more people work, national output increases, leading to wage increases, more consumer spending, and rising prices. Signup and view all the answers

What is stagflation?

A situation where both inflation and unemployment are high at the same time. Signup and view all the answers

The current rate of inflation in Australia is ______.

to be found out by the student. Signup and view all the answers

What is the RBA goal for inflation?

Between 2-3%. Signup and view all the answers

Why does the ABS choose to weight certain goods and services in the 'basket of goods' used to calculate the CPI?

To reflect the importance of each commodity in the expenditure pattern of the average household. Signup and view all the answers

Define Demand Pull Inflation.

Demand-pull inflation occurs when aggregate demand within the economy increases, often leading to a price increase instead of an increase in productivity and supply. Signup and view all the answers

Define Cost Push Inflation.

Cost-push inflation occurs when production costs increase (e.g., wages or oil), and suppliers pass those costs onto consumers. Signup and view all the answers

Define Inflation.

Inflation is a persistent and appreciable rise in the general level of prices. Signup and view all the answers

How is Inflation Measured?

Inflation in Australia is most commonly measured by the Consumer Price Index (CPI), which summarizes price changes of various goods and services. Signup and view all the answers

What is the equation for the measurement of Inflation?

Inflation is measured with the equation: $\frac{CPI_2 - CPI_1}{CPI_1} \times 100$. Signup and view all the answers

Where does Demand Pull Inflation Originate?

Demand pull inflation can originate from consumers (wage rises, tax cuts), firms (business optimism), government (budget deficits), or overseas (rising demand for exports). Signup and view all the answers

Where does Cost Push Inflation Originate?

Cost push inflation originates from rises in production costs (like wages), an increase in import prices, key raw material price hikes, and rising government charges. Signup and view all the answers

What are some examples of Demand Pull Inflation?

Examples include the building boom from 2004-2006, where high demand led to shortages of skilled tradespeople. Signup and view all the answers

Define Headline Inflation.

Headline inflation includes the influences of seasonal factors, interest rate changes, and overall policy changes. Signup and view all the answers

Define Underlying Inflation.

Underlying inflation, or the 'core rate', excludes seasonal effects and policy changes, providing a more stable measure of inflation. Signup and view all the answers

What are some issues with using CPI as a form of measurement of Inflation?

Issues include not reflecting price movements outside metro areas, neglecting changing consumer preferences, and not accounting for changes in quality. Signup and view all the answers

What are the effects on output of Inflation?

Inflation affects income, employment, and reduces consumer purchasing power while promoting uncertainty and potential economic collapse. Signup and view all the answers

Who are the winners out of inflation?

Winners include those who anticipate inflation, households purchasing real assets, sectors with market power, debtors, and government due to higher tax rates. Signup and view all the answers

Who are the losers out of inflation?

Losers include low income earners, PAYG taxpayers, savers, and creditors. Signup and view all the answers

Define Unemployment.

Unemployment occurs when individuals willing and able to work cannot find a job, specifically those who've not worked for at least one hour. Signup and view all the answers

Define Participation Rate.

The participation rate is the proportion of working-age population (>15) who are either employed or actively seeking work. Signup and view all the answers

What is the formula for calculating the Participation Rate?

PR = $\frac{Labour\ Force}{Population>15} \times 100$. Signup and view all the answers

Define and explain underemployment.

Underemployment occurs when individuals prefer to work more than the one hour per week used for paid employment statistics. Signup and view all the answers

Define The Natural Rate of Unemployment.

The natural rate of unemployment is the minimum achievable level of unemployment based on current labor market conditions, excluding cyclical unemployment. Signup and view all the answers

What are some reasons given for the fact that Unemployment is not at 0%?

Reasons include structural unemployment, market impediments, minimum wage effects, labor market regulations, and union power. Signup and view all the answers

How is unemployment measured?

Unemployment is measured by surveying households to determine labor force status, resulting in a calculated unemployment rate. Signup and view all the answers

What is the equation for calculating the unemployment rate?

UE Rate = $\frac{Unemployed}{Labour\ Force} \times 100$. Signup and view all the answers

Define the Labour Force.

The labor force consists of individuals aged 15 and over who are employed or actively seeking work. Signup and view all the answers

What measurement issues should be borne in mind when examining employment statistics?

Issues include underemployment, hidden unemployment, and individuals seeking education opportunities due to job scarcity. Signup and view all the answers

What are the three main types of unemployment?

The three main types of unemployment are frictional, cyclical, and structural. Signup and view all the answers

Define Frictional Unemployment.

Frictional unemployment occurs when individuals are temporarily between jobs. Signup and view all the answers

What are the reasons for Frictional Unemployment occurring?

Reasons include time taken to find suitable jobs, differing job offers, and dynamics in labor market conditions. Signup and view all the answers

What is the incidence of Frictional Unemployment in Australia?

Frictional unemployment in Australia typically accounts for 1-1.5% of the workforce, depending on economic conditions. Signup and view all the answers

Define Structural Unemployment.

Structural unemployment occurs from a mismatch of skills required and available in the labor market. Signup and view all the answers

What are the reasons for Structural Unemployment occurring?

Reasons include technological changes, shifts in consumer demand, and adjustments within the labor market. Signup and view all the answers

What is the incidence of Structural Unemployment in Australia?

Structural unemployment is a dominant form in Australia, often causing longer periods of joblessness. Signup and view all the answers

What is the incidence of Cyclical Unemployment in Australia?

Cyclical unemployment correlates with the business cycle, rising during recessions and falling in periods of economic expansion. Signup and view all the answers

What are the reasons for Cyclical Unemployment occurring?

Cyclical unemployment arises from insufficient aggregate demand leading to underutilization of labor resources. Signup and view all the answers

Define Cyclical Unemployment.

Cyclical unemployment, or demand-deficient unemployment, occurs when aggregate demand is insufficient for full employment. Signup and view all the answers

What are the 'output' effects of Unemployment on the economy?

Unemployment leads to unused resources, resulting in a GDP gap and lower levels of consumption and investment. Signup and view all the answers

What are the 'distribution' effects of Unemployment on the economy?

High unemployment increases income inequality, affects certain demographic groups more than others, and can create long-lasting social issues. Signup and view all the answers

Full Employment in Australia is considered between 4.5-5% - why is this considered 'Full Employment?'

Full employment in Australia refers to the lowest sustainable unemployment rate, which is typically accepted at 4-5%. Signup and view all the answers

Study Notes

Inflation Concepts

Demand-Pull Inflation: Occurs when aggregate demand increases to the extent that it causes a rise in prices, especially near productive capacity.
Cost-Push Inflation: Happens when production costs rise (e.g., wages, raw materials) and suppliers pass these costs on to consumers, leading to price increases.
Definition of Inflation: A sustained increase in the general price level of goods and services in an economy.

Inflation Measurement

Consumer Price Index (CPI): The primary measure of inflation in Australia, reflecting price changes of a selected basket of goods and services, calculated quarterly.
Inflation Calculation: Uses the formula:
[ \text{Inflation Rate} = \frac{\text{CPI}_2 - \text{CPI}_1}{\text{CPI}_1} \times 100 ]

Types of Inflation

Headline Inflation: Captures overall price movements, including seasonal effects and policy changes; can be misleading.
Underlying Inflation: Also called the 'core rate', excludes volatile elements, offering a clearer picture of inflation trends.

Issues with CPI

May not reflect price movements in non-urban areas.
Does not account for shifts in consumer preferences or quality changes over time.
Despite drawbacks, CPI remains a critical economic indicator for policymaking.

Effects of Inflation

Output Effects: Affects income and employment, reduces consumer purchasing power, and may lead to economic uncertainty.
Benefits of Low Inflation: Supports low-interest rates and boosts international competitiveness.

Winners and Losers of Inflation

Winners: Include those who can anticipate inflation, debtors, and sectors with pricing power.
Losers: Typically low-income earners, savers, and creditors whose purchasing power diminishes in times of inflation.

Unemployment Concepts

Definition of Unemployment: Refers to individuals who are willing and able to work but cannot find employment, with active job-seeking conducted in the last week.
Potential Labour Force: All individuals aged 15 and over, including those not currently in the workforce (e.g., retirees).

Measuring Unemployment

Participation Rate: Represents those of working age (15+) engaged in work or actively seeking work. Calculated by the formula:
[ \text{Participation Rate} = \frac{\text{Labour Force}}{\text{Population} , (>15)} \times 100 ]

Types and Causes of Unemployment

Frictional Unemployment: Arises from the time taken for workers to find suitable employment; inherent to a dynamic labor market.
Structural Unemployment: Results from a mismatch of skills and job requirements; influenced by technological changes and evolving consumer preferences.
Cyclical Unemployment: Linked to economic cycles, increasing during recessions and decreasing during economic booms.

Implications of Different Unemployment Types

Frictional Unemployment: Generally low and temporary, contributing positively to the labor market by facilitating better job matches.
Structural Unemployment: More persistent, requiring retraining and adaptation, affecting older workers disproportionately.
Cyclical Unemployment: Fluctuates with economic activity, particularly affecting sectors sensitive to consumer demand.

Full Employment

Full Employment in Australia: Defined as an unemployment rate of 4.5-5%, indicating an equilibrium where inflation and employment stability exist.
NAIRU (Non-Accelerating Inflationary Rate of Unemployment): Represents the lowest sustainable unemployment rate without triggering inflation.

Phillips Curve

Economic Tradeoff: Illustrates the inverse relationship between unemployment and inflation; lower unemployment can lead to higher inflation due to increased wage and price pressures.

Economic Consequences of Unemployment

Output Effects: Unused labor resources cause lower economic output than potential, creating a GDP gap and opportunity costs related to economic growth.
Distribution Effects: High unemployment exacerbates income inequality, affecting different demographics variably, leading to long-term social challenges.### Chain of Economic Beliefs
Increased employment leads to higher national output.
As output rises, wages increase, allowing consumers to have more disposable income.
Higher disposable income results in increased consumer spending.
Increased consumer spending heightens demand for goods and services.
This growing demand ultimately drives up prices.

Phillips Curve Understanding

Demonstrates the inverse relationship between unemployment and inflation.
When unemployment decreases, inflation tends to increase and vice versa.
Presents a challenge for policymakers aiming to simultaneously reduce both inflation and unemployment.

Stagflation

Defined as a period where both inflation and unemployment rates are elevated simultaneously.
Notably occurred in Australia during the 1970s, primarily due to external economic factors.

Inflation Monitoring

Current inflation rate in Australia requires independent research to find.

Reserve Bank of Australia (RBA) Inflation Goals

The RBA aims to maintain inflation between 2-3% to ensure economic stability.

Australian Bureau of Statistics (ABS) and the CPI

The ABS uses weighted values for various goods and services in the 'basket of goods' for the Consumer Price Index (CPI).
Weights reflect the significance of each item in the typical household's expenditure pattern, ensuring accurate representation in inflation calculations.

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Description

Explore key concepts related to unemployment and inflation with these flashcards. Learn definitions like demand-pull inflation and cost-push inflation, essential for understanding economic dynamics. Perfect for students studying economics or preparing for exams.