ECONOMIC ISSUES: Essay Structure Outline

Essay Structure Economic

Unemployment
growth

Inflation

External
Stability

Income
Distribution

Environmental
Sustainability
Protecting and
enhancing the
natural
environment by
protecting air,
water and soil,
preserving
biodiversity, using
renewable and
non-renewable
resources
sustainably and
minimising
negative
externalities.
Land degradation,
depletion of nonrenewable
resources,
extinction and
pollution. The long
term impact of
resource overuse is
a decrease in the
economy' PPF.
Australia has a
poor record of
preserving
biodiversity.
Public goods like
street lights are
non-excludable and
non-rival. Public
sector goods are
provided by
government like
trains, hospitals.

1) Explain,
Define

A sustained
increase in a
countrys
productive capacity
over time,
measured by the
% increase in real
GDP.

A situation where
individuals want to
work but are
unable to find a job
and as a result
labour resources
are not utilised.

The sustained
increase in the
general level of
prices over a
period of time,
measured by the
% change in the
CPI.

An aim of
government policy
that seeks to
promote
sustainability on
the external
accounts so that
Australia can
service its foreign
liabilities in the
medium to long
run and avoid
currency volatility.

The way in which

an economys
income is spread
among the
members of
different social and
socio-economic
groups.

2) Indicators;
Current Stats.
Recent
changes/
trends.

Economies are
subject to the
business cycle
caused by changes
in AD and AS. In
recent times our
growth has been
stable and
sustained. Growth
rate around 3.1%,
above average for
OECD economies.

Participation rate,
unemployment
rate. From 19932007 falling cyclical
due to sustained
growth followed by
rising cyclical after
2007 due to GFC.
Now around 5%.

Inflation rate is the

% change in CPI.
Headline rate
misleading as it
includes volatile g
& s. Underlying
rate removes
effects of one-off
or volatile price
movements.
Relatively high
inflation since the
mid 1970s was
lowered from the
early 1990s with
inflation targeting
by the RBA. Has
been between 2
and 4% since.

CAD as a % of GDP
since the 1980s
moved in a range
of around 3 to 6%
of GDP.
Net Foreign
Liabilities (net
foreign debt + net
foreign equity) as a
% of GDP has
grown from 22% in
1980 to 61% in
2012.
Exchange rate has
fluctuated
markedly and in
recent years has
appreciated to high
levels.

The Gini coefficient

summarises the
distribution of
income across a
population. Ranges
between 0 when all
incomes are equal
and 1 when a
single household
receives all the
income. The Gini
has increased since
the mid 1990s to
around 0.34 (OECD
average 0.31).

Essay Structure

Economic
growth

Unemployment

Inflation

External
Stability

Income
Distribution

Environmental
Sustainability

3) Causes,
sources of the
issue(s)

A mix of domestic
and external
factors. Global
economic
conditions have
been favourable to
us in the 1990s
the US pushed us
along and in the
2000s Chinas
demand benefitted.
A sustained
increase in our
terms of trade has
led to a surge in
investment in
resources. Macro
management
generally
successful at
keeping inflation
between 2-3%.
Pre-emptive use of
monetary policy by
RBA has helped.

Demand for labour

is derived from
demand for g & s
so a downturn in
AD increases
unemployment.
Changes in
economic growth
levels mainly affect
cyclical
unemployment.
Structural and
technological
change is also a
cause. Other types
are structural,
frictional, seasonal,
hidden,
underemployment
and long term.

Demand-pull
when AD is
growing whilst
economy is at
supply capacity.
Cost-push an
increase in
production costs
that producers
pass on.
Expectations
when people
expect higher
inflation in future
they buy now or
negotiate higher
wages.
Imported rising
import prices
and/or a
depreciation in $A.

CAD is mainly
the result of a
savings and
investment gap
rather than a trade
gap (a structural
issue related to the
NPI account in
which foreign
savings are used to
finance investment
instead of domestic
savings).
Net foreign
liabilities net
foreign debt (loans
owed to foreigners)
is a much bigger
component of CAD
than net foreign
equity (Australian
assets owned by
foreigners).

Gender and
occupation
average weekly
earnings of women
only 2/3 those of
males.
Ethnic and cultural
background
migrants from
English speaking
countries have
higher income
levels and migrants
from NSSB have
lower income levels
than people born in
Australia.
Indigenous
Australians
experience high
disadvantage.
Geography
different
states/territories
have different
levels, as well as
within states.
In general the
distribution of
wealth is far more
unequal than
income.

Market failure
occurs as the price
mechanism takes
into account
private benefits
and costs and not
the wider social
costs and benefits.
Negative
externalities are a
cost to society
(and vice versa). G
& s that have
negative
externalities are
known as demerit
goods.

Environmental
resources like
oceans and air are
not valued by the
price mechanism
and can be
destroyed by
overuse (the
tragedy of the
commons).

Essay Structure

Economic
growth

Unemployment

Inflation

External
Stability

Income
Distribution

Environmental
Sustainability

4) Analyse
impact on the
economy. To
what extent is
the issue
good/bad?
Relationship to
other issues
e.g. growth.

Dutch Disease
high commodity
prices driving up
currency value,
making other
sectors less
competitive. Can
negatively affect
income distribution
our Gini has
increased over last
two decades.

Economic costs
opportunity cost
(economy is below
its PPF), lower
living standards,
costs to
government.
Social costs
increased
inequality, personal
and social
problems.
Particular groups
suffer more
including youth,
indigenous, specific
regions and those
born outside
Australia.

Is a constraint on
economic growth
and distorts
economic decision
making since
producers and
consumers change
their decisions to
minimise the effect
of inflation. Has a
negative effect on
income
distribution. The
Phillips curve
shows the
relationship
between
unemployment and
inflation low
inflation = high
unemployment and
vice versa.
Stagflation is the
long term situation
where the Phillips
curve breaks down
with simultaneous
increases in
inflation and
unemployment.
Reduces
international
competitiveness.
May appreciate
exchange rate as
speculators expect
RBA to increase
rates in response.

CAD Australia
lacks international
competitiveness in
manufacturing.
Dutch disease may
be occurring as the
commodities
industry benefits at
the expense of
service and other
industries.
Excessive growth
in net foreign debt
can lead to the
debt trap scenario.
The debt servicing
ratio is a measure
of a countrys
ability to service
foreign debt and is
the proportion of
export revenue
used to make
repayments on
foreign debt. It was
20% in 1990 and is
now around 7%,
the lowest for 30
years.
The high $A can
reduce the
international
competitiveness of
other industries.

Benefits are
incentive based.
Encourages labour
to increase
education and skill
levels and work
longer and harder.
Makes labour more
mobile. Encourages
entrepreneurs.
Creates the
potential for higher
savings.
Costs reduces
utility (satisfaction)
in society. Creates
a leisure class of
high income
earners. Creates
poverty and social
problems and
increases the cost
of welfare.

The preservation of
natural
environments in
the long run the
economy cannot
keep growing if the
environment is
degraded. Affects
human health (air
and water
pollution) and
restricts availability
of resources.
Climate change,
also known as
global warming, is
expected to have
major
consequences. The
impact of resource
depletion will be
greatest on future
generations.

Essay Structure

Economic
growth

Unemployment

Inflation

External
Stability

Income
Distribution

Environmental
Sustainability

5) Current
policy mix being
used to address
the issue.
Evaluate policy
mix. Impact(s)
on other issues.

Macro affect AD.

Include fiscal
(stimulus during
GFC), monetary
(rates lowered to
45 year lows
during GFC).
Micro affect AS.
Include more
investment in
workforce skills
and physical
infrastructure.

Policies depend on
the cause. If
structural, policies
aim at training and
skills. If cyclical,
policies encourage
economic growth.
Biggest factor in
Australia is
structural. As a
result the key
focus is micro
reform including
tariff reduction,
deregulation,
national
competition policy,
privatisation and
tax reform.

Monetary policy is
the main tool in the
short to medium
term. Fiscal policy
(increasing taxes
and decreasing
spending) can
reduce demandpull inflation.
Micro policies also
used. Reducing
protection makes
imports cheaper.
Making wage
increases link to
productivity
increases. More
spending on
economic
infrastructure like
roads, rail and
ports.

In recent years
external stability
has not been a
major objective of
macro policy - a
reflection of the
Pitchford (or
consenting adults)
thesis that our CAD
and foreign
liabilities are
generated by the
private sector and
do not require
policy change by
government. As
such external
stability is treated
as a long term
objective in which
the risk of external
shocks that could
adversely affect
Australias access
to global financial
markets is
reduced.

Fiscal and labour

market policies
have the most
direct impact.
Reducing
unemployment
helps.
Decentralisation of
the labour market
worsened the
situation as under
enterprise
agreements
workers with
greater skill and
bargaining power
achieved higher
wage increases
than less skilled
workers. In June
2012 FWA raised
minimum wages
2.9% - less than
wage rises under
enterprise
agreements.
Compulsory
superannuation has
improved
distribution.

Environmental
issues tend to play
a secondary role to
economic
objectives like
growth and living
standards.
Governments can
ban production of a
good or service, or
impose a tax on its
production or use.
The tax internalises
the externality.
Encouraging
environmentally
friendly g & s like
subsidising public
transport.
Governments can
provide some
services
themselves.
Typically market
mechanisms are
used rather that
outright bans.

ECONOMIC POLICIES & MANAGEMENT: Essay Structure Outline

Essay Structure

Fiscal

Monetary

Microeconomic

Labour

1) Explain the
policy, define

A macro (demand side)

policy used to influence
resource allocation,
redistribute income and
smoothen the business cycle
Budget annual statement
of income and expenditure.
Discretionary changes affect
structural component, nondiscretionary affects cyclical
(automatic stabilisers).
Expansionary aims to
AD. Contractionary aims
to AD. Impacts income
distribution, CAD (crowding
out effect), allocation of
resources. Short term
impact time lag.

3) Analyse the
policys current
economic role
(stance).

Mildly contractionary,
spending cuts and revenue
increases. Social reform
Gonski, DisabilityCare
Australia, more investment
in Nation Building Program,
NBN. Vulnerable to shifts in
external factors.

Supply side policies

aimed at individual
industries, seeking to
increase AS by improving
efficiency and
productivity
Supply side economics
reducing business costs
to shift AS curve to the
right leading to more
goods at lower prices.
Promotes structural
change which are
changes in the pattern of
production some
industries may even
disappear. Works on
product and factor
markets. E.g.
deregulation,
corporatisation/privatisati
on, National Competition
Policy. Short term costs
(jobs). Long term impact
time lag.
Council of Australian
Governments aims to
reform regulation and
competition to
Commonwealth-State
arrangements.
Government has reduced
protection to promote
import competition contrast Holden
subsidies.

Supply side (micro) policies

influences operation and
outcomes of labour market:
industrial relations, wage
setting, training etc.

2) Explain the
mechanism,
how it is
implemented/tr
ansmitted and
how it impacts
on the economy

A macro (demand side)

policy influences supply of
money to achieve
outcomes: inflation,
economic growth, full
employment
RBA DMOs affect the level
of interest rates. Loosening
policy means buying CGSs
which money supply,
interest rates . Tightening
policy means selling CGSs
which money supply, cash
rate . Transmission
mechanism makes
borrowing cheaper/more
expensive which
encourages/discourages
borrowing and therefore
impacts AD. Time lag of 6
18 months.

Loosening stance at present

to stimulate economy,
global outlook soft, falling
commodity prices, weaker
demand in east Asia,
depreciating $AU, inflation
at the lower end of target
range

Fair Work Act 2009

established awards (15%),
individual agreements
(37%), and collective
agreements (43%).
Provides minimum wages
and conditions that reduce
income inequality. More
decentralised than before encourages productivity
whilst keeping
unemployment low. Wage
growth linked to specific
areas.

Decentralised system
contributes to a more
efficient allocation of
resources and structural
change. Paid parental leave
makes it easier for women
to stay. Job Services
Australia reduces
unemployment.

Comment on each policys impact on each issue.

Economic
Policy

Economic
Growth

Unemployment

Inflation

External
Stability

Income
Distribution

Fiscal
Policy

Government
spending and
taxation have a
significant influence
on the level of
economic activity in
the short term. The
multiplier process
is a factor here.

Can help reduce unemployment

by stimulating AD. During a
downturn can reduce cyclical
unemployment. E.g. GFC
stimulus package, increased tax
free threshold, paid parental
leave.

Can help improve

national savings by
running fiscal
surpluses which
reduces demands
on private savings.
Compulsory
superannuation.

Automatic
stabilisers and
discretionary
changes like
increased tax free
threshold,
compulsory super,
Schoolkids Bonus.

Monetary
Policy

RBA can reduce

rates to stimulate
AD and the rate of
economic growth.
This policy has, in
recent years, been
the most important
macro policy for
influencing
economic growth.

An RBA objective is lower

unemployment. If RBA thinks
unemployment is NAIRU it is
likely to tighten policy to prevent
excessive spending feeding into
higher prices and wages.

Under an inflation
targeting regime
fiscal policy can
clearly affect
monetary policy
decisions. Can be
used to reduce
demand-pull
inflationary
pressure (
revenue,
spending)
Used pre-emptively
due to a time lag of
6 -18 months. Band
of 2 3% over
course of business
cycle. Changes
consumption and
investment
spending.

Using monetary
policy to reduce
spending on
imports considered
ineffective. Higher
rates also increase
capital inflows,
meaning higher NPI
outflows, worsening
current account.
Also cant target
the structural
causes of
imbalances.

When interests
rates rise, wealth
transfers from low
to high income
earners because
most low income
earners are
borrowers and must
pay the higher
rates. High earners
often have net
savings so their
income is
increased.

Economic
Policy

Economic
Growth

Unemployment

Inflation

External
Stability

Income
Distribution

Micro
Economic
Policies

Aggregate supply
plays an important
long-term role in
influencing levels of
economic growth.
As such policies
that remove rules
and regulations
may lead to an
increase in
production of g & s.
Removal of
infrastructure
bottlenecks can
increase output.
Decentralisation
leads to efficient
allocation of
resources and
structural change.
Can promote
productivity.

Reform in this area aims to

increase economic growth and
job creation long term. E.g. tariff
reduction, deregulation, national
competition policy, privatisation,
tax reform. Short term can
cause structural unemployment.

Reduced protection
has lowered import
prices. Has
increased domestic
competition. Labour
reform links wage
increases to
productivity.

Can be used to
address structural
problems.
International
competitiveness of
g & s should be
improved using
these policies.
Reduce capacity
constraints, reduce
protectionist
barriers.

Policy tries to
improve efficiency
and rate of return
for investors
benefits wealthy
asset owners. Policy
can be supported
by adjustment
packages where
they would increase
inequality.

Decentralisation and wage

flexibility helps labour market
adjust when there is a negative
shock to the economy, which
helps keep unemployment at a
lower rate. If a recession causes
a in AD, therefore demand
for labour, a flexible market can
allow wages to fall while keeping
people in jobs. Education,
training, matching and wage
subsidies are other policies used.

Decentralisation, by
boosting
productivity, can
reduce inflationary
pressure (making
more output for
less input).

Decentralisation
arguably
contributes to
international
competitiveness
through lower
prices for g & s.

Decentralisation
can lead to greater
inequality through
increased wage
dispersion.
Employees in an
industry where
unions have little
power are less
likely to receive
wage increases
regardless of their
productivity as they
lack bargaining
power.

Labour
Market
Policies

The issue of Environmental Management is best covered separately with an analysis of policies and initiatives specific to
environmental issues.

H.S.C. Economics Extended Response Questions 2001 13

Key Words and Topics in Extended Responses

Year
2013

2012

2011

2010

2009

2008

Question and key word

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Explain
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Analyse
Analyse
Analyse
Analyse
Discuss
Discuss
How does _ affect
Discuss
Discuss
Analyse
Discuss
Analyse
Discuss
Evaluate (effectiveness of)

Topic
Exchange rates influence on economy
Macro policy on growth and inflation
Effect of free trade/protection on Australian economy
Causes of unemployment and effect on Australian economy
Changes in global economy on BOP
Changes in global economy on structure of industry
Globalisation- impact on ec. growth and life
Economic policies in achieving Aus. Govt objectives
Fiscal Policy on economic activity and income distribution
Monetary Policy on inflation and unemployment
Micro reform on product/factor markets
Impact of change on exchange rate
Environmental Sustainability
Distribution of Income
External Stability
Trade Protection effect on Australia
Microeconomic Policies
Globalisation: Impact on dev., dist. of wealth
Macro Policies for inflation and unemploy.
Global impact on Aust. Growth and ext. stab.
Globalisation: role of trading blocs etc.
Exchange rate (appreciation)
Fiscal Policy
Monetary Policy

2007

2006

2005

2004

2003

2002

2001

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Discuss
Explain
Analyse
Outline and Discuss
Examine and Explain
Outline and Analyse
Analyse
Discuss
Discuss
Explain
Explain
Analyse
Discuss
Analyse

Impact of Fiscal (surplus)

CAD (economic implications)
Labour Market policies
Global (case study) development
Reduced Global Protection
Impacts of Policy Mix
Exchange Rate (Appreciation)
Ecological Sustainable Dev. & Growth
Trade/Structure
Inflation
Growth/Unemployment
Globalisation
Exchange rates
External Stability
Macro Policies
Globalisation
Unemployment
Inflation
Globalisation
Labour Policies
Micro Policies
Fiscal Policy
External stability
Protection, Australia
External stability
Policies (Growth)
Globalisation (Australia)
Globalisation (case study)