1

Economics Notes
Year 12

Elsie Gillezeau

Year 12 Outcomes
Objectives
A student will develop:
Knowledge and understand about:
- The economic behaviour of individuals, firms, institutions and governments
- The function and operation of markets
- The operation and management of economies
- Contemporary economic problems and issues facing individuals, firms and governments
Skills to:
- Investigate and engage in effective analysis, synthesis and evaluation of economic
information from a variety of sources
- Communicate economic information, ideas and issues in appropriate forms
Values and attitudes about:
- Informed participation in economic debate and decision-making
- Responsible approaches towards people, societies and environments.

Year 12 Course
1. The Global Economy
2. Australia’s Place in the Global Economy
3. Economic Issues
4. Economic Policies and Management

The Key Issues:

- Economic Growth
- Unemployment
- Inflation
- External Stability
- Distribution of Income
- Environmental Sustainability
 2

Question 2017 2018 2019 2020

25 Impact of global Free trade Expansionary CAD

economic restricts full fiscal policy +
activity on employment, economic
Australia’s distribution of growth and
economic income and external stability
policies external stability.

26 Economic Macroeconomic Microeconomic Macroeconomic

policies and policies and policy + policy and
price stability economic employment and internal stability
growth inflation

27 China and Environmental Unequal Exchange rates

Australia impact sustainability distribution of
of globalisation income and
on eco growth wealth
and environment

28 Labour market Size and Effects of Causes and

policies + composition of protectionist effects of
economic current account policies unemployment?
objectives.

https://www.abs.gov.au/
HSC TOPIC ONE: The Global Economy
The focus of this study is the operation of the global economy and the impact of globalisation on
individual economies

Note:
This topic is less tested in the HSC, however it is important to understand the concepts to
support arguments made for other topics and it can come up in multiple choice.

Students learn to:

Examine economic issues
- Examine the ​effects of globalisation​ on the economic issues (economic growth, quality
of life, unemployment, inflation, environment and external stability)
- Investigate the ​global distribution​ of income and wealth and its consequences
- Discuss the effects of ​protectionist​ policies on the global economy

Apply economic skills

 3

- Analyse statistics on trade and financial flows to determine the nature and extent of
global interdependence
- Assess the impact on the global economy of ​international organisations​ and
contemporary ​trading bloc​ agreements
- Evaluate the impact of ​development strategies​ used in a range of contemporary and
hypothetical situations.

Content
International economic integration (1.1)
- The global economy (1.1.1)
The ‘global economy’ refers to the fact that individual economies are becoming increasingly
linked with each other economically. As a result, changes in a single economy can have ripple
effects on other national economies thus creating a ‘global economy’.

- Gross World Product (1.1.2)

Gross World Product (GWP) refers to the total value of all goods and services produced
worldwide each year in the global economy. It combines the GDP of all countries/economies.
GWP 2019 = vs. GWP 2020 = > GWP is 50 times its 1960 level

- Globalisation (1.1.3)
Globalisation refers to the increasing economic integration and interdependency between
national economies.
Major indicators of international integration include:
1. International trade in g/s
2. International financial flows
3. International investment flows and TNCs
4. Technology, transport and communication
5. Movement of workers between countries.

- Trade in g/s
Trade: the sale of goods and services across national borders
Imports: G/S a country buys from another
Exports: G/S a country sells to another

Trade is an important indicator of globalisation because it is a measure of how many G/S

produced in an economy are consumed in other economies worldwide. Trade is important
because an economy cannot produce all the goods it needs or as efficiently.

Stats:
- Annual growth in trade has been twice that of economic growth.
- However they are more volatile (Coronavirus has seen world trade fall up to ​30%​)
- Trade has grown rapidly over the decades from US$6.2trillion in 1987 (37% of
global output) to ​US$43.8trillion​ in 2018 (50% of global output)
 4

Volume​ of world trade grew to 125 times its 1960 level.

High volume of global trade reflects the fact that economies do not produce all the items they
need and because transport and communication technologies have reduced the cost of moving
goods between economies.

Composition of trade refers to the mix of g/s traded.

- Used to be dominated by manufactured goods (still is but smaller)
- Services are growing significantly
- In the future it is expected that trade in finance and communication services will be the
fastest growing industry, which Australia will benefit from due to the Australian labour
market having extensive business and commercial skills.

Direction of trade flows have changed in recent decades

- reflecting strong growth in ​emerging​ economies
- East and Pacific region saw an 8% point rise in their share of global trade between 1995
and 2016 (7% to 15%)

- Financial flows

International financial flows refer to the movement of money for the purposes of ​speculation,
investment​ or ​trade​. Financial flows are the ​most​ globalised feature, as money moves more
quickly (electronically) than g/s or people (labour market).
International flows expanded greatly since deregulation in the 1970s/80s with one measure of
financial flows and exchange traded derivatives increasing from 1 trillion USD in 1990 to 74
trillion in 2014.

Deregulation included lifting the controls of:

- FOREX (Foreign Exchange Market - the market for foreign currency)
- Foreign capital flows
- Banking interest rates
- FDI inflows.

Purposes of international financial flows:

- Speculation (FOREX) increases market volatility due to high volumes being traded.
- Speculators: investors who buy or sell financial assets with the aim of making
profits from short-term price movements.
- Worsened by ‘herd behaviour’ when an upward or downward trend in asset
prices is established the trend continues.
- 95% of Australia’s currency​ is involved in speculative activity, hence our
exchange rate is volatile relative to stable currencies like the USD.
- International Monetary Fund (notes further down)
 5

- Investment and transnational corporations

Investment: Foreign direct investment (FDI) refers to the movement of funds between
economies for the purpose of establishing a new company or buying a controlling share (i.e.
more than 10%) in an existing company.
- FDI is a long-term investment
- Investors intend to be involved in the management of the business.
- In contrast financial flows are often short term (portfolio investments)
Since the 1980s, many countries have lifted restrictions on FDI (floating exchange rates,
removing lending controls, general financial market deregulation) increasing FDI. However, FDI
is also volatile dropping during the dot-com bubble burst, GFC and coronavirus pandemic.

FDI traditionally favoured developed nations but has shifted towards emerging nations (CHINA).
- Emerging and developing​ nations received ​59% of FDI​ inflows in 2014.
- FDI normally accounts for less than 20% of total investment​ within an economy with the
other 80% being domestic investment.

Transnational corporations: have been a major contributor to the growth in FDI. TNCs are
companies that operate in at least two countries.
When a TNC establishes a subsidiary within another economy it is providing FDI. Governments
hence encourage FDI from TNCs through subsidies and tax concessions (​SEZs​ in China).
However, TNCs often undertake profit shifting by selling intermediate goods to their subsidiaries
at prices that cause most of their profits to be made in countries with low tax.
- Since the 1990s it has grown from ​37000 TNCs to 104,000​ and employs over 79 million.
- Technology, transport and communication
Technology facilitates the process of globalisation.
Freight economies have benefitted from more efficient logistics systems to facilitate greater
trade in goods (e.g. roads, railways, airports etc.)

The internet also allows for international communication, which is widely used in financial
markets (​2 billion internet users and 7.2 billion phone subscriptions​)
- Cheaper and more reliable international communication (broadband)

Efficient aircrafts allow for greater labour mobility.

- International division of labour, migration

Migration refers to the movement of people between countries on a permanent or long term
basis (more than 12 months)
Labour markets are less internationalised as people cannot always move between countries
freely.
- Almost 70% of the world’s migrants live in high-income countries.
- Movement of labour between economies is concentrated at the top and bottom.
- Top: Highly skilled workers attracted towards the richest economies (brain drain)
 6

- Bottom: Low skilled labour in demand for jobs that require basic skills (can be
illegal)
These trends in migration reflect an ​international division​ of labour where people move to the
jobs where their skills are needed.
When corporations shift production in global supply chains labour can move.

- International division of labour reflects the theory of ​comparative advantage​ which states
that economies should specialise in the production of the goods and services they can
produce at the lowest opportunity cost.
- Trends of different nations specialising in different types of production and labour
skills.
- Developing nations have low skilled, low paid labour markets (attractive to TNCs)

Barriers to movement of labour include:

- Immigration restrictions
- Language
- Cultural factors
- Incompatible education.

Efficient aircrafts allow for greater labour mobility.

- The international and regional business cycles (1.1.4)

Business cycles: the fluctuation in economic activity in an economy or ​group​ of economies over
time.
Business cycles of individual economies have become synchronised as a result of globalisation.
- When a country is experiencing strong growth, its people attain high incomes and spend
more on imports. THis means trading partners are selling more exports, resulting in
higher levels of growth.
- Eco growth in individual economies is stronger when the rest of the world is growing
strongly.
- RBA found that 63%​ of changes in their level of output in Australia is attributed to
changes in interest rates, growth levels, and inflation rates in the largest industrialised
countries (i.e. the G7).
- IBC = International business cycle and RBC = regional business cycle

Note: Imports are induced because they are a function of the level of domestic economic
activity. Exports are ​autonomous​ because they are affected by overseas demand that is not
caused by domestic economic activity.

Transmission​ of economic conditions

- Trade flows - booms and recessions in one country affect its demand for g/s from other
nations
 7

- Investment flows - economic conditions in one country affect whether businesses will
invest
- TNCs
- Financial flows - countries with strong financial integration experience an increase in
financial flows between themselves in response to common external shocks
- Global interest rates (financial market confidence)
- Commodity prices (reliance in the manufacturing/production process, driver for
inflation/growth and therefore has flow on effects in employment, investment etc)
- International organisations (coordinating global economic strategy)

Regional business cycles: fluctuations in economic activity in a geographical region.

- Regional business cycles dominated by the largest and most globalised economies.
Regional business cycles can be different from patterns in global economic activity with some
regions performing more strongly than others and fluctuating independently of other regions.

Trade, financial flows and foreign investment (1.2)

This section explores free trade, which occurs when a government chooses to not control its
country’s imports and exports. This section is closely linked with section three (protectionism)
when governments use strategies to artificially give domestic firms an advantage over foreign
competitors.

This section is ​very​ frequently tested, especially 3-4 mark questions. Must know diagrams.

- The basis of free trade - its advantage and disadvantages (1.2.1)

Free trade: the movement of g/s between countries without the imposition of artificial barriers by
governments.
Absolute advantage: can produce ​both​ goods at a higher productivity.
Comparative advantage: the principle of comparative advantage states that countries should
specialise in the production of goods that they have the lowest opportunity cost at producing,
and trade to attain goods they produce less productively.
- Even if an economy has an absolute advantage at producing all goods, each country will
have comparative advantages. Production and trade according to comparative
advantage increases world allocative efficiency and maximises global output
(specialisation).

Advantage of free trade:

- Trade allows countries to obtain g/s otherwise could not produce
- Free trade allows countries to specialise = increased efficiency
- Free trade encourages efficient allocation of resources
- Greater specialisation results in economies of scale (low production costs)
- Encourages innovation and spread of new technologies.
 8

- Leads to higher living standards as a result of lower prices (increased competition)

- Efficiency:
- Technical efficiency = specialisation leading to economies of scale
- Allocative efficiency = more optimal allocation of resources
- Dynamic and innovative efficiency = producers have greater incentive to innovate

Disadvantages of free trade:

- Increase in unemployment may occur due to structural changes (CAR INDUSTRY)
- More difficult for less advanced economies to establish new business without protection
- Production surpluses from some countries can lead to dumping
- Encourage environmentally negative externalities with irresponsible production methods
due to competing with prices.

- Role of international organisations - WTO, IMF, World Bank, UN, OECD (1.2.2)
World Trade Organisation (WTO):
- Role = implement and advance global trade agreements and resolve trade disputes
- Trade liberalisation (forced China at start to reduce average tariff from 35% to 15%)
- Formed in 1995
- 164 members and 23 observer countries

International Monetary Fund (IMF):

- Role = maintain international financial stability, in relation to foreign exchange markets
- Structural adjustment policies > open up to trade > receive financial assistance
- IMF injected $250 billion US into the global markets to maintain financial liquidity during
GFC 2008
World Bank:
- Role = help poorer countries with their economic development
- Funded by contributions made from member countries and borrowings on global
financial markets
- Two major goals are:
- Reduce the rate of extreme poverty to less than 3% of population (2030)
- Reduce inequality by fostering income growth for world’s bottom 40%

United Nations:
- Established 1945, 193 members
- Broad objectives to do with global economy = international security, environment,
poverty and development, international law and global health issues.
- The United Nations Development Program (UNDP) is a UN agency with a development
mandate that helps the economies of developing countries by devising appropriate
economic strategies and policies, as well as building the human capital in those places.
- The United Nations has also played an important global economic role in establishing
the Millennium Development Goals (MDG) and supporting initiatives to achieve the
targets set out in the MDG.
 9

Organisation for Economic Cooperation and Development (OECD)

- Role = promote policies to achieve the highest sustainable eco growth and employment
while rising living standards of member countries + fiscal stability
- 36 countries committed to democracy and the market economy (Australia)
- Undertakes a large amount of original economic research regarded as most reliable and
highest quality.

- Influence of government economic forums - G20, G7/8 (1.2.3)

Group of Seven Nations (G7)
- Seven largest ​industrialised​ nations (US, UK, France, Germany, Canada, Japan, Italy)
- Significance in decline ​reflects​ the shift in the global balance of power towards emerging
economies (particularly ​China​)
- Share of GDP shrunk from ​68% in 1992 to 39% in 2018
Group of Twenty Nations (G20)
- Coordination of fiscal stimulus following GFC
- Includes 19 of the world’s largest national economies, plus the EU
- Makes up​ 80% of World GDP​ and ⅔ of the population
- Limited effectiveness as no ramifications for not implementing agreed policy.

- Trading blocs, monetary unions and free trade agreements (1.2.4)

Economic integration is the liberalisation of trade between two or more countries. This
liberalisation may lead to the creation of a free trade area, customs union, common market or
monetary union.

- Trading Blocs:​ occurs when countries join in formal preferential trading agreement to
the exclusion of other countries. Trading blocs impose protection on non member
countries i.e. not free trade (EU)
- Customs Union: A Free Trade Agreement (FTA) that includes a common set of external
tariffs.
- Common Market:​ the same as a Customs Union but also allows for the free travel of
labour and capital between the member countries (visas).
- Monetary Unions:​ characterised by the features of a single market which allows not
only free trade but also the free mobility of labour and capital within the union PLUS the
adoption of a ​common currency​ and the coordination of monetary policy through a single
central bank. (EU)
- Free Trade Agreements: ​are formal agreements between two or more countries to
break down barriers to trade and encourage increased trade flows. Can be called
‘preferential trade agreements’.
- Two countries = Bilateral (ChAFTA China + Australia)
 10

- Three or more = Multilateral (ASEAN Association of SouthEast Asian Nations)

- Advantage of FTAs is that it is a ‘stepping-stone’ to free trade. Disadvantage is that they
can lead to the formation of trading blocs, hindering progress to global free trade.
- Regional trade agreements: ​27 in 1990 now 206 in 2015
- Reduction in average tariffs around the world from ​14% in 1990 to 7% in 2014 allowed
trade to increase 5 times to US $45 trillion.

- Advantages and disadvantages of multilateral and bilateral agreements

MULTILATERAL:
- APEC ​(Asia-Pacific Economic Cooperation)
- Established 1989 in response to other trading blocs forming like EU- 21 members
- Region accounts:
- 60% of population
- 54% of world GDP
- 44% of trade
- NOT a secluded trading bloc does not put barriers on non-member economies.
- FORUM not a FTA or BLOC
- Australia:
- Increased Australia’s national output by 6.8% and created 500,000 jobs between
1989 to 2010.
- APEC accounts for ​75%​ of Australian trade.
- Impacts:
- Income per capita across the region almost ​doubled
- Not very enforceable though.

- TPP-11 ​(Trans-Pacific Partnership)

- Multilateral trade agreement among 11 Pacific Rim countries
- Ratified March 2018
- Represents ​13% of global economic output and 15% of global trade
- Australia:
- Exports to TPP-11 members in 2018 were ​$164 billion (22% of trade​)
- Impacts:
- The World Bank estimates that TPP-11 members should see an increase in GDP
by ​approx. 1.1%
- ASEAN ​(Association of South-East Asian nations)
- Counter-weight to APEC forum which is dominated by larger economies
- AANZFTA 2010 (ASEAN + Australia and NZ)
- Extensive tariff reductions (​96% of Australian exports​ into the region)
- Largest preferential trade agreement for Australia
- Impacts:
- $3.8bn increase in ​service​ exports in the four years after agreement to ASEAN nations
- Australia’s FDI in ASEAN nations from ​2011-2016 increased by $21bn
 11

- NAFTA ​(North American Free Trade Agreement)

- United States, Canada and Mexico
- 1994 accounts for 13% of global merchandise trade
- Impacts:
- Access to Mexico for USA and Canadian manufacturers to exploit lower labour
costs
- Trade creation - trade quadrupled in first 18 years FDI increased fourfold.
- However, highly political in the US because of jobs
- Mexico lost 1.3 million farm jobs as a result.

- EU ​(European Union)
- MOST important trading bloc in the world economy
- Larger than US similar size to China
- Accounts for ​20% of global ​merchandise trade
- Trade between EU countries accounts for 66% of all EU trade
- Customs Union:
- Common external tariff average is 5.9% mode is 15%
- 47% of items have no tariff
- Free movement of labour and capital
- EU Monetary Union:
- Single currency (euro) amongst 18 members
- Came under pressure during GFC and consequent Euro crisis.
- Reduced transaction costs
- Eliminates exchange rate uncertainty
- BUT loss of national currency controls
- Loss of monetary policy as a tool to solve specific issues in your domestic
economy.
- Benefits of EU membership
- Free trade
- Attractive for FDI
- Huge market size
- Free movement of labour and capital.
- Costs of EU membership
- Forced to follow EU laws and regulations
- Cost of contributions to EU budget
- Trade benefits accrue from FTAs instead.
- Trade diversion! Reduces world allocative efficiency.

BILATERAL:
Trade diversion occurs when trade is diverted away from a more efficient producer to a less
efficient producer due to the latter entering into a FTA
Examples of bilateral:
 12

- CHAFTA 2015​ aimed to eliminate 86% of tariffs and then 96% on full implementation in
2029.
- Services: Most-favoured nation (MVN) clause, Australia’s competitive position in
services will be protected for legal services, education services and
telecommunication services
- AUSFTA (2005) USA. provides significant tariffs reductions on agriculture and
manufacturing. Tariffs on ALL GOODS eliminated from 2015

Protection (1.3)
- Reasons for protection - infant industry argument, domestic employment, dumping,
defence (1.3.1)
Protection: government policies that give domestic producers an artificial advantage over
foreign competitors such as tariffs on imported goods.
Main measures of protection include tariffs, quotas, and subsidies.

1. Infant Industry Argument

New industries generally face many difficulties and risks in their early years
- Start out with high operating costs - small scale
Require protection in order to build capacity, establish markets and achieve economies of scale
so that they can compete in the global economy.
A key ​test for economic reliability​ is whether the industry protection is removed over time.
Industries should reach a level of efficiency that lets them operate without protection.
Disadvantages:
- Firms cannot gain international competitiveness as they become reliant on protection
and fail to innovate
- CAR INDUSTRY: Toyota, Holden and Ford
- Subsidy was ​$500 million a year​ but industry only supplied ​10% of
domestic demand​ and couldn't stay competitive due to higher costs of
production than the competitors in Japan and the US.
- Ceased manufacturing in Australia 2016-2017

2. Domestic employment
Protection can save domestic jobs causing more domestic employment.
- Argument gains support during times of recession when unemployment is rising
(COVID… gas?)​ but economists do NOT support this argument.
Disadvantages:
- Protection distorts the allocation of resources in an economy away from areas of more
efficient production in the long run leading to higher levels of u/e and lower growth rates.

3. Prevention of dumping
Dumping occurs when firms attempt to sell their goods in another country’s market at below
production costs. This practice is done to dispose of large production surpluses or to establish
 13

market positions in another country as low prices can put local firms out of business allowing
way for a monopoly.
- Consumers gain from lower prices but foreign producers will increase prices after.

4. Defence and self-sufficiency.

Non-economic reason for protection. Major powers want to retain their own defence industry in
case of war meaning they do not try to rely too heavily on other countries for their national
security. (Self-sufficiency argument).
Self-sufficiency comes at the expense of higher living standards that could be achieved through
specialisation and free trade. (COVID is showing that countries want to be more self-sufficient).

- Methods of protection and the effects of protectionist policies on the domestic and global
economy - tariffs, subsidies, quotas, local content rules, export incentives (1.3.2)
Tariffs:​ A government imposed tax on imported goods for the purpose of protecting domestic
industries.
Pros:
- Causes an extension in ​domestic supply​, increasing production and employment
- Creates a source of revenue for the ​government​.
Cons:
- Contract domestic demand because consumers pay a higher price
- Reduction in allocative efficiency. Represented by the ​deadweight​ loss where part of the
consumer surplus is lost and never recovered in the economy.
- Retaliation effect (US-China trade war)
- Tariffs increase the input costs for other industries who did not receive tariff protection.
- Making industries artificially competitive reduce dynamic efficiency as domestic firms
have less incentive to adopt new technology to reduce production costs.
- OECD estimates that every $1 in protection decreases GWP by 66 cents
Facts:
- Average tariff ​3%​ (20% in 1990)
 14

Subsidies:​ cash payments given to domestic producers to reduce the cost of production and
compete more easily with imported goods.
Pros:
- Increase domestic production and employment
- Does’t raise the price unlike tariffs or quotas
- Less retaliation
Cons:
- Cost for the government
- Increased domestic production represents increase in demand for factors of production
raising factor costs for other firms who do not receive subsidies.
- Domestic firms become reliant (loss of dynamic efficiency)
- Can create an oversupply, which can lead to dumping.
 15

Quotas:​ Restrictions on the amounts or values of various kinds of g/s that may be imported.
Pros:
- Stimulates domestic production and employment is protected
- More resources allocated to protected industry
Cons:
- Redistribution of income away from consumers to domestic producers, resulting in lower
levels of overall economic growth.
- Unlike tariffs, no government revenue directly generated
- Retaliation effect.

DIAGRAM

Local Content Rules: ​Specify that goods must contain a percentage of locally produced parts.
Example:
- 2015 one assessment criteria for overseas companies wanting to build Australia’s
submarines was the extent of local manufacturing and maintenance work that would be
done in Australia.
- Commercial TV required to have ​55% of local content between 6am to midnight​ on
primary channel.

Export Incentives: ​are programs that give domestic producers assistance to penetrate global
markets or expand their global market share.
Examples:
- Grants, loans or technical advice and encourage businesses to penetrate global
markets.
- Australia has the Export Market Development Grant (EMDG) that provides direct funding
and general assistance to local manufacturers looking to break into international
markets.

Overall effects of protectionism:

- Reductions in trade between nations
- Reduce living standards and reduce global economic growth by shielding inefficient
producers
- Increased difficulty for individual economies to specialise in efficient production
- Negative impacts tend to be greatest for developing economies that are excluded from
access to the markets of advanced economies.

Globalisation and economic development ​(1.4)

This is a frequently asked section in multiple choice.
The process of globalisation has seen a transformation in the size and power of the world’s major
economies.
 16

- Differences between economic growth and economic development (1.4.1)

Q. Describe the difference between economic growth and economic development (2 marks)
Economic growth (EG) is the increase in the overall value of G+S produced by a given economy
measured in the percentage rate of increase in real GDP. Comparatively, economic development (ED)
refers to a country’s well being measured using trends in sustainability and quality of life as well as the
Human Development Index (HDI), which involves education and life expectancy.

Economic Growth: is a sustained increase in a country’s productive capacity over time.

- GNI (Gross National Income) is the sum of value added by all resident producers in an
economy plus receipts of primary income from foreign sources (inflation adjusted + PPP)
- US and China have the largest GNI
- Inaccurate to use as a comparison because it doesn't consider living standards.
This is why economists use PPP
- PPP (Purchasing Power Parity): a theory that states that exchange rates should adjust to
equalise the price of identical goods and services in different economies throughout the
world.
- Divide the REAL GNI by the POPULATION generating a GNI per capita figure.
- Global Wealth: Another dimension to global inequality.
- Significant growth over recent decades 66% from 1995-2014
- Natural capital was the most important asset for low income countries at​ 47% of
total wealth in 2014
- Human capital accounts for approximately ⅔ of global wealth.
- Top 10% of people account for 87% of the world's wealth​. (developed countries)

Economic Development: is a broad measure of welfare in a nation. Includes indicators of health,

education, environment, mental quality and material living standards.
Human Development Index (HDI)
- A measure of economic development devised by the UN
- Considers: life expectancy at birth, levels of education attainment and expected years of
attendance, GNI per capita.
- 0 = bad 1 = good
- Norway highest 0.949 (​Australia 2nd 0.939​) and lowest Central African Republic at 0.352

- Distribution of income and wealth (1.4.2)

Income: refers to earnings of a person from contributing to production, including wages, rent,
interest, profit, transfer payments, pensions etc.
Wealth: refers to a person’s net value of assets (real estate, cash deposits etc.) Wealth is a
stock concept which accumulates into income.
Measured by the Gini coefficient
- Australian Gini for income declined from ​68.7 in mid 2000s to 64.9 in mid 2010s
 17

- Income and quality of life indicators (1.4.3)

HDI is key measure (high eco growth is ​usually​ correlated with high HDI)
Millennium Development Goals (MDG)
- UN Summit 2000 189 countries agreed to eight MDG goals
- Improve: income, education, health and environment.
- From 1995-2015 global population living in ​extreme poverty fell from 36% to 12%

- Developing economies, emerging economies, advanced economies (1.4.4)

Advanced economies; characterised by:
- High levels of economic development (average income <$​40,000​USD)
- Slower eco growth (​1.8%​ average)
- Structure of economy = service-based with advanced manufacturing
- Close economic ties with each other
- Liberal-democratic political/economic institutions
Emerging economies; characterised by: (BRIC - Brazil, Russia, India, China)
- Varying income levels
- High rates of income GROWTH
- Strong economic growth (5-10%)
- Currently industrialising (heavy manufacturing presence)
Developing economies; characterised by:
- Low income levels
- Human resources with poorer education and health outcomes
- Industrialisation to a limited extent
- Large numbers of people living in absolute poverty

- Reasons for differences between nations (1.4.5)

Content-heavy section. Remember two reasons (one global one domestic) in detail and the
others vaguely.
Global Trade System: ​Several features of the global trade system work to reinforce inequalities
- Protectionism in the agricultural sector, particularly in wealthy countries
- Regional trading blocs (cause trade diversion away from developing countries)
- Benefits of free trade agreements being inaccessible to developing nations.
- If developing countries like Africa, South-America and Asia could increase trade
by 1% would lift 128 million out of poverty.
- Bilateral agreements favour advanced and emerging economies.
Global Finance Architecture:
- Long-term flows of investment favour developed countries and short-term favour
emerging economies (can be volatile though)
- International tax havens
- IMF structural adjustment policies favour and serve interests of rich countries
- World’s 48 poorest countries received just 4.3% of global FDI
 18

- Developing countries have huge foreign debt burdens. World Bank/IMF provide ‘debt
relief’ to HIPCS (heavily indebted poor countries)
Global aid and assistance:
- 58% shortfall​ of promised vs. delivered aid since 1970
- Phantom Aid​ - aid that does not improve lives of poor
- 1 in 6 dollars is technical cooperation, further 11% is debt and 5% is
administration
- Aid spending reflects military interests rather than the needs of the poorer countries

Domestic factors: some developing nations suffer a self-perpetuating set of circumstances that
make it difficult for a country to leave poverty.
Natural Resource endowment:
- Economies with larger quantities of natural resources such as oil and precious minerals
generate higher export income, which can fund education and health.
Labour supply and quality:
- Differences in education quality and standards and skills.
Institutional factors:
- High levels of corruption, which decrease public investment in schools etc.
- Political instability

- Effects of globalisation (1.4.6)

Economic growth and development:
- No clear evidence globalisation produced an acceleration of eco growth.
- World GDP fallen marginally from ​2.9% during 1980s to 2.8%​ per year from 2000-2017
- BUT most countries experienced improvements in development.
- Impacted emerging economies the most
Income inequality:
- Global mobility of skilled labour has increased income inequality.
- Lower tariffs can improve standards of living for the poor by reducing prices of goods.
- Income inequality has risen by almost ​0.45% per year​ over the past three decades.
- Major reason is the impact of technological change.

- Trade, investment and transnational corporations (1.4.7)

SIGNIFICANTLY INCREASED TRADE FLOWS AND FDI.
TNCs accounted for over one quarter of GWP in 2017
International trade in g/s accounts for two thirds of global output.
- Vertical specialisation:​ feature of trade growth where goods are produced in different
stages in different economies. (Since late 2000s two thirds of global trade is intermediate
goods).
- Between 1990 and 2001 ​FDI increased sevenfold​ due to deregulation

- Environmental sustainability (1.4.8)

Negative environmental consequences.
 19

- Increased trade sees increase in use of non-renewable fuels for transport

- Low income countries desperate for foreign investment engage in economic behaviour
that harms the environment.
- BUT there are also international institutions and conventions to help enviro (Kyoto)

- The international business cycle (1.4.9)

Closer economic integration makes economies more exposed to downturns in the international
business cycle.
Positive impacts of global financial markets include:
- Ability to conduct international transactions
- Easier to access loans or attract investors
- Efficient international financial markets fosters economic development
Negative impacts of global financial markets:
- Markets shift massive volumes of money causing volatility and collapse exchange rates
- In 2000s financial markets played a part in worst economic crisis since Great Depression

Case Study
Undertake a case study of the influence of globalisation on an economy other than Australia,
including an evaluation of the strategies used to promote economic growth and development in
this economy.

CHINA ​(Largest economy)

Stats

History 1978 introduced ‘Open-Door’ policy beginning the SEZs that attracted
TNCs and FDI because the tax rate was 15% rather than 33%, low
labour costs (5% of US wages) and low import duties.
- FDI rose US0.25bn (1978) to US71bn (2019)
- Open-Door accounted for 45% of FDI
- 1993 International Trade and Investment report stated “​in the
1980s contribution to EG came mainly from foreign investment”

Economic Growth Average 9.5% annually was

January 2020 China recorded negative growth rates for first time -6.8%

Economic HDI​ = 0.758 in 2019 (85th worldwide) improved from 0.500 in 1990
Development Wages:​ increased by 6% p.a. Every year since 1995 > US$770 in 1995
now US$12680 in 2020
- TNCs created 335 million new kobs
- 2013 Rise of the South Report estimated EG achieved as a
result of trade and financial strategies helped raise 800 million
out of poverty
Enviro ​“War for blue skies” (2018) strategy renovate outdated factories
Education​:
 20

The Compulsory Education Development Memorandum (2017), focuses on critical

thinking and innovation, which are crucial skills stated under the Oxford Economics
Report. It purports that China must employ innovation to boost productivity and
sustain its previous high levels of EG. In January 2020 China recorded negative
growth rates for the first time, shrinking 6.8% due to the Covid-19 pandemic.
However, in April 2020, China still managed to record a trade surplus of $45.34bn,
which can be attributed to manufacturing industries refocusing on producing medical
supplies. This feat could only have been achieved through an innovative and skilled
workforce demonstrating that education strategies have not only benefited China’s ED
but also its growth.

Trade Goods: ​Successful due to cheap prices and high volumes

- 38% of GDP in 2018
- Trade doubled in first 10 years of Open-Door
- Foxconn stated their parts would cost double if they were
produced in the US rather than China.
BOGS trade surplus of $45.34bn in April 2020 (slightly less than 2019)

However, China is export-led (they need to transition away from this)

- Too strong a reliance on trade revenue
- Highlighted during US-China Trade War US accounting for
16.2% of China’s exports placed tariffs on hundreds of billions
worth of goods dropping EG to a pre-Covid low of 6% in 2019

Multilateral and bilateral agreements are valuable (WTO) in 2001

China has 44 FTAs.

Services: ​Records trade deficits highlighting need for reform

2017 trade deficit of US$290bn (services)
Imports mostly skilled services like education (Australia)
- To boost services China focused on education reforms.

Financial Flows Direct: ​(more than 10% otherwise known as FDI)

- Open-Door policy improved FDI
- China receives huge financial inflows but wants to increase its
financial outflows to balance reliance on inbound FDI.
- Financial outflows = 0.5% of GDP between 2000-2015
- China has relaxed restriction on private firms investing
abroad
- SOEs (state-owned enterprises) compromised 94% of
outbound FDI in 2002 but ​strategies​ like “Made in China
2025” (2015) helped this drop to 50% in 2018.
- Belt and Road Initiative​ (2013)
- Largest global infrastructure project
 21

- Costs China US$150bn per year to link 68 countries

- Boosts China’s net primary income earned on FDI

Portfolio: ​(less than 10% can be loans or financial market)

- 1990s deregulation improved financial inflows and outflows
- Relaxed laws on banking firms, formed a strong stock market
and embraced free-market strategies.
- Second largest stock market BUT foreign investors own only
3% of China’s total securities (China owns more of others)
- China owns US$4trillion in foreign currency reserves meaning
they can control the renminbi against the USD (devaluing)

HSC TOPIC TWO: Australia’s Place in the Global Economy

Students learn to:

Examine economic issues
- Assess the impact of recent changes in the global economy on Australia’s trade and
financial flows
- Examine the effects of changes in trade and financial flows on Australia’s economic
performance
- Analyse the effects of changes in the value of the Australian dollar on the Australian
economy
- Discuss the impact of free trade and protection policies on the quality of life in Australia
- Propose likely changes to the structure of industry within Australia as a result of current
trends in the global economy

Apply economic skills

- Calculate the main components of Australia’s balance of payments
- Analyse the relationship between the balance of the capital and financial account and
the net income balance
- Explain the relationship between the current account balance and the balance of the
capital and financial account
- Use supply and demand diagrams to explain how the value of a currency is determined
under different exchange rate systems
- Analyse the impact of changes in the components of the balance of payments on the
value of the Australian dollar

Content:
Australia’s trade and financial flows (2.1)
 22

Demand for Australia’s imports tends to be price inelastic (demand and supply are not affected
by price) as Australia imports capital and consumer goods with few imports.
Demand for exports (like agriculture and commodities) are price elastic since Australia is a
price-taker on the international market, making us vulnerable to external shocks.

Value, composition and direction of Australia’s trade and financial flows

- Trends in Australia’s trade pattern (2.1.1)
Exports​:
Composition 2018/19:
1. Mining ​57%
2. Services ​22%
3. Manufacturing 12%
4. Agriculture 10%

Composition 1981/82
1. Mining 32%
2. Agriculture 29%
3. Services 26%
4. Manufacturing 14%

Direction 2018/19:
1. China 36%
2. Other 26%
3. Japan 16%
4. East Asian Economies 12%
5. ASEAN 10%

Direction 1981/82:
1. Japan 27%
2. Other 23%
3. EU 15%
4. East Asia 15%
5. USA 10%
6. Asean 9%

Imports
Composition 2018/19:
1. Intermediate Goods 32%
2. Consumer Goods 25%
3. Services 24%
4. Capital 19%

Composition 1981/82:
 23

1. Capital 53%
2. Intermediate Goods 22%
3. Consumer Goods 19%
4. Services 5%

Direction 2018/19:
1. China 24%
2. Other 20%
3. EU 17%
4. ASEAN 16%
5. East Asia 13%
6. USA 10%

Direction 1981/82:
1. EU 26%
2. USA 21%
3. Japan 20%
4. Other 14%
5. East Asia 11%
6. ASEAN 6%

Notes:
- Australia has a comparative advantage in the primary sector (mining commodities) due
to vast natural resources
- Less competitive in manufacturing due to high wages
- EXPORT BASE HAS NARROWED (i.e. not diverse)
- Dutch Disease​ = reliance on mining. When exports from one sector increase demand for
dollars causing appreciation and making other sectors less international competitive.
- In ​2011 AUD surpassed parity with USD​ due to high mining demand from China,
services such as education and tourism suffered.
- Reliance on mining makes the country vulnerable to external shocks.
- China’s GDP growth declined from 8% to 6.9% (2015-16) causing deterioration in
world price for coal and iron ore > Australia’s terms of trade and increased the
CAD by 40%
- Future: ​Australia should diversify its export base by shifting towards services and ETMs

- Trends in financial flows - debt and equity (2.1.2)

Key definitions:
Gross foreign debt: total amount of outstanding funds Australia owes ​foreign​ firms.
Net foreign debt: = gross foreign debt - total funds that foreigners owe to Australia and RBA
Net foreign equity: net amount of investments in Australian assets, including land (rent) and FDI
profit made by foreigners.
Foreign liabilities: debt and equity that Australia owes TO foreigners.
 24

Foreign assets: debt and equity that foreigners owe TO Australia

Net foreign liabilities: net foreign debt + net foreign equity = gross foreign liabilities -
gross foreign assets.

Composition:
Direct Investment (FDI):
- More than 10%
- Investor intends to have a say in the management of the business
- Long Term
Portfolio Investment:
- Less than 10%
- Includes loans, securities, property and smaller share holding
- Investors will not play a role in managing
- Short term.

Trends:
- Better technology (internet) = easier transfer of information
- Floating of exchange rates 1983 (FDI doubled)
- Deregulation of financial markets in 1970s (removal of capital restrictions and
technological changes)
- Growth of TNCs
- Investment is currently 90 times its level in 1980​ (portfolio higher than direct)
- Does Australia own more FDI overseas or do foreigners own more of Aus?

Australia’s Balance of Payments ​(2.1.3)

The Balance of Payments: ​the record of the transactions between Australia and the rest of the
world during a given period, consisting of the current account and the capital and financial
account. The Balance of Payments (BoP) is an important indicator of the health of the economy
and ability for Australia to make good with its obligations to the rest of the world.
- Money flowing ​into​ Australia is a CREDIT money flowing ​out​ of Australia is a DEBIT
(​follow the money)​

- Structure
Current Account (CA) + Capital and Financial Account (CAFA) = 0 i.e. they should ​balance​.

- Current Account, debits and credits

Current Account (CA): ​non-reversible transactions; ​three​ components. Shows receipts and
payments for trade in goods and services, transfer payments and income flows between
Australia and the rest of the world. (MOST IMPORTANT indicator of global relationships)
- Balance on goods and services (BOGS): value of exports minus value of imports
- Net Primary Income (NPY): earnings on the factors of production (income interest, rent,
profits)
 25

- Net Secondary Income (NSY): earnings not from the factors of production (unconditional
aid, gifts, insurance claims, pensions received from other governments)

- Capital and Financial Account

Capital and Financial Account (CAFA):​ records ​one-off​ borrowing, lending, sales and
purchase of assets between Australia and the rest of the world.
- Capital Account:
- capital transfers (foreign aid for construction of infrastructure)
- transfers of non-produced, non-financial assets (e.g. intellectual property like
trademarks)
- Financial Account: (Australia’s transactions in foreign financial assets and liabilities)
- Direct Investment (10% or more)
- Portfolio Investment (10% or less)
- Financial derivatives (complex financial instruments)
- Reserve Assets (RBA gold or foreign currency)
- Other Investments
- Net Errors and Omissions: s​ tatistical discrepancies.

- Links between key Balance of Payments categories

The AUD ensures there is balance due to the exchange rate mechanism as the supply of AUD
equals the demand for AUD under a floating exchange rate.
Supply of A$: ​(M, Y debits ​and ​K outflows)
- Payments for imports of goods and services ​(M)
 26

- Primary and secondary income/transfers ​overseas​ ​(Y debits)

- Capital and financial outflow ​(K outflow)
Demand for A$: ​(X, Y credits​ and ​K inflows)
- Receipts for exports of goods and services ​(X)
- Primary and secondary income/transfers from overseas ​(Y credits)
- Capital and financial inflow ​(K inflows)
Calculation
M + Y debits + K outflow = X + Y credits + K inflow
(M - X) + (Y debits - Y credits) = K inflow - K outflow
(Current Account = Capital and Financial Account)

Financial inflows ​(K inflows)​ can create debits on the primary income ​(Y debits)​ category in
two ways:
1. International borrowing (foreign debt)
- This requires regular interest payments (primary income outflow)
2. Foreign investment (foreign equity)
- Requires returns on the equity investment
- Equity inflows are related to the foreign purchase of Australian assets
- These assets return rent, dividends, profits etc. (primary income outflow)

Overtime, high CAFA surplus will result in widening CAD as servicing costs for foreign liabilities
increase.

Debt Trap Scenario​: An economy borrows to pay the ​interest​ servicing costs on its existing
foreign debt.

- Trends in the size and composition of Australia’s Balance of Payments

- International competitiveness, terms of trade, international borrowing, foreign
investment
CAD (Current Account Deficit)​: first emerged as a serious economic concern in the 1980s.
- Averaged 1.1% of GDP in 1970s then 4.0% in 1980s
- Sudden increase prompted ​structural reforms​ to restore international
competitiveness.
- Since the 1980s ​CAD​ has moved in a range of ​3-6%​ of GDP.
- Recorded a ​CAS (Current Account Surplus)​ for the first time in 44 years in 2019​.
- Rise in demand for Australia’s commodity exports (LNG)
- Growing overseas earning from superannuation investments (NPI)

Balance on Goods and Services:​ (trade balance) has recorded an improving trend.
- Main cyclical component of the ​CAD

CYCLICAL FACTORS:
Movements in the exchange rate:
 27

- Affects the international competitiveness of Australia’s exports and the relative

price of imported goods and services.
- Depreciation causes increased international competitiveness of exports
(discourages import spending) which improves the BOGS account.

Terms of Trade​: Greatest influence on BOGS in recent years.

- Shows relationship between ​price o ​ f exports and p
​ rice​ of imports.
- Commodity prices (Australia export base) have steadily increased, which has
seen the ToT improve.
- Leads to a decrease in CAD

Domestic Economic Growth​: Affects BOGS balance by influencing demand for imports.
- Upturn in the domestic business cycle results in increased business investment and
higher disposable income.
- Leads to higher consumption
- Therefore greater import expenditure worsening the BOGS
- Above trends have contributed to Australia’s poor BOGS performance during the mid to
late 2000s.

International business cycle: ​Affects demand for Australia’s exports

- Improvements in IBC improves BOGS (increased consumption of exports)
- A continuation of this success depends on strengthening ​trade​ linkages with the
economies that are most likely to drive global economic growth (China + India)

STRUCTURAL FACTORS:
Export Base:​ Important long-term behaviour on the BOGS
- Australia has a narrow export base (heavily weighted towards primary commodities)
- Low-value added products such as minerals and agriculture.
- Therefore, Australia imports more expensive value-added products such as consumer
and capital goods
- Long run BOGS tends to then be in a deficit not surplus
- Also impacted by global commodity prices.

Trends in the ​Primary Income Account:

The relative size of Australia’s interest repayments is affected by two cyclical factors:
- Value of the exchange rate
- Movements in the exchange rate will alter the value of debt denominated in the
foreign currencies. (​valuation effect​)
- An appreciation will reduce Australia’s foreign debt service
- A depreciation will increase Australia’s foreign debt service
- Domestic business cycle
- Influence on equity servicing costs
 28

- When the domestic economy experiences strong growth, domestic profit rises
and the profits redistributed in dividends increases.
- Debit on primary income account (converse is true for the above)

- Effects of these trends on Australia’s Balance of Payments

Consequences of a high CAD:
Growth of foreign liabilities:
- Over a period of time this will mean that lenders may become more reluctant to lend to,
or invest in Australia.
Increased servicing costs:
- Foreign debt must be serviced through interest payments according to global and
domestic interest rates.
- Higher levels of foreign debt can result in lenders demanding a risk premium on loans.
- Forces interest rates up.
Increased exchange rate volatility:
- High CAD may undermine confidence of investors in Australian economy reducing
demand for the AUD
- Results in depreciation of AUD
Constraint on economic growth:
- Referred to as the Balance of Payments Constraint
- The extent to which an economy’s capacity to grow is constrained by its need to
keep the current account deficit at a sustainable level.
Contractionary economic policy:
- If necessary to reduce a high CAD in the short term, tightening of policies may occur.
- This will reduce economic growth etc.
Loss of international investor confidence:
- Countries with high CADs are more vulnerable to shifts in investor sentiment.
- Has the ability to trigger economic crises ​(Asia Financial Crisis was due to
Thailand’s high CAD in 1997)

Exchange Rates (2.2)

- Measurement of relative exchange rates (2.2.1)
- To other individual currencies
An exchange rate is the ​price​ of one currency measured in terms of another. Currency
conversion occurs in the foreign exchange market (FOREX) where forces of supply and
demand determine the price of one country’s currency in terms of another.
- Bilateral
- Most common conversion is AUD vs. USD
- Not holistic
- Trade Weighted Index
TWI​ (Trade Weighted Index): measures movements of the AUD against a basket of currencies
of Australia’s ​trading partners​ weighted according to their importance to Australia’s trade.
- Increasing TWI leads to AUD appreciation compared to currencies of trading partners.
 29

- Same concept as CPI but for currencies not goods.

More ​accurate​ comparison as comparing against a single currency can be misleading. I.e. AUD
could appreciate against the USD but depreciate against all other currencies.
However,​ ignores the fact that the majority of trade is denominated in USD hence the $A/US
rate is more important than it appears in the TWI calculation.

- Factors affecting the demand for and supply of Australian dollars (2.2.2)
NOTE: Short-answer questions for this topic. Do not need to memorise all the reasons.
DEMAND:
Financial Flows:
- Interest rates: ​high domestic cash rates/interest rate differentials increase demand
- Investment Opportunities:​ When foreigners want to invest in Australia they have to buy
AUD increasing demand for AUD.
Expectations:​ Speculators who make money off short-term price movements.
- Self-fulfilling prophecy​ because of herd mentality. If buyers think AUD will go up they buy
and then others do to, which increases demand sees AUD go up and voila self-fulfilled.
Exports (Demand and Supply):
- Increasing exports will lead to an increase of demand of AUD
- Rise in TOT and commodity prices generally associated with increase in Aus exports
- Demand for exports determined by international competitiveness and inflation
Inflation:
- High inflation = less international competitiveness = lower exports = less demand.

SUPPLY:
Imports (Demand and Supply):
- Increase in imports will lead to an increase of supply of AUD.
- Demand for imports comes from rising incomes, taste and preferences and
higher domestic inflation rate than other countries.
- Strong economic growth increases consumption of imports and thus supply of AUD.
Financial Flows:
- Financial flows leaving Australia increases supply of AUD
- I.e. RBA wants to increase their foreign reserves so they buy foreign currency increasing
the supply of Australian dollars.

- Changes in exchange rates - appreciation/depreciation (2.2.3)

APPRECIATION
- Increase in ​interest rates​ or a decrease in overseas interest rates
- Improved ​investment opportunities​ in Australia or deterioration in foreign investment
opportunities
- Rise in ​commodity prices​ and an improvement in Australia’s ​ToT
- Improvement in Australia’s ​international competitiveness
- Lower ​inflation​ in Australia
- Increased ​demand​ for Australia’s ​exports
 30

- Expectations​ of a currency appreciation.

- Strong ​global economic conditions​ improves demand for Aus exports

DEPRECIATION
- OPPOSITE OF EVERYTHING ABOVE.

- Determination of exchange rates including fixed, flexible and managed rates (2.2.4)
FIXED: Governments determine the exchange rate on the value of another country’s currency
- What:
- Overvaluing: If market equilibrium is below fixed rate, the government must buy
excess demand using foreign reserves.
- Undervaluing: must create excess supply by purchasing foreign reserves.
- Australia used this prior to 1976
- Advantages:
- Useful for exporters and importers and central bank
- Disadvantages:
- Defying market for long periods can deplete foreign reserves increasing i/r
- Can increase speculation (Soros selling and buying of Deutschmark and Pound
led him to make 1 billion pounds in one day)
- BOP creates money supply issues
- Country is insulated from global conditions

FLOATING: the price of currency is determined by market forces and there are no restrictions.
- Clean float = no intervention
- Dirty float = central bank will aim to curb volatility
- Advantages:
- More realistic
- Discourages destabilising speculation
 31

- Can have more effective monetary policy as BOP doesn’t influence money
supply
- Provides insulation properties for Aus economy
- Consistent with major trading partners
- Stabilises ToT
- Disadvantages: Volatility caused by exchange rate expectations can lead to:
- Uncertainty in savings and investment decisions
- Overshooting
- Bandwagon effects
- Speculative bubbles

MANAGED/FLEXIBLE PEG: Australia from 1976-1983

- Mix of fixed and floating
- Embraced by China in June 2010
- Fix it everyday

- The influence of the RBA on exchange rates** (2.2.5)

Used for ​dirtying the float
RBA gold and foreign reserves were ​$A82bn in May 2018
- Small compared to the ​$5.3trillion traded daily
- Intervention power is limited by the size of foreign currency holdings.

Monetary policy:
- Higher interest rates will attract more foreign savings
- Increase demand put upward pressure on exchange rate (effective short term)
- RBA estimates that a 10% depreciation leads to a 0.25%-0.50% increase in inflation
each year for two years.

Jawboning:
- RBA can indirectly affect the exchange rate by releasing information into the public on
the forecast influencing speculation decisions.

- The effects of fluctuations in exchange rates on the Australian economy (2.2.6)

APPRECIATION
Negative Effects:
- Australian exports more expensive leads to decrease in export income and deterioration
in Australia’s CAD in the medium term
- Imports less expensive encouraging import spending worsening CAD
- Trade deficit reduces economic growth
- Lower financial inflows as its expensive to invest
- Reduces AUD value of foreign income causing deterioration of net primary income
- Reduces value of foreign assets (valuation effect)
 32

Positive Effects:
- Australian consumers enjoy increased purchasing power
- Appreciation decreases the interest servicing cost on foreign debt
- Inflationary pressures reduce (imports become cheaper so less imported inflation)

DEPRECIATION
Negative effects:
- Australian consumers suffer reduced purchasing power
- Increases the interest servicing cost on Australia’s foreign debt
- Increases imported inflation

Positive Effects:
- Australian exports are cheaper improving demand and CAD
- Imports more expensive discourages spending improves CAD
- Trade surplus = better economic growth
- Increases AUD value of net primary income inflows
- Increases the value of foreign assets

Free Trade and Protection (2.3)

Protection​ = any type of government action that has the effect of giving domestic producers an
artificial advantage over foreign competitors.

- Australia’s policies regarding free trade and protection (2.3.1)

Australia was one of the most protected economies in the world.
Decreased protection:
- Whitlam 25% cuts to all tariffs (1973) and more in 1988 (MICROECONOMIC REFORM)
- Protection phased out 1991, 25% clothing and 15% textiles averaging 3.7% in 2002
- average tariff 1.3%
- Car subsidies ended in 2016

Increased free trade:

- WTO (1995)
- Multilateral and Bilateral agreements (see Topic One)

- Australia’s multilateral and bilateral free trade agreements (2.3.2)

Bilateral and Multilateral agreements reduce overall protection for Australian industries.
Multilateral: three or more countries.
- AANZFTA (2010)
- Extensive tariff reductions
- Aus two way trade with ASEAN and NZ grew by 10% p.a. Over past 5 years
- Covers area of 600 million people and GDP of $3.3trillion
- APEC forum
- ASEAN
 33

Bilateral: Two countries. Easy to negotiate.

- ChAFTA (2015) China
- 2017 China bought $116bn of Aus exports (BIGGEST trading partner)
- More explanation in TOPIC 1.

- The implications of Australia’s policies for individuals, firms and governments (2.3.3)
Consider both ​short term​ and ​long term​ (short term are usually positive and long term bad)
INDIVIDUALS:
- Structural unemployment in short term
- Increase quality of life due to decrease in prices and increase in choices
- Long term job opportunities as some sectors become more internationally competitive
FIRMS:
- Increase efficiency of increase competition
- Cheaper imports for firms that use in production
- However, increase offshoring in some sectors
- Decrease revenue in some sectors
GOVERNMENTS:
- Decreased tax revenue (from no tariffs)
- Structural unemployment benefits increase
- Increased expenditure on training
- Long term increase international competitiveness
OTHER:
- Economic development rises
- Short-term increase in imports worsens CAD however long term CAD is better due to
better international competitiveness.

- Implications for Australia of protection of other countries and trading blocs. (2.3.4)
Global protectionist policies impede trade reducing the extent of structural change promoted by
free trade.
For example: Australia has a comparative advantage in agricultural products however
protectionist policies such as heavy subsidies by the EU (Common Agricultural policy) and the
US (the Export Enhancement Scheme) drive down global prices for agricultural products. Since
agricultural products have perfect competition, Australian producers will receive lower prices for
their exports.

Trading Blocs:
- Are preferential
- Creates trade diversion
- Fragments global trade.
 34

HSC TOPIC THREE: Economic Issues

Students learn to:

Examine economic issues
- Examine the arguments for and against increasing economic growth rates
- Investigate the economic and social problems created by unemployment
- Analyse the effects of inflation on an economy
- Discuss the effect of a continued current account deficit on an economy
- Investigate recent trends in the distribution of income in Australia and identify the impact
of specific economic policies on this distribution
- Analyse the economic and social costs of inequality in the distribution of income
- Examine the economic issues associated with the goal of ecologically sustainable
development

Apply Economic Skills

- Identify and analyse problems facing contemporary and hypothetical economies
- Calculate an equilibrium position for an economy using leakages and injection
- Determine the impact of the (simple) multiplier effect on national income
- Explain the implications of the multiplier for fluctuations in the level of economic activity
in an economy
- Calculate the unemployment rate and the participation rate using labour force statistics
- Interpret a Lorenz curve and a Gini coefficient for the distribution of income in an
economy
- Use economic concepts to analyse a contemporary environment issue
- Assess the key problems and issues facing the Australian economy.

Content:
Economic Issues in the Australian economy
Economic growth (​ 3.1)
Economic growth is an increase in the value of g/s produced by an economy over a period of
time. It is measured by a percentage change in real GDP (adjusted for inflation)

- Aggregate demand its components: Y = C+I+G+X-M (3.1.1)

GDP = national income (Y)
- It is the sum of consumption (C) , investment (I), Government spending (G) and net
exports (X-M).
Keynesian Aggregate Demand Theory:
AD​ = C + I + G + X-M
 35

Y ​= Aggregate supply also known as national income.

AS = C + S + T
The AD/AS model explains how changes in AD and AS affect the level of ​output (GDP) ​and
price levels (inflation)​.

Y Axis (Price Level) ​can be labelled as CPI

or ​INFLATION

X Axis (Output) ​can be labelled as Real

Income or Real GDP

Equilibrium: ​Y = C + I + (G-T) + (X-M)

TRENDS:
C (Consumption):
- CONSUMPTION MAKES UP 50-60% OF AD (59% in 2018)
- Income is most important factor of consumption so C^ when:
- Rise in income
- RIse in inflation
- Future shortage of goods
- The more equitable distribution of income the higher the rate of ​C

I (Investment):
- Most volatile component (15% of AD)
- A change in the i/r would make it cheaper to borrow funds for the purchase of capital
goods improving investment.
- If cost of labour decreased more attractive to businesses than capital

G + T (Government Spending and Taxation):

- Goal of sustainable economic growth
- Policy objectives for external stability
- Sustainability of government debt

X-M (Exports - Imports):

- Higher AD means more imports changing trade balance
- International competitiveness
- Protectionism
- Consumer taste and preferences (demand of Aus exports)
- Exchange rate (weaker means more exports > X-M increase)
 36

- The multiplier also applies for decreases in AD

- Injections and leakages (I+G+X = S+T+M) (3.1.2)

INJECTIONS: Government Spending, exports and investment ​(I + G +X)
LEAKAGES: Government Taxation, imports and savings ​(S + T + M)

Equilibrium when ​AD = AS or Y = AD

I+G+X=S+T+M

If I > L then the economy will grow if L > I then the economy will shrink.

- The simple multiplier: k = 1/1-MPC (3.1.3)

When an individual spends money to consume goods and services that consumption forms
income for another individual, who will spend some or save some. The process continues
meaning that an initial increase in AD eventually ends up in a larger increase in national income.

Simple Multiple = K
K = 1/MPS ​or ​K = 1/1-MPC
(MPC + MPS = 1) ​> MPC = Marginal Propensity to consume which refers to the proportion of
each ​extra dollar of earned income​ that is spent on consumption, whereas APC (Average…) is
the proportion of ​total income.​

Change in national income is:

∆Y = K x ∆AD

Initial increase in AD is ​I​ and is referred to as ​autonomous investment​ and the subsequent
increase in AD will be ​C​ and is referred to as ​induced consumption​.

- Measurement of growth through changes in real Gross Domestic Product (3.1.4)

You measure economic growth through the increase in the ​volume​ of g/s measured by the rate
of change in ​GDP​.
Real GDP takes into account inflation.

- Sources and effects of economic growth in Australia (3.1.5)

SOURCES of economic growth:
Government utilises macroeconomic policy to influence the rate of economic growth.
- They want to smooth the business cycle
Fiscal Policy Objectives:
 37

- Sustainable economic growth between 3-4%

- Price stability CPI between 2-3% (Inflation)
- Full employment i.e. u/e rate of >5%
If the Government wants to increase economic growth they can:
- Reduce taxation ​(T)
- Increase expenditure ​(G)

Monetary policy is conducted by the RBA and influences the level of interest rates in the
economy.
- DECREASE INTEREST RATES TO STIMULATE ECONOMIC GROWTH BECAUSE
MORE PEOPLE CAN BORROW WHICH BOOSTS C+I

Microeconomic policies affect ​AS​.

EFFECTS of economic growth:

Living Standards:
- Faster eco growth results in an increase in real GDp per capita -> real wages can rise
and households enjoy high disposable income.
Employment:
- Jobs and growth
- Eco growth can mean low unemployment
Inflation:
- Higher levels of growth can result in price increases and larger wages > higher inflation
due to cost-push inflation.
External stability:
- Eco growth = higher disposable incomes = more imports = trade deficit
Income distribution:
- Eco growth can lead to inequality in income distribution as those who own factors of
production benefit the most.
- Absolute poverty should fall but relative poverty could increase.
Environmental impacts:
- Potential negative impacts if growth is pursued with little regard to social costs.
Increases in technology:
- Capital deepening and investment.

- Increases in aggregate supply - improvements in efficiency and technology** (3.1.6)

Aggregate supply (Y) is the total productive capacity of an economy or the potential output when
all factors of production are fully utilised.
Components are: consumption (C), Savings (S) and Taxation (T) > ​Y = C + S + T

An economy’s AS is determined by the ​quantity​ and ​quality​ of the ​factors of production​ - natural,
labour, capital, entrepreneurship.
Achieved through:
 38

- Population growth: labour is main input into the production process, increase in
population means economy can produce more g/s
- Discovery of new resources
- Workers acquiring new skills: increases productivity (education programs)
- The adoption of new technology: increases productivity (can be cost reducing)
- Measures to improve efficiency (i.e. standardisation in freight containers)
- Government policies: MICRO

- Trends in business cycle (3.1.7)

Business Cycle: the fluctuations in GDP over a period of time.
Can be expanding > peaking/booming > contracting > recession > depression

Current Trends:
2020 is the first recession in 29 years. ​Last recession was the early 1991-92
GDP fell 0.3% in the three months to March 31st.
- Not as bad as other economies like US that shrank 5%, Britain 7.7% and CHina 33.8%
Recession is two quarters of an economy shrinking.
Forecasts that GDP will slump at least 8%

Historical:
- Terms of trade reached highest level for 140 years in September 2011 adding an
estimated 15% to Australia’s national income (good use of fiscal and monetary)
- Productivity growth has decreased from its peak in the 1990’s (2.1%) to around 1.1%

Unemployment ​(3.2)
- Measurement (3.2.1)
A person is unemployed if they are aged 15 or over and are not currently working but are
actively seeking work​ and are willing and able to work.
Employed people are those who work for ​one or more hours per week​.
- Labour force
Labour force is ​employed + unemployed people ​aged 15-64
Approximately 13.2 million
- Participation rate
Labour force participation rate is the ​percentage​ of the working age population who ​want​ to
work.

- Unemployment rate
Unemployment rate is the ​percentage​ of the labour force who are not yet employed.
u/e = u/e over u/e + employed
 39

- Trends (3.2.2)
Historical: Labour is a derived demand so follows the business cycle
- Recession in the 1990s u/e reached 11% (highest)
- Resources boom saw it gradually drop
- 2008 reached its lowest 3.9% (before GFC)
Current:
- 709,000 jobs were lost to coronavirus in the June quarter of 2020 (coronavirus)
- Official u/e is at 7.4% but fails to take into account people on JobKeeper subsidy or who
have left the workforce because of Covid.
- Effective u/e = ​ 11.3% down from 13% but could rise because of Melbourne.

- Types and Causes (3.2.3)

- Cyclical
Occurs due to fluctuations in the business cycle (labour is a derived demand)
- Main cause of u/e atm because Coronavirus is impacting the business cycle
Okun’s Law:​ to reduce u/e the annual rate of economic growth must exceed the sum of the rate
of productivity growth + labour force increases. This rate of growth is estimated to be 3% i.e.
economic growth should be higher than this to curb unemployment.
- Structural
The mismatch between the labour skills of employees and the vacancies offered by firms.
- Caused by structural changes in the economy or technical innovation
For example: motor vehicle industry shutdown caused 50,000 people to become structurally
unemployed meaning their skills were not needed by employers.
- Frictional
People moving between jobs
- Women re-entering the workforce or people in the arts
- Seasonal
Jobs that are not available at all times of the year.
- Dressing as Santa for shopping centres.
- Underemployment ​(not counted in official stat)
Refers to those who want to work more house
- Underemployment is ​not​ c​ ounted in the official unemployment statistics published by the
ABC.
- BIGGEST ISSUE AND MOST IMPORTANT TREND
- Currently over 1 million Australians identify as underemployed.
- Hidden (not counted in official stat)
Those ​not​ officially counted in the unemployment statistics because they have given up looking
for work i.e. ‘discouraged job-seekers’
- More during Covid
- Long term
Those who have been unemployed for over 12 months
- Long-term unemployment levels have increased 18% between 2016-17
 40

CAUSES:
- Inadequate levels of training and investment
- Inflexibility in the labour market
- Level of economic growth
- Stance of macroeconomic policy
- Rising participation rates
- Structural change
- Technological change
- Productivity
- Increased labour costs (businesses shift from labour to capital)

Underutilisation = unemployment + underemployment ​(more accurate)

- Non-accelerating inflation rate of unemployment (NAIRU)** (3.2.4)

NAIRU refers to the level of unemployment at which there is ​no cyclical unemployment​, that
is, where the economy is at ​full employment. ​(no cyclical = full employment)
- When unemployment is above the NAIRU there is spare capacity in the labour market so
policymakers should stimulate economic growth to reduce unemployment.
When unemployment is at or below the NAIRU an increase in economic growth will increase
inflation pressures​ because:
- Employers will be forced to raise wages to compete for workers who are already in the
work-force, which causes cost-push inflation
Australia’s NAIRU is 5-6%

Inflation:
- If unemployment is ​less​ than the NAIRU inflation ​rises
- If unemployment is ​equal ​to the NAIRU inflation ​stays​ the same
- If unemployment is ​more​ than the NAIRU inflation rate f​ alls

Phillips curve: ​shows the ​inverse​ relationship that occurs between inflation and unemployment.

The NAIRU (5-6%) can be shifted over the long

term through ​supply-side​ policies (policies that
reduce structural, seasonal, and frictional
unemployment) i.e.
- Re-skilling programs
- Increasing occupational and
geographical mobility
 41

- Main groups affected by unemployment (3.2.5)

Indigenous Australians
- Approx. four times the national average at 21.3% (2018)

Age-related unemployment
- highest among ​young ​australians 17.6% from 2015-2019
- Underutilisation 15-24 yr olds 29.6% in 2018

Specific regions
- NSW state average ​usually​ 4.8%
- Regional 8.1% and city (eastern suburbs) 2.1%
- Born outside of Australians usually contributes to structural differences i.e. language
barriers

- Effects of unemployment - economic and social costs (3.2.6)

ECONOMIC COSTS:
Opportunity cost:
- U/e means an economy is not operating at its PPF
Lower living standards:
- Less income = lower living standards
- Reliance on public welfare
- Higher u/e production of g/s is reduced lowering overall living standards
Decline in labour market skills for long term u/e:
- Hysteresis ​is the process whereby u/e results in the persistence of u/e in future periods
as unemployed people lose their skills, job contacts and motivation.
Costs to the government:
- Falling tax revenue and increase in u/e benefits ​(BIG during Covid)
- Income from tax fell $31.7bn in 2019-20 and the Gov expects it to fall another $63.9bn in
this financial year.
Lower wage growth:
- Excess supply means equilibrium level of wages falls.

SOCIAL COSTS:
Increased inequality:
- U/e tends to occur among low-income earners such as the young and the unskilled
increasing the gap between low and high
Other social costs:​ (social problems)
- Severe financial hardship and poverty
- Increased levels of debt
- Homelessness and housing problems
- Family tensions and breakdowns
- Loss of work skills
 42

- Increased social isolation and suicide.

- Increased crime
Inflation (​ 3.3)
Inflation: is defined as a general increase in the general level of prices.
- Measurement - headline and underlying (3.3.1)
Measured using the Consumer Price Index (CPI), which measures the price movement of a
basket of goods and services weighted according to average household consumption.

^ same calculation but replace ‘Previous CPI’ with ‘Base Year’ to find base year.

Headline Inflation: ​all price changes in the CPI basket. Somewhat inaccurate as it includes
one-off or volatile price changes that don’t show the rise in the ​general​ level of prices.
Underlying Inflation:​ Removes the effects of one-off changes (Such as bananas in cyclone)
- Trimmed mean - average inflation after excluding the top and bottom 15% of price
changes
- Weighted mean - compare the inflation rate of every item in the CPI and identify the

mean.

- Trends (3.3.2)
- Steadily decreased since 1982 where the recession saw inflation peak at 21%
- Decrease has been due to inflation targeting (2-3% target) since 1993
WE ARE CURRENTLY EXPERIENCING DEFLATION
The CPI was recorded at –1.9% a drop from the previous +2.2% (from the 12 months to March)
- This is deflation
- Biggest fall in CPI since the great depression
- Inflation should be +2%
- Deflation is almost as bad as high inflation

Mainly a result of:

- Childcare went down at –95% (because government made it free)
- Wages went down 5%
- Drop in the price of fuel (-19.3%)
- And primary education down (-16.2%).
- Mr Hockman said "Excluding these three components, the CPI would have risen 0.1% in
the June quarter."

- Causes (3.3.3)
- Demand-Pull inflation
When demand for g/s increases with no change to supply levels.
 43

- Firms can’t increase their production in the short term so increase prices and increase
inflation.
- Associated with the ​boom​ phase of the cycle.

- Cost-Push inflation
Inflation occurs when the price of ​inputs​ increases, which causes producers to increase the
price of the final good or service.
- Increase in wages or capital

- Imported inflation (can cause

cost-push)
Increase in the price of imported goods can
increase inflation rate.
- Many goods imported and resold domestically
- 40% of intermediate goods are imported, so if they increase cost-push increases.
- A depreciation of the AUD will increase the price of domestic exports and will lead to
imported inflation.
- Inflationary expectations (can cause demand-pull)
If inflation is expected to rise, consumers will purchase more now increasing demand-pull
- Self-fulfilling prophecy
 44

- Workers may also seek higher wages in anticipation of higher costs increasing cost-push

- Positive and negative effects (3.3.4)

NOTE: When answering a question about the effects of inflation look at whether they’re asking
about ​low​ inflation or ​high​ inflation as there is a difference.
NEGATIVE:
Decreased purchasing power:​ ​High​ inflation means more disposable income is need to
purchases goods reducing the amount of goods you can buy and thus your living standards
Constrained economic growth:​ In order to keep inflation within target economic growth must be
constrained through ​contractionary fiscal or monetary policy​.
Unemployment:​ Labour is derived from demand of goods and services so if economic growth is
constrained to decrease demand pull then firms will release employees.
Wages:​ Employees seek wage increases so their purchasing power does not decrease,
however this can lead to an ​inflationary wage spiral​ where increased wages causes inflation and
the cycle repeats.
Income Distribution:​ Lower incomes or fixed incomes (welfare recipients or self-funded retirees)
have less bargaining power cannot receive wage increases when inflation occurs leading to
divide i.e High inflation > increase in cash rate > wealthier have higher MPS so higher cash rate
favours wealthier.
International competitiveness:​ Inflation increases the price of domestic g/s decreasing IC and
leading to decreased demand for exports and decrease in AD (demand for minerals less
impacted as more inelastic)
POSITIVE:
Borrowers:​ benefit from having the real value of their loans eroded (good for Gov in particular)
Avoids Deflation​: which can cause problems such as a “liquidity trap” where the real value of a
loan rises over time discouraging businesses from investing by borrowing.
Exchange rate:​ low inflation suggests stability meaning investors are more confident.

External Stability**** (​ 3.4)

External stability: is when Australia’s external economic relations do NOT have negative effects
on the domestic economy. We can service our external liabilities to avoid volatility in our
accounts and constraints on the domestic economy.
- Measurement (3.4.1)

- Current account deficit (CAD) ​as a percentage of GDP

Current account deficit (CAD) as a percentage of GDP:​ is the key measure of external
stability over time.
- IMF states that acceptable levels of CAD are less than 6% in the short-term and less
than 4% in the long-term
- Australia has experienced persistently large CAD since the 1980s
- CAD is largely explained as the result of a savings and investment gap rather than a
trade gap.
 45

Savings-Investment Gap:
- Excess of domestic investment over domestic savings
- If people are saving, our national banks have less so they are forced to borrow from
overseas to finance high levels of investment, which then increases net primary outflows
- NOT happening as much anymore as our banks can borrow from strong domestic
reserves.
Trade-Gap:
- International competitiveness: a lack of IC especially in value-added areas of global
trade such as ETMS can create a trade gap because our exports are cheaper than our
imports.
- Terms of Trade: our commodity export base and commodity price trends.

- Net foreign debt and liabilities a percentage of GDP

Net foreign liabilities: ​net foreign debt + net foreign equity
Net foreign debt: ​the total stock of loans owed by Australians TO foreigners minus the total
stock of loans owed by foreigners TO Australians.
- Debt to GDP ratio
- Has been growing consistently since the 1980s (since globalisation)
- Ranges between 50-60% of GDP used to be 6% in 1981
Consequences:
- High debt levels increases vulnerability of an economy to deteriorating world economic
conditions (i.e. if the currency depreciates foreign currency denominated debt increases
interest payments)
Net foreign equity: ​the total value of assets in Australia owned by foreigners minus the total
value of assets overseas owned by Australians.
- Smaller component of net foreign liabilities
- Since 2013 recorded for first time greater foreign assets than foreign ownership of
australian assets (SUPERANNUATION)
- Net foreign equity fell to zero
- Terms of Trade
- Exchange Rate
Exchange rate can cause external instability if it is volatile.
Volatility in the value of currency reflects the world’s opinion of Australia as a trading partner
- Impacted by people’s confidence in Australia for investment, g/s
- AUD is the 5th most traded currency.
- 80% of AUD sold is used to buy USD
Floating exchange rate
- One of the most important mechanisms that helps Australia to adjust to changing global
economic conditions (shock absorber)
- However has a SIGNIFICANT impact on Australia’s external stability
High Exchange Rate: causes bad Terms of Trade affecting external stability
Low Exchange Rate: leads to high inflation thus a loss in market confidence
 46

RBA is better able to deal with ​high​ AUD than low because with a larger supply of money they
can sell it off.

Compare the impact of a falling currency in Australia vs. Thailand.

Australia's foreign debt is dominated by AUD rather than foreign currency unlike Thailand where
their foreign debt is denominated in US dollars. When crises occur and the currency falls it does
not affect the Australian economy greatly as it is in AUD so it can assist in internal stability whilst
not affecting external stability. However for Thailand debts can double if their currency changes
in relation to the USD.
- International competitiveness

- Trends (3.4.2)
Main external stability issues have been:
- Persistent CAD (but no longer)
- Volatile terms of trade
- Australia’s lack of international competitiveness
- Growth of foreign debt
- Rising foreign ownership in Australia (offshore profits)
- Volatile Australian dollar ∆

- Positive and negative causes and effects (3.4.3)

Causes:
 47

EFFECTS
Positive:
- Borrowing overseas allows businesses to fund investment and growth of different
industries
- Creates employment and development within the economy.
- Pitchford Thesis:​ overseas liabilities are acceptable if they are used to fund
investment into industries that create money to pay back the loans.
Negative:
- Constraints economic growth.
- High debt requires contractionary policies to increase saving so that debt can be
paid
- Exchange rate volatility
- Growth of foreign liabilities (can lead to debt trap)
- Higher servicing costs.

Distribution of income and wealth (​ 3.5)

- Measurement - Lorenz Curve and Gini coefficient (3.5.1)
Income: amount of money a person earns each year from land, labour, capital and enterprise
Wealth: monetary value of assets that are currently owned.
Distribution of income and wealth: refers to the degree of inequality distributed amongst people
in the economy.
Lorenz Curve:​ The Lorenz curve plots the cumulative percentage of total income received
against the cumulative percentage of income recipients to produce a centre line of perfect
equality. The Lorenz curve allows economists to determine the degree of inequality in an
economy by judging how far it lies from the line of equality.
Gini Coefficient:​ The Gini coefficient is a single statistic that summarises the distribution of
income across a population by calculating a number between 0-1 with 0 being all incomes are
equal and 1 being when only a single household receives all income. The Gini coefficient is
calculated as the ratio of area between the actual Lorenz curve and the line of equality (A) and
the total area under the line of equality (A+B) becoming the equation: A/A+B.

- Sources of income as a percentage of household income (3.5.2)

Wages (54%) rent (12%) earning from capital (19%), transfer payments (9%) and other (6%)
Wage growth has fallen significantly from 4.25% 2007 to below 2% in 2018

- Taxation, transfer payments and other assistance (3.5.3)

Taxation:
Progressive Taxation of personal income:
- Higher marginal rates mean that the more income earned, the more tax paid as a
percentage of income
- Is then REDISTRIBUTED away from high income earners
- Large changes to tax brackets in the last 10 years
- Amendments mostly for high income earners
 48

- Positively impacted middle-high earners but widened inequality

Fringe benefits and capital gains tax: (target high income earners to redistribute)
- Capital gains tax taxes gains on investments such as the sale of property or shares
- Fringe benefits targets aspects of salary packages such as company cars

Transfer payments:
Targeted government welfare:
- Social security accounts for around 33.3% of government expenditure.
- Pensions, family benefits, ​jobkeeper, jobseeker​, assist the unemployed, elderly
single parents, disabled etc. and distributes income to them
Superannuation:
Compulsory 9.5% means that all quintiles have access to a saving scheme that build wealth.
- ABS estimated that the wealth of the lowest quintile would be 22% of what it is without
super
- Reduces wealth inequality.

Other assistance:
Social wage: benefits to workers which come from a component other than their wage/salary.
- Provision of health, education, housing, transport subsidies etc.

- Sources of wealth (3.5.4)

Sources:
- Real estate (home) = 42%
- Real estate (investment) = 16%
- Superannuation = 17%
- Own business = 6%
- Personal assets within the home = 7%
- Savings in financial institutions = 5%
- Shares = 2%
- Trusts = 3%
- Vehicles = 3%
Net wealth = household assets (house + super) - household liabilities (loans for house).

Stats:
- Australia is 11th most unequal of 34 countries (OECD)
- Highest 20% of income earners are five times richer than the poorest 20%
Gini coefficient for wealth.

- Dimensions and trends, according to gender, age, occupation, ethnic background and
family structure (3.5.5)
Age and education:
- Income remains highest between ages of 25-54
- 45-54 earn highest mean weekly earnings ($1842)
 49

- 20 and under earn lowest ($722)

- Better education = higher income levels
- Post grad degree ($1675)
- Non-school qualifications ($882)
Gender and occupation:
- Full time men earn more than full time women (women earn 84% of men)
- Influenced by:
- Historical attitudes of women in society
- Choice of occupation
- Women having greater home responsibilities.
Ethical and cultural background:
- English speaking migrants earned up to $4000 MORE than national average
- Non-English speaking migrants earned $8000 LESS than national average
- Education level, age and english affect the success of new migrants.
- Indigenous Australians face large inequalities
- More likely to be in rural areas
- Lower levels of education
- Approx. $200 less disposable income than general population
Family Structure:
- Couple (no children) > Couple (children) > Average > Single person > Single parent

- Economic and social costs and benefits of inequality (3.5.6)

Economic benefits of inequality Economic Costs of inequality

Incentive to upskill: increase in education Decreased utility: high income earner save
i.e. less utility of earning these incomes

Incentive to become productive: productivity Decreases economic growth: higher incomes

growth. have a lower propensity to consume

Incentive to mobilise: move somewhere Creates conspicuous consumption: increase

better increases allocative efficiency in demand for expensive goods

Potential for savings from high earners Increased welfare support: budget deficit

Two major social costs of inequality:

- Social class divisions can increase tension (crime and social disorder), which increases
social and economic instability
- Poverty: can create poverty traps or increase crime, suicide, disease and reduce life
expectancy.
 50

Environmental Sustainability (​ 3.6)

- Ecologically sustainable development (3.6.1)
Ecologically sustainable development involves conserving and enhancing the community’s
resources so that ecological processes and quality of life are maintained. It is a level of
economic activity that is compatible with the long term preservation of the environment, rather
than the maximum level of growth possible in the short term.

- Private and social costs and benefits - externalities, market failure (3.6.2)
Market failure:​ occurs when the price mechanism fails to take into account the social costs
and benefits of production.
- Private cost: expenditure by producers on resources to produce output and the costs
incurred by consumers in spending their income to buy g/s
- Social cost: costs imposed on or borne by society as a result of private actions.
Externality: ​the unintended effect of production/consumption.
- Positive externality: social benefits of promotion which are unintended positive
outcomes from economic activity (EDUCATION)
- Negative externality: social costs of production which are unintended negative
outcomes from economic activity. (POLLUTION)

- Public and private goods - free riders* (3.6.3)

Private goods: ​most g/s that you have to pay for.
- Rival:​ one person’s consumption inhibits others from using it.
- Excludable:​ people can be excluded.
Public goods:​ no direct payment (STREETLIGHTS, DEFENCE FORCE)
- Non-rival
- Non-excludable
Free riders: ​an individual/household or firm that benefits from a g/s without contributing to its
funding
- Public goods attract free riders hence private businesses have no incentive to produce
them
- As a result ​market failure occurs​ since the value of the good cannot be accurately
measured
- If its existence is necessary for society (e.g. Sydney water or defence force)
government will produce it itself or subsidise firms to produce it.

- Environmental issues: (3.6.4)

- Preservation of natural environments
In the long run, the economy cannot continue to grow if the environment is degraded.
Environmental damage affects human health through higher levels of air/water pollution +
restricts availability of resources.
Australia only protects 17% of its land area compared to 33% in New Zealand
Measures to preserve:
- Restriction on development in environmentally sensitive areas
 51

- Protecting native plant and animal species

- Control over emissions
- HOWEVER these measures usually come at a short-term cost to economic growth

- Pollution, climate change

Impact of pollution is often felt away from its source
Measures to reduce pollution:
- Laws banning environmentally damaging production techniques (asbestos)
- Quotas to restrict emission of pollutants (ETS)
- Subsidies to encourage environmentally friendly practices
- Taxes to discourage some forms of economic activity.

Climate Change: (higher greenhouse gases)

- Worsened by high levels of fossil fuels to meet electricity and transport needs
- Close link between economic growth and higher carbon emissions
- CO2 emissions increase from 2001-2020 estimated at 1.9%p.a.
Impacts:
- Skin cancer increases by 140%
- Environmental refugees increase to up to 200 million
- Tourism impacted (Great barrier reef dead)

- Depletion of renewable and non-renewable resources

Renewable resources: resources that can naturally regenerate or replace themselves in a
relatively short period of time.
Non-renewable resourcesL resources that are in limited supply or cannot be replenished at all
- Impact of depletion is greatest on future generations.
- Reliance on non-renewable sources will create terrible impacts (Climate Change)

HSC TOPIC FOUR: Economic Policies and Management

Students learn to:
Examine economic issues
- Analyse the opportunity cost of government decisions in addressing specific economic
problems or issues
- Investigate structural changes in the Australian economy resulting from microeconomic
policies
- Apply economic theory to explain how a government could address an economic
problem or issue in hypothetical situations
- Analyse alternative ways to finance a budget deficit.

Apply Economic Skills

- Explain how govs are restricted in their ability to simultaneously achieve economic
objectives
 52

- Use (simple) multiplier analysis to explain how governments can solve economic
problems
- Identify limitations of the effectiveness of economic policies
- Explain the impact of key economic policies on an economy
- Propose and evaluate alternative policies to address an economic problem in
hypothetical and contemporary Australian contexts.
- Use economic theory to explain the general effects of macroeconomic and
microeconomic policies
- Select an appropriate policy mix to address a specific economic problem

Economic Objectives in relation to:

- Economic growth and quality of life
Economic growth between 3-4% can improve living standards through improving GNI per
capita.

- Full employment (internal stability)

Natural rate of unemployment means no cyclical unemployment otherwise known as NAIRU
which is around 5%

- Price stability (internal stability)

Price stability is the rate of inflation which the RBA sets a target of 2-3% over the business
cycle.

- External stability
External stability involves a country meeting its long-term financial obligations to the rest of the
world so that external accounts do not restrict government decisions to achieve internal
objectives.
CAD: low is better cause otherwise gov cannot service debts and spend on our economy
Net foreign debt as a % of GDP: should be at a level that can be repaid through revenue earned
to not be reliant on foreign inflows to service.
Exchange rate: low volatility is better and strong international competitiveness and confidence

- Environmental sustainability
Achieve sustainable development i.e. preserving the natural environment, climate change and
depletion of natural resources.

- Distribution of income
Equal distribution is better as free market operations disadvantage certain groups who have
less opportunities.

Economic Growth + Internal Balance ​(full employment, price stability) ​+ External balance
(external stability) ​+ Enviro + Distribution
 53

Potential conflicts among objectives.

Price stability vs. full employment
- To decrease unemployment Gov needs to use expansionary policy to increase AD
- Increasing AD can increase demand-pull and cost-push inflation.

Economic growth vs. external stability

- Strong AD and high GNI per capita can lead to increase in expenditure on imports
- Deteriorates trade balance and external stability

Economic growth vs. environmental sustainability

- Increase eco growth involves producing more g/s using more resources as inputs
- This depletes natural resources and manufacturing plants can produce pollution

Macroeconomic policies:
- Rationale for macroeconomic policies - stabilisation and shifts in AD
Macroeconomic policies attempt to minimise the fluctuations of the business cycle i.e. they use
counter cyclical policies to flatten out the cycle.
- Macro deal mostly with AD
- Multiplier effect is important as it explains why the gov can achieve goals

Unlike monetary it is immediate and can target specific geographic regions, however, politics
can delay the process of implementation.

Fiscal Policy:
Fiscal policy can influence:
- Resource allocation
- Redistribution of income
- Fluctuations in the business cycle.
Main instruments include:
- Government spending and taxation
- The Budget outcome.
 54

- Federal Government budgets and budget outcomes

The Budget: the tool of the government for the exercise of fiscal policy. Shows the government’s
planned expenditure and revenue for the next financial year.
Revenue includes:
- Direct tax (personal income tax, company tax)
- Indirect tax (custom and excise duties + GST)
- Other revenues (dividends from public trading enterprises)
Major items of expenditure:
- Social welfare
- Health
- Education
- General public services
- Defence

MYEFO: Mid Year Economic and Fiscal Outlook

UEFO: Updated Economic and Fiscal Outlook ​(COVID)
PEFO: Pre Election Fiscal Outlook

Budget outcomes:
- Budget surplus T > G
- Budget Deficit G > T
- Balanced Budget G = T

Measuring the Budget outcome:

- Underlying cash balance (most commonly used measure) shows the budget’s short term
impact on the country
- Headline cash balance: Underlying cash balance ​+ ​government’s purchase or sale of
assets ​+ ​future fund earnings
- Fiscal outcome: revenue - expenses - net capital investment (excludes one off items)

- Effects of budgetary changes on resource use, income distribution and economic activity
Changes in budget outcomes​/Components of fiscal policy:
Discretionary changes:
- Legislated
- Involve deliberate changes to fiscal policy such as reduced spending or increased
taxation
- Influence the ​structural component​ of the budget outcome
Automatic stabilisers:
- Changes in the level of government revenue and expenditure ​as a result of change​ of
changes in the level of economic activity.
- Activated by the counter-cyclical purpose of fiscal policy.
- Key examples:
- Unemployment benefits: transfer payments are affected by business cycle
 55

- Progressive income tax system: high eco growth means more tax can be earnt
EFFECTS OF THE BUDGET:
Economic Growth:
- Expansionary stimulates economic activity through the multiplier effect
- Expansionary stance throughout GFC
- Expansionary stance right now
Resource Use:
Market failure arises due to the price mechanism failing to take into account social
costs/benefits of production.
- Direct intervention: Gov can allocate expenditure to particular sectors in order to
increase production i.e. $18.6bn to education in the 2017-18
- Indirect intervention:
- Taxation: e.g. 15% excise tax on cigarettes in the 2016 budget to reduce quantity
produced
- Subsidies
- Providing goods and services through public goods that are non-rival and
non-excludable that attract free riders (public transport, national defence, lighthouses
etc.)
Income Distribution:
- Progressive income tax
- Transfer payments
Unemployment:
- JobKeeper
- JobSeeker

- Methods of financing deficits

Borrowing from the private sector:
- Sells treasury bonds to private purchasers
- Advantage is that it is certain it can fully finance its debt but disadvantage is the
crowding out effect​ as people are buying bonds instead of saving which create
competition for a limited amount of savings to finance domestic consumption and
investment causing an increase in interest rates and businesses have to borrow from
overseas worsening the CAD.
Currently:
5 year bonds = 0.4% interest rate
10 year bonds = 0.9%
Ross Gittins; “​With inflation at 1.7% this means its costing us nothing to borrow.”

Borrowing from overseas:

- The RBA sells government bonds overseas to avoid crowding out effect.
- Distinction between borrowing from australia or overseas is diminishing due to
globalisation
 56

- Interest repayments however are recorded as debits on the primary income account
worsening the CAD.
Borrowing from the Reserve Bank:
- Quantitative easing or monetize the deficit the RBA can print money
- However, this increases the money supply without changing the quantity of goods and
services causing demand pull inflation (germany remember bad)
Selling assets/privatising:
- Selling shares in businesses like Australia Post
- Privatising Medibank, Telstra etc.
- Does not reduce the underlying cash deficit because that removes one-off transactions.
- Has not occurred since market deregulation in 1982

- Use of a surplus
Can be used in three ways:
- Depositing it with the Reserve Bank
- Using it to pay off existing public sector debt
- Placing the money in a specially established investment fund
- Future Fund set up by Howard and Costello

- UEFO (because we didn’t get a budget)

Main goal of fiscal policy since 2010-11 has been to return the budget to surplus, which was
almost achieved this year when there was a forecast of a $7bn forecast before COVID hit.
Now…

UEFO 23.07.20
- No new policies announced except for updates to Job Keeper and Seeker

STATS:
Budget 2019/20: -$86bn deficit instead of +$7bn surplus
Budget 2020/21: -$185bn deficit ​(10% of GDP) ​biggest deficit since WWII

Why has the government moved into a deficit?

Government stimulus:
- Job Keeper contributes $20bn
- Business support contributes $15bn
- Jobseeker contributes $6bn

General:
Automatic stabilisers were on third of stimulus and discretionary (government decisions such as
job keeper) were two thirds.

Automatic stabilisers have seen a reduction in the underlying cash balance due to tax dropping
by $32.4bn in 2019-20 and $72.2bn in 2020-21
 57

DEBT:
The Government expects net debt (gross debt - assets) to reach $488 billion at the end of June.
It expects that will grow beyond $677 billion, equivalent to almost 36 per cent of gross domestic
product, this financial year.
Gross debt was $684 billion at the end of 2019-20 and is tipped to be almost $852 billion in
2020-21.
If realised, gross debt would exceed Australia's debt ceiling of $850 billion.
The Government faces the prospect of needing decades to pay back the debt incurred during
the pandemic.

Impacts:
- Have avoided the ‘fiscal cliff’ that was predicted in September when JobKeeper was
apparently going to end

Ross Gittins comments:

- When the Economic Society of Australia polled 50 leading economists recently, 88 per
cent of them agreed that governments should provide ongoing budgetary support to
boost demand during the economic crisis and recovery, "even if it means a substantial
increase in public debt".
- Dr Shane Oliver has said, "it makes sense for the public sector to borrow from
households and businesses at a time when they have cut their spending, and to give the
borrowed funds to help those businesses and individuals that need help"

Automatic Stabilisers ​(unemployment benefits influenced by business cycle)

Job Keeper​:
$1500 (Fortnight) and Job Seeker = $1100
October Job Keeper goes down to $1200 full time and $750 part-time
January Job Keeper goes down to $1000 full time and $650 part-time
(It's tapering off – reducing the amount of injections)

Job Seeker:
$550 supplement for Job Seeker went to $1100 at the beginning of Covid-19 but has been
updated to go down to $850.
● If you are on Job Seeker the government still wants to encourage you to find a job so
you can earn up to $406 before they tax you 50 cents for every dollar over it.

Monetary Policy:
- Purpose of monetary policy
1. Stability of the currency​ (maintaining low inflation and ensuring the AUD does not
fluctuate)
2. Full employment​ (4% u/e)
 58

3. Economic prosperity​ and welfare (maintain high rate of eco growth)

4. Medium-term ​inflation​ target (2-3% inflation)

Expansionary Monetary Policy: ​cutting interest rates (cash rates) to stimulate

Contractionary Monetary Policy: ​raising interest rates (cash rates) to dampen.

​ s it affects all regions and industries equally.

It is a ‘​blunt instrument’ a
- Can take up to 18 months to work (disadvantage)
- Independent of the Government (advantage)
- Interest rates are monthly and quick and easy to implement (advantage)
- Cannot target regions (disadvantage)

Examples:
Recession = Expansionary
Undervalued AUD = Contractionary (because putting up interest rates encourages investment)
High Unemployment = Expansionary (easier to borrow etc.)
High inflation = Contractionary (more people save means less consumptions puts downward
pressure on high inflation)

- Implementation of monetary policy by the RBA

Cash rate is the main instrument of monetary policy
Implemented through DMOs (Domestic Market Operations)
This is to influence the interest rate by increasing or decreasing it.

- Impact of changes in interest rates on economic activity and the exchange rate.
Impacts of interest rate ​INCREASE​:
Business investment​ = ​discouraged ​because bank loans are expensive
Consumer spending​ = ​discouraged​ because you would make more money off saving your
money in banks that are offering high interest payments.
AUD​ =​ Appreciation​ because if the interest differential rate shows that Australia has higher
interest rates than other countries foreign investors will invest in Australian banks as they know
they will make more money. This leads to a deterioration in the trade balance and a fall in
national income.
Asset prices​ = ​decrease​ in asset prices because the supply of assets would increase as
households can’t afford their mortgages etc.

Impacts of interest rate ​DECREASE​:

Business investment​ = ​encouraged​ because bank loans aren’t expensive
Consumer spending​ = ​encouraged​ because you wouldn’t be saving anything in the bank and
you can also take out loans
AUD​ = ​Depreciation​ because foreign investors take their AUD out and put it on the FOREX
increasing the supply, which can improve the trade balance and a rise in national income.
 59

Asset prices​ = makes it easier for people to buy property and shares, which increases their
demand and puts ​up​ their prices. Then people who have these wealth assets leads to greater
levels of household spending (“wealth effect”)

MICRO
- Rationale for microeconomic policies including shifts in aggregate
supply efficiency
Microeconomic policies are policies that are aimed at individual industries or markets, seeking to
increase aggregate supply by improving the efficiency and productivity of producers. Their
rationale is to increase the productivity and output of the economy.

Shifting the aggregate supply curve to the right stimulates long-term economic growth that is
sustainable (i.e. growth without inflationary pressures).

Micro policies are closely related with structural change:

- Structural change​: refers to shifts in the pattern of production that reflect changes in
technology, consumer demand, policy and global competitiveness.
Government induced structural change:​ Regulation, deregulation, decentralisation, privatisation,
tax reform and infrastructure.
Non-government induced structural change:​ Technology, consumer preferences and
globalisation.

Productivity:​ refers to the level of output per given ​unit​ of input.

- Multifactor productivity refers to productivity across labour and capital whereas Labour
productivity just measures labour.
Efficiency:​ refers to how effectively industries can use resources to meet demand. THere are
three types of efficiency:
- Allocative Efficiency: e ​ nsuring resources are distributed to the most valued production.
- Promotes structural change by allowing resources to flow to those areas where
they are used most efficiently.
- Technical Efficiency: m ​ aximising production from fixed resources through increasing
productivity.
- Greater productivity means that businesses can produce output more cheaply,
leading to greater competitiveness in domestic and international markets.
- Dynamic efficiency: ​the ability of the economy to adapt to changing conditions.
- Elimination of distortions such as government regulation and subsidies improve
dynamic efficiency.
- Major way to address this is through increasing competition in industries, which
will force producers to be more responsive to changes in demand and supply.
 60

- Effects of microeconomic policies on individual product and factor

markets, individual industries and the economy
Trends:
Efficiency gains should lead to a rise in ​national income ​and ​living standards.
Increases in efficiency in the 2000s have been attributed to increases in productivity due to
widespread microeconomic reforms in the 1980s-90s.
- Annual productivity growth averaged 2.2% between 1990-2001, with productivity growth
being a major source.
- Productivity growth has led to a $25 billion boost to GDP and increased incomes by an
average of $1200 throughout Australia.
- Productivity growth has slowed throughout the 2000s due to the heavy investment in the
mining industry.
- Australia’s labour productivity growth dropped by 2.2% in the June quarter of 2020
compared to a drop of 0.25% in the previous year’s quarter.
- Lower and more sustained inflation because increased competition pressures reduces
prices.
Deregulation: ​involves the simplification or removal of rules that constrain the operation of
market forces, aiming to improve the efficiency of industries.

Factor Markets: ​are markets for the inputs to production such as labour market and financial
markets.
FINANCIAL/CAPITAL REFORMS (deregulation)
- 1980s removal of RBA control of domestic bank lending and interest rates to increase
competition in the market
- Floating of the exchange rate in 1983 to allow market forces to determine the value of
the dollar.
- Creation of mortgage finance lenders.
- Royal Commision into Misconduct in the Banking, Superannuation and Financial
Services Industry 2019
Effectiveness of reforms:
- 22% increase in capital expenditure between 1990-2012
- Financial/insurance services now account for 10% of output up from 6% in 1990
(allocative efficiency).
LABOUR MARKET REFORMS (decentralisation):
- Move from centralised wage determination towards a decentralised determination
system to achieve greater productivity of labour.
- Workers incentivised to increase output in order to receive greater returns on
labour.
- Linking wage increases to productivity growth allows companies to increase
wages without the need to raise prices of g/s (inflation).
- 1991 introduction of enterprise bargaining at the workplace level
- Workplace Relations Act (1996)
 61

- Reduction in the power of unions by ending compulsory unionism.

- Relaxing Unfair Dismissal Laws to promote greater flexibility for employers hiring labour.
- Replacement of state industrial relations system with a national system (Fair Work
Australia > Fair Work Act 2009).
Effectiveness of reform:
- More affordable labour saw unemployment fall in the ​longer term.
- 11% in the 1980s to 5.1% in 2019 (pre-Covid stat).
- Labour productivity grew by 2.2% annually from 1990-2014 considered above the OECD
average.

Product Markets: ​Include markets for goods, such as motor vehicles, and services, such as
transport.
Example Industries:
- Agriculture​: removal of single government-owned businesses, industry cooperatives
having a monopoly on buying farmers’ produce, the wool industry having a floor price
which led to overproduction and the milk industry having quotas which inflated prices.
- Deregulation incentivised innovation and productivity growth
- Over the past decade, farm production has increased almost 50% whilst the
number of farms has fallen by over 30%.
- However, productivity growth is falling likely due to worsening climate conditions.
- Transport​: Domestic aviation deregulated in 1990 ended the Two Airline Policy allowing
new (often foreign) competition into the Australian market such as Virgin providing
consumers with greater levels of choice.
- Since removal of Two Airline Policy the cost of the London to Sydney Flight has
reduced by 89%.
- Telecommunications​: Privatisation of Telecom Australia (Telstra) monopoly increased
competition.
- Telecom industry has grown 3.2% and companies like Optus and Vodafone have
increased market share to 9.2% indicative of increased competition.
- Trade Policy​: All tariffs reduced by 25% in 1974 in response to inflation (Whitlam), major
dismantling of industry protection and removal of tariffs and quotas in the late 1980s,
bilateral and unilateral trade agreements and removal of PMV subsidies in 2016/17.
- Led to structural change in the economy with manufacturing industry GDP share
dropping from 15% to 6%.
- Also led to ​structural unemployment ​with it estimated that 90% of manufacturing
workers who lost their jobs in the 1990s over the age of 40 never worked again.
- $300m government re-training program in response.

- Regulation and deregulation - competition policy

Deregulation: ​involves the simplification of rules that constrain the operation of market forces.
Removing regulations allows firms to be exposed to competition, which encourages companies
to innovate and become more efficient in order to maintain profits.
 62

Government owned businesses can be ​privatised ​or ​corporatised t​ o encourage market forces to
operate.
Privatisation:​ involves the sale of a government business to the private sector where private
owners will seek to respond to consumer demands, resulting in greater customer satisfaction i.e.
Telstra, Qantas and Medibank
Corporatisation​: means the government retains ownership but the business is tasked with
maximising profits i.e. Australia Post and NBN. Eliminates political and bureaucratic
supervision).

Competition Policy:
Competition policy aims to promote competition in markets so that firms increase efficiency and
lower prices for consumers.
In 1995 the Commonwealth and State Government agreed to implement the ​National
Competition Policy.
- Formation of the Australian Competition and Consumer Commission (ACCC).
- Prohibits anti-competitive behaviour such as collusion (when firms get together to fix
prices or agree on market sharing arrangements), monopolisation and exclusive dealing.
- Key principles was ​workable competition.​
- Turnbull Government ​updated​ Australia’s competition policy regime in 2017, principally
by expanding the laws on misuse of market power.
- Went from finding a business guilty if it had the intentions to harm competitors to
now depending on the effect of the business practice, which was easier to prove
as a misuse of market power.
- Example = ​$10 million in penalties imposed on Optus in 2019 for misleading
consumers who unknowingly purchased or subscribed to content through Optus’
direct billing service.
- A Productivity Commision (PC) report in 2017 found that the areas where competition
would help improve outcomes the most included social housing, public hospitals,
services in remote Indigenous communities and family and community services i.e.
human services.

Future of microeconomic policy:

The period from the mid-1980s to the early 2000s witnessed extensive microeconomic reforms
that saw industries change dramatically. However, since then, policy priorities have shifted to
other areas such as managing the GFC and Covid-19 crisis, making it harder for governments
to achieve the consensus needed for reform.
Example: ​A major review of the energy sector in 2017 was led by Dr Alan Finkel but the
subsequent National Energy Guarantee policy to reduce Australia’s carbon emissions was
scrapped by the Turnbull Government in 2018.
Most recent microeconomic reforms:
- NBN, Gonski, Fair Work Act (2009), banning plastic bags, removal of subsidies to the
PMV industry and tax cuts in 2019.
 63

Shifting the Dial Report 2017​ estimated that the increase in productivity resulting from the
changes recommended could eventually lift Australia’s GDP by $80 billion a year. Key areas
were:
- Health reforms such as making regional health funding more flexible.
- Education reforms such as aiming for proficiency not just competency.
- City reforms including introducing charges for read use.
- Market reforms including for energy, encouraging innovation and better cooperation
between the Commonwealth and State Governments.

Benefits Costs

HIgher economic growth and living Higher structural unemployment in the short
standards term

New business and job opportunities Closure of inefficient businesses

Greater efficiency and productivity growth Greater work intensity

Lower inflation Less equal distribution of income.

National and global context for environmental management

Environmental management policies are designed to address issues of environmental
sustainability. These include the preservation of natural environments, pollution and climate
change, and managing the use of renewable and non-renewable resources.

- Regulation
Environmental regulations are laws or rules that govern economic behaviour. A government
may choose to regulate the production of an ‘environmentally harmful’, or demerit goods by
imposing a ban on its production. This policy approach has been adopted by the Australian
government in the past in order to eliminate all negative externalities associated with the good.
Examples:
- Leaded petrol in 2002 eliminated the destructive levels of pollution associated with
leaded petrol.
- According to the UN, temperature levels in Australia were ​expected​ to increase
by 1 degree of their 1990 levels by 2010, however temperature only saw an
average 0.8 degree increase indicating that the ban on leaded petrol was
successful.
- 35% reduction in nitrogen oxide levels since 2000 and compliance rate of 98%.
- Banning the production of single-use plastic bags: NSW agreed in March 2020.
- Australia consumers 9 billion bags a year.
- Ecologically Sustainable Marine Reserves and National Parks: Limits the extent of
human activity to prevent the depletion of renewable resources, such as fish stocks and
 64

environmental damage as if these resources are depleted through overuse it will

permanently reduce the productive capacity of the economy (SHIFT IN PPF GRAPH).
- The Great Barrier Reef proclaims that two thirds have suffered coral bleaching. In
2018 the Queensland Government joined the Commonwealth Government to
commit to the Reef 2050 Long-Term Sustainability Plan with the Turnbull
government announcing a $444 million grant to the GBR Foundation.

- Market-based policies (internalising the externality)

Market-based policies involve financial incentives and disincentives (such as subsidies and
taxes) to influence the behaviour of households and businesses.
- Taxation to demerit goods vs. subsidies to merit goods.
Examples:
- The Australian government provides $1.5 billion worth of subsidization yearly to the
production of renewable energy through the Clean Energy Innovation Fund. (Use shift to
right in supply graph).
Carbon Pricing Scheme:
- Introduced as part of the Clean Energy Act 2011 coming into effect 1 July 2012 taxed
$23 per tonne. OVerall aim was to achieve a 5% reduction of 2000 levels by 2020 and
80% by 2050.
- Was highly effectively: following implementation, emissions fell to the lowest level since
1997-98
- However due to political limitations was severely limited through repeal in 2014.
Emissions Trading Scheme (ETS):
- Cap instituted on GHG emissions establishes a carbon market where companies receive
or buy emission allowances.
- Covers 2600 companies in regions across the world. ​(STUDY GRAPH i.e. straight line
supply).
- Abolished by Abott in 2014

- Targets
The Australian Government can use targets to incentivise the increased use of renewable
energy.
Renewable Energy Target (RET):
- Target is to source 23.5% of Australia’s electricity supply from renewable energy sources
like solar and wind power by 2020.
- The RET places a legal obligation on electricity companies to contribute to the target
thus being highly effective.
One of the most difficult areas of policymaking in the past decade has been long-term targets to
reduce the ‘carbon intensity’ of the Australian economy and lower Australia’s carbon emissions
with several Prime Ministers losing office after a backlash over their policies.

- International agreements
 65

International cooperation is fundamental to having successful environmental management

policies as most issues related to environmental sustainability are global rather than national.
Example ​ozone layer:
- Montreal Protocol committed members to phasing out the production of ozone-depleting
products by 2000.
- According to the United Nations Development Programme over 98% of ozone-depleting
substances were eliminated between 1987 to 2014 and as a result the ozone layer
should recover to pre 1980 levels by 2050.
Other Examples:
- Kyoto protocol on climate change 1992
- Objective of stabilising greenhouse gas concentrations.
- Ineffective as the US and China were not involved.
- Paris Agreement on climate change (2015)

Labour Market Policies

Governments intervene in labour markets to:
- Achieve macroeconomic objectives such as low inflation and macroeconomic stability
(since wage growth is a major influence on inflation).
- Achieving microeconomic objectives such as productivity growth as the cost of labour
generally represents 60% of business costs, so policy changes that influence labour
costs are a major influence on the economy.
- Achieving objectives relating to the distribution of income and wealth.

- Role of national and state systems

Historically, each state had its own system of industrial relations frameworks in addition to a
federal system, which caused inefficiencies since companies had to comply with both state and
federal legislation.
Fair Work Act 2009
- Industrial Relations of states ceded to create a national workplace relations system,
which reduced compliance costs by $4.8bn over 10 years.
- The FWA sets the minimum wage, approves enterprise agreements, heads disputes and
conciliates and arbitrates to resolve them.
Australia’s Wage determination system:
The Fair Work Act 2009 also established the rules of the national system to determine the pay
and conditions of employees.
- 38% of employees are covered by some kind of collective agreement (formal system).
- 38% are covered by an individual agreement/Common law contract.
- 21% are covered only by industrial awards.

- The national system for determining

- Minimum employment standards
 66

The Fair Work Commission developed 10 minimum employment standards to prevent

exploitation.
1. Maximum weekly hours of work (not exceed 38 ordinary hours)
2. Requests for flexible working arrangements
3. Parental leave and related entitlements
4. Annual leave
5. Personal/carer’s leave and compassionate leave
6. Community service leave
7. Long service leave
8. Public holidays
9. Notice of termination and redundancy pay
10. Provision of a Fair Work Information Statement

- Minimum wages
A Minimum Wage Panel conducts a wage review annually to update. It must assess the
performance and competitiveness of the national economy while balancing the needs of the
unemployed and low paid workers.
- May 2019 increased national minimum wage by 3% delivering a real wage increase of
approximately 1.7%.
- Employees under 21 receive pro-rata wages.

- Awards
Awards establish the minimum wage and working conditions for employees specific to that
employee’s work or industry, such as fast food.
- Provides a further safety net of wages and conditions
- Fair Work act 2009 streamlined 4300 awards to 122 ‘modern awards’.

- Enterprise agreements
Enterprise agreements are employment contracts at the workplace level of terms and
conditions.
Most common method of wage determination in the ​formal system​. These agreements modify
awards through the negotiation of terms that can involve unions or employer associations.
- Collective Agreements generally produce wage increases averaging around 4%.
- Agreement must be approved by the Fair Work Commission and pass the ‘Better Off
Overall Test (BOOT)’.

- Employment contracts for high income earners

Fair Work Act 2009 abolished individual contracts as part of the formal industrial relations
system as they had been criticised as unfair for employers having much greater bargaining
power than individual employees.
- Made an exception for employment contracts for high income earners.
 67

- Modern awards do ​not ​apply when an employee earns more than $149,000 they are
instead covered by provisions in the agreement they make with their employer known as
a ​common law contract.

- Dispute resolution
Disputes arise due to issues in work, wages, conditions, discrimination etc. If not controlled
disputes can lead to industrial action which ​lowers productivity and decreases output:
- Strike, Work ban and lockout.
Dispute resolution mechanisms are built into different employment contracts through grievance
procedures.
Conciliation: ​a process whereby an industrial tribunal tries to help the parties to reach a mutual
agreement but it is not binding.
Arbitration: ​when an industrial tribunal makes a ruling that resolves a dispute and is legally
binding on the parties. Where conciliation is unsuccessful, arbitration can end an industrial
dispute.
- Arbitration used to be compulsory but under the Fair Work Act the FWC only intervenes
to resolve disputes when:
- After a serious sustained breach of good faith bargaining
- On public interest grounds (Qantas) i.e. resolve industrial action.
- Special low-paid bargaining system
- Or by agreement.
Effectiveness: is measured through measuring the level of disputes and strikes, which were
averaging around 4000 days yearly in the 80s to now 200.

- Arguments for and against the use of centralised, decentralised and

individualised methods of determining employment contracts
A centralised labour market is one in which wages and other outcomes are primarily determined
by the government.
A decentralised labour market determines wage outcomes at an enterprise or workplace level,
with a more limited role for tribunals.
- Market forces and a firm's capacity to pay play a greater role.
- Leads to greater flexibility and the potential for ​greater inequality.

Advantages Disadvantages

Centralised Easier to enforce wages and Increased red tape - decreased

working conditions set out in
awards.
Increased equality of income
distribution.
Reduced issues regarding
efficiency.
‘Real wage overhang’ whereby wage
growth outstrips productivity growth
leading to poor macroeconomic
outcomes.
 68

‘casualisation’ and classification of Possible wage spiral hence possible

employees. cost push inflation.

Decentralised More efficient allocation of resources Greater inequality as a result of

and structural changes.
Promotes productivity growth as
workers are incentivised to undergo
training and skill programs to
increase wage outcomes.
Wage flexibility increases the ability
of the market to respond to negative
changes keeping u/e lower,
wage dispersion.
May be vulnerable to wage price
spirals when economic growth is
strong and the labour market is near
full employment.
Decreased worker
protection/enforcement of working
conditions/standards.

- Education, training and employment programs

These policies aim to increase participation and productivity of the workforce.
Education: ​Government aims to equip the labour force with skills that match the current and
​ eeds of the economy as well as being able to adjust to changing economic conditions.
future n
- A 2019 report by OECD estimates that 14% of existing jobs could disappear by 2040
with a further 32% changing radically. Already significant mismatches exist in the labour
market, hence without major changes to training systems many employees will not be
equipped for the changing demands of the workplace.
Examples:
- Early childhood education standards have been increased/
- Facilities such as trades training centres have been built adjacent to high schools.
- Training places for students pursuing careers in trades have been increased.
- Students are more easily able to obtain loans for vocational education courses.
- Goals to increase school retention rates to 90% by 2020 and raise the number of 25-34
year olds with a uni degree to 40% by 2025.
- National curriculum in 2015
- Increasing the costs of art degrees at uni (why the fuck we will never know).
Gonski 2017:
- Restructuring school funding towards a “needs-based” model.
- Increase funding by up to $23.5bn over a further 10 years and bring an additional $2300
per student.

Jobactive was introduced in 2015/16, incorporating ​Work for the Dole​: a mutual obligation
program that required recipients of Jobseeker to undertake 6 months of approved activities with
government agencies or not-for-profit organisations in order to build skills and make
unemployed workers more employable.
A 2015 evaluation of Work for the Dole found that it increased employment from 13% to 20% of
participants. However, ACOSS said the main drawback with the work for benefits framework is
 69

that the work experience offered often bears no resemblance to the work opportunities in the
jobs market.

Employment Programs: ​help unemployed people fine jobs, Programs are integrated with
income support so individuals make genuine efforts to find jobs regulated by Centrelink.
Examples:
- Jobactive introduced in 2015/16 is incorporated with Work for the Dole. It is a mutual
obligation program that requires recipients of Jobseeker to undertake 6 months of
approved activities with government agencies or NGOs.
- Increased employment from 13% to 20% of participants.
- PaTH (Prepare, Trial, Hire) introduced in 2016/17 incentivises businesses to trial a
young person for a 4-12 week internship.
- 43%-57% of interns found a job within 3 months of internship.
- However, it has been criticised for only achieving 10% of its planned goal of
30,000 people placed into paid employment.

Effectiveness of labour market policies:

- Decentralisation throughout the 1990s saw an average of 2.1% productivity growth
compared to a previous 1.2% in the 1980s, which supports long-term economic growth
(pre-covid).
- Labour market reforms to upskill workers has seen a decrease in structural and frictional
unemployment as there is a better match of skills to jobs required, which has decreased
the NAIRU and hence decreased u/e.
- However, there has been an increase in inequality due to a decentralised system to
determine wage outcomes.
- Clear decrease in inflationary pressures.

Limitations of economic policies

- Time lags
FISCAL:
Implementation time lag = medium term (annual may budget)
Impact lag = short term i.e. effective in immediately stimulating AD therefore beneficial
particularly during a downturn (i.e. COVID response saving unemployment).
MONETARY:
Implementation time lag = short term (meets first Tuesday of every month)
Impact lag = medium term (6-18 months) takes time for changes in the level of interest rates to
indirectly feed through to changes in the borrowing and savings behaviour of consumers and
businesses (transmission mechanism).
MICRO:
Implementation time lag = long term (needs to secure the support of six states, two territories
and the commonwealth and can involve extensive planning i.e. carbon tax.)
 70

Impact time lag = long term (5-20 years). Benefits of structural change can take several years to
be observed as resources are reallocated from one sector to another (allocative efficiency).

- Global influences
Global Interest Rates:
- Influences monetary policy
- Economic objectives: Inflation and AUD
International Business Cycle:
- Influences both monetary and fiscal
- Economic objectives: External stability, U/E and economic growth.
International Organisation:
- Influences macro and micro
- Economic objectives: Trade, labour market and efficiency.
Financial Deregulation:
- Influences monetary policy.
- Economic objectives: Price stability and external stability

- Political constraints
Policy Cycle:​ Australia has a three year policy cycle hence, governments are reluctant to
implement controversial policies in the third year -> this particularly applies to microeconomic
reforms.

Special Interest groups: ​i.e. vested interests

Example: A high profile special interest group campaign against a government policy was the
mining industry’s campaign to defeat the proposed ‘Resources Super Profits Tax’ in 2010. The
mining industry threatened to spend $100 million to defeat the government at the election that
was due later that year.

Delegation: ​To avoid being held responsible governments may delegate decisions to
independent organisations i.e. RBA and Fair Work Commission.

Approval process: ​Many policies can only be implemented through legislation during the
Budget process.
 71

Environmental Management
Essay
Evaluate the success of government policies designed to achieve environmental
sustainability in Australia.

Definitions:
- Ecologically sustainable development
- Market failure
- Government policy
- Externalities
- Preservation of natural environment, pollution and climate change, depletion of
non-renewable resources

Para 1. Regulations
- Leaded petrol (2002 was effective cause UN said temps would rise 1 degree of
1990 levels by 2010 but only rose 0.8 degrees)
- Plastic bags (NSW last state)
- National parks (Great Barrier Reef)
- PPF graph

Para 2. Market based

- Emissions trading scheme (cancelled)
- National Energy Guarantee (cancelled)
- Carbon Tax (cancelled)
- Petrol Tax (not cancelled)

Para 3. International agreements

- RET
- Carry over credits
- Paris 2015, reduce increase in temperatures below 2 degrees by 2030
- Kyoto

Federal Policies:
- Carbon Tax
- CPRS (ETS)
- NEG
RET
- Direct Action
- 2020 Budget Gas led recovery
 72

- 2050 net zero emissions

State Petrols:
- Plastic bag ban
- Return and Earn (bottles)
- Leaded Petrol Ban
- Committed 2050 carbon neutral

BUDGET 2020 ANNOUNCEMENT

- Most severe economic crisis since the Great Depression
- 600 million jobs lost across the world
- Contracted 0.1% during GFC and is now contracting 4.5%
- 1 million Australians lost their job
- “Unprecedented support saving lives, cushioning the blow and ensuring
Australians remain in work” - Frydenberg
- JobKeeper $101bn economic lifeline supporting 3.5 million Australians
- $28bn cash boost to small businesses
- 2 x $750 payments to pensioners and those on income support
- “Our actions saved 700,000 jobs.”
- We maintained our triple A rating
- $213bn deficit
- Net debt increase to $703bn 36% of GDP peak at $966bn or 46% of GDP
- “It is a heavy burden but a necessary one.”
- Our net debt is half of the United Kingdoms, a third of the US and a quarter of
Japan
- We fell by 7% when it was 20% in the UK and 12% in NZ
- “The Australian economy is fighting back”
- “There is no economic recovery without a job recovery.”

JobMaker (MICRO)​ hiring credit to encourage businesses to hire young Australia

- Immediately available to to employees who hire 16-24 years olds on
JobSeeker
- New hires must work for at least 20 hours a week
- Will support 450,000 jobs for young people
- $1bn JobTrainer fund
- $2.8bn to protect 180,000 apprenticeships and trainees
- Additional $1.8bn to create another 100,000 apprenticeships with a 50%
wage subsidy.
- Direct fund for indigenous Australians (2000 sponsored) ​INCOME INEQUALITY
 73

Tax
- More than 11 million taxpayers will get a tax cut backdated to July this year
- Generating 50,000 new jobs
- Encourage local businesses to hire mor
- Lower to middle income owners get a tax reduction of up to approx $6000 by
bringing forwards the 2022 plans
- $37,000 tax bracket lifted to $45,000

Jobs
- 8/10 jobs are in the private sector and they need a kickstart
- Instant asset write off
- Over 99% of businesses will be available to write off the full value of any asset
until 2022 (LARGEST INVESTMENT ANY GOVERNMENT HAS EVER MADE)
- Will create 10s of 1000s of jobs
- AGGREGATE SUPPLY
- Reforms to insolvency assist in creating 50,000 jobs

Income inequality for women

- 60% of the 450,000 jobs created since May filled by women
- $240m in programs for women in STEM and job creation
- 2020 Women Economic Security statement

Self-dependency
- Ensure Australian manufacturing plays a better role in Australia’s economic
recovery
- $1.3bn for medical products, recycling and clean energy and defence etc.
- Enabling manufacturers to be internationally competitive through the combination
of other programs that subsidise wages

Renewables
- $2bn in additional research and development incentives for renewables
- $459m additional funding for the CSIRO
- $1.9bn in new funding as part of an energy plan helping to lower emissions and
address Climate Change
- IN GAS
- More Gas at lower prices will support more jobs in Australia’s manufacturing
sector

Infrastructure
 74

- $14bn in new and accelerated infrastructure projects support another 450,000

jobs
- Fund major projects across each State i.e. rail lines in Victoria
- “Building infrastructure builds jobs”
- $2bn in road safety upgrades to save Australians’ lives
- $100bn to local councils

Regions​ (benefit of fiscal over monetary is it can target)

- $2bn in concessional loans to help farmers overcome the drought
- $350m to help regional tourism (another round of the Building better regions
funds)
- $370m to exporters.
- $2bn in new funding to build on the national water grid supporting regional jobs

Environment
- $1.8bn in funding for the enviro
- Help wildlife recover from the black summer bushfires
- Biggest single investment - injected $233m to update facilities in national parks
- $67m to restoring mangroves and oceans
- Recycling creates jobs
- Banning the export of plastic, tyre and recycling waste (RESPONSE TO
CHINA)
- Invest $250m to modernise recycling infrastructure
- Investment into responding to natural disasters announced after Royal
Commission

Housing Market
- Additional 10,000 home buyers will be able to purchase a home under the better
first home buyers scheme
- Only need a deposit of 5%
- $100bn of low-cost finance to support the construction of affordable infrastructure
- $4.6bn annually in rental assistance
- $150m in the indigenous home ownership project for regional areas ​(inequality)

Essential Services
- Record funding for hospitals, schools, age care, child care and disability services
- $3.9bn for the NDIS supporting 400,000 Australians
- $16bn health response to COVID-19 (PPE and capacity of ICU)
- 80m potential vaccines to COVID
 75

- Mental health
- $7m subsidised mental health services
- Doubling funding to mental health
- Support to Kids Helpline, Headspace and Lifeline
- $5.7bn to mental health all up

Wealth
- $12trn in superannuation
- $450m in unnecessary fees
- “Your super will now follow you” (don't have to change every job)
- Online comparison tool known as Your Super
- Save workers $17.9bn

Security
- $1.7bn invested in cyber security plan

Fiscal effectiveness
- U/e will fall to 6.5% due to policy responses
- EG will grow a quarter of a percent
- First focus is full employment ​(economic objective)
- When EG and u/e is below -6%/6% can move back to fiscal consolidation
- Message is ​“We have your back and we have a plan.”

Key notes
-