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?
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What is stagflation?
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The current rate of inflation in Australia is ______.
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What is the RBA goal for inflation?
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Why does the ABS choose to weight certain goods and services in the 'basket of goods' used to calculate the CPI?
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Define Demand Pull Inflation.
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Define Cost Push Inflation.
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Define Inflation.
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How is Inflation Measured?
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What is the equation for the measurement of Inflation?
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Where does Demand Pull Inflation Originate?
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Where does Cost Push Inflation Originate?
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What are some examples of Demand Pull Inflation?
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Define Headline Inflation.
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Define Underlying Inflation.
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What are some issues with using CPI as a form of measurement of Inflation?
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What are the effects on output of Inflation?
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Who are the winners out of inflation?
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Who are the losers out of inflation?
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Define Unemployment.
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Define Participation Rate.
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What is the formula for calculating the Participation Rate?
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Define and explain underemployment.
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Define The Natural Rate of Unemployment.
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What are some reasons given for the fact that Unemployment is not at 0%?
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How is unemployment measured?
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What is the equation for calculating the unemployment rate?
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Define the Labour Force.
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What measurement issues should be borne in mind when examining employment statistics?
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What are the three main types of unemployment?
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Define Frictional Unemployment.
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What are the reasons for Frictional Unemployment occurring?
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What is the incidence of Frictional Unemployment in Australia?
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Define Structural Unemployment.
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What are the reasons for Structural Unemployment occurring?
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What is the incidence of Structural Unemployment in Australia?
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What is the incidence of Cyclical Unemployment in Australia?
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What are the reasons for Cyclical Unemployment occurring?
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Define Cyclical Unemployment.
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What are the 'output' effects of Unemployment on the economy?
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What are the 'distribution' effects of Unemployment on the economy?
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Full Employment in Australia is considered between 4.5-5% - why is this considered 'Full Employment?'
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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.
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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
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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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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.