Professional Documents
Culture Documents
CHAPTER 1 NOTES
Definitions:
Living standards: Material: Level of economic wellbeing of individuals. It relates to quantity of goods and services available for consumption, or GDP per capita. (Assuming equitable income distribution). Non-Material: General happiness, affected by living conditions, freedom, peace, health, environment, crime etc. Relationship: Increase in material can lead to decrease in non-material, due to increased pollution, stress etc. Economics: Study of how to use our limited resources in a way that maximises the quantity of goods and services produced to meet the unlimited needs and wants of society. Scarcity: There will always be limited resources and unlimited needs and wants. Resources: Natural: Land, Oil, minerals, water etc. Labour: Human, both physical and intellectual. Capital: Manufactured items used to help create other goods and services. Machines etc. Opportunity Cost: The value of the next best alternative foregone. In order to produce one thing we must forgo producing something else, due to our limited resources. Opp. Cost exists for individuals, businesses and governments. Production Possibility Frontier: Limit of production between 2 items, given constant level of resources. Point B has highest total production maximises efficiency. Point X has underuse of resources inefficient. Point Y is unattainable, and attempting to reach it will cause inflation, due to demand outstripping supply. To increase the PPF (moving it left) we need to acquire more resources or use the current ones more efficiently. Efficient allocation of resources: Desirable situation where our scarce resources are used in ways that maximise our production levels or GDP.
Markets
1. What and how much to produce? Consumer sovereignty provides for 80% of resource allocation. Government allocates other 20%. Consumers dictate by their choices what they want produced, and businesses do so in order to make profits. 2. How to produce? Method of production, use of machinery. Usually aims to cut costs. 3. For whom to produce? Who does the profit go to? In Australias capitalist system, owners (shareholders) keep profits. Types of markets: Pure competition: Many sellers very strong competition no product/brand differentiation ease of entry/exit into market price takers compete only on price. Example fruit & veg markets. Monopolistic competition: Many sellers some small product differentiation some brand loyalty moderate ease of entry. Example restaurants. Oligopoly: Few sellers large product differentiation large brand loyalty difficult ease of entry. Example airlines, banks. Monopoly: One seller weak/no competition no differentiation very difficult/impossible entry into market price taker sets own prices. Example Australia Post. Advantages and disadvantages of competition: Advantages: Forces firms to increase quality and decrease prices, increases exportability. Disadvantages: Super-aggressive cost-cutting could reduce product quality and safety. Preconditions for a competitive market: 1. 2. 3. 4. 5. Consumer sovereignty: Consumers dictate how resources are to be used. Identical products. Ease of entry Firms want to maximise profits do so by cutting costs. Consumers and sellers have the same information.
Determinants of demand elasticity: 1. Type of item: Necessities will be inelastic, whereas luxury and unnecessary items will be elastic 2. Substitutability: Items that can easily be substituted (e.g. soft drinks) will have elastic demand, whereas items that cannot be substituted (cigarettes) will have inelastic demand. 3. Time period: In the short term it may be harder to find alternatives, so demand will be inelastic, but in the long term demand will always be elastic. 4. Cost and relative importance: Cheaper items will be more inelastic, whereas expensive items will be more elastic. 5. Complementary items: Cheap complementary items that are used with expensive products (e.g. water for a swimming pool) will have inelastic demand. Factors affecting demand: 1. 2. 3. 4. 5. Changes in wages and disposable income levels Changes in interest rates Changes in prices of substitutes or complementary items Changes in consumer confidence Changes in population size
Supply Supply has a direct relationship with price, meaning that as prices rise, quantity supplied will increase. Price elasticity of supply: Elastic: Small change in price leads to large change in quantity supplied. Unit elasticity: Proportionate change in price/supply 10% rise in price = 10% increase is supply. Inelastic: Large change in price only causes small change in quantity supplied.
Determinants of supply elasticity: 1. Storability: If an item can be stored for a long time (paper) then it will have elastic supply as suppliers can immediately release higher quantities to the market. If an item cannot be stored (fresh fruit) then suppliers cannot increase supply, regardless of price changes. 2. Resource mobility and unused industry capacity: If resources can quickly be procured to increase production, or there are spare resources that can be activated, then supply is elastic as more can be immediately produced. 3. Time period: In the short term it is difficult to increase supply, but in the long term it will always be possible. E.g. fruit growers takes time to grow fruit. Factors affecting supply: 1. 2. 3. 4. 5. Changes in profitability Changes in wages and production costs Changes in interest rates Changes in company tax rates Changes in government assistance/subsidies
Equilibrium price: The price at which the demand and supply lines meet = market price.
In general, the bigger the demand (i.e. the further right it moves), the higher the equilibrium price, and vice versa. The higher the supply (i.e. the further right it moves) the lower the equilibrium price, and vice versa.
Market failure
Types of market failure and their solutions: Markets fail when socially undesirable goods are overproduced government increases tax to slow production. Markets fail when socially desirable goods are under-produced government gives subsidies to increase production, or produces it themselves. Markets fail when competition is weak government aims to increase competition by disallowing anticompetitive practices (ACCC), deregulating markets, and reducing tariffs. Markets fail when there is asymmetric information if the seller knows more than the buyer, he can claim an unfair price. Markets fail when externalities occur when third parties are affected by the transaction by pollution, noise, etc. Markets fail because of the free-rider problem when public goods or services are non-excludable, e.g. defence, street lighting, there is no way to force consumers to pay for it, thus reducing profit for producers. Since producers dont want to manufacture these goods, the government must do it instead. Government failure: Minimum wage: The minimum wage set a floor price for labour, causing unemployment. Rectified by enterprise bargaining. Tariffs decreased competition and hence efficiency. Regulation of markets e.g. airlines, banks, caused decreased competition and hence efficiency.
CHAPTER 2 NOTES
Economic Activity: Term that relates to the actions of individuals, firms and governments to help generate goods and services, employment, and incomes. The business cycle diagram:
Peak: Unemployment at lowest level demand inflation at highest point may result in a boom where resources are fully used but are not able to meet demand. Ideal: Ideal point on the graph. Found on long-term-trend line midway between peak and a boom. Here unemployment due to lack of demand is not high, and demand inflation is not high. The government will use demand-side policy to steer the economy to this point. Trough: High unemployment due to lack of demand low inflation may be a recession (2 quarters of negative economic growth), if severe.
Lagging indicators: Indicators which reveal how the economy was previously, for example GDP, as by the time the data has been collated and released, some time has passed. Coincident indicators: Indicators which reveal how the economy is performing at that point in time, e.g. monthly retail sales. Leading indicators: Indicators which predict how the economy will perform in the future, e.g. consumer or business confidence.
Aggregate Demand
Definition: Total aggregate spending on locally made goods and services. Consists of: Consumers (C) + Business Investment (I) + Government consumption and investment (G1 and G2) + Net exports (Exports (X) Imports (M)). Demand-side economic theory developed by John Maynard Keynes in the 1930s. Keynes said that instability in the components of AD was responsible for cyclical upswings and downswings in the economy. Rising AD causes increased consumption and hence increased production. May cause boom and inflation. Falling AD causes reduced consumption and hence decreased production. May cause recession and unemployment. Ideal level of AD is when growth is neither excessive nor insufficient. Aggregate Demand theory does not account for stagflation rising prices but falling production. Components of Aggregate Demand Private consumption (C): Represents 60% of AD. Mostly affected by consumer confidence, household disposable income, interest rates. Mostly stable. Private investment (I): Business spending on capital equipment. Approximately 22% of AD. Mostly affected by business confidence, tax and interest rates. Quite unstable major cause of changes in AD. Government consumption (G1): Government spending on its own running costs, as well as ongoing expenses such as health, education and defence. Represents 16% of AD, but changes due to factors such as population size, election promises, budget income and the state if the economy. Government investment (G2): Public expenditure on capital equipment. Improves our production capacity. Around 3% of AD, but changes due to economic conditions, population size. Net exports (X M): Difference between foreign spending on our exports and our spending on foreign products. Typically around + or 4%. Behaves erratically, affected by the terms of trade index, consumer and business confidence, domestic and overseas economic conditions.
Aggregate supply
Definition: Total annual quantity of all finished goods and services produced in Australia. Development: Was the favoured theory pre-Keynes. Adam Smith, John Stuart Mill and Jean Batiste Say were its main proponents. Characterised by Says Law: Supply creates its own demand, meaning that the more that is produced, the more that will be spent. Limited resources would be the only factor affecting economic growth. Disproven by the Great Depression. Revitalised by Arthur Laffer, proponent of Reagonomics which advocated creating favourable supplyside factors to increase production, such as incentivisation. In order for AD to increase without causing inflation, AS must increase also. Therefore governments will always work to make favourable supply-side factors to increase production. Determinants of aggregate supply: 1. Quantity, quality, and efficiency of resources available: The more resources we have, the higher quality they are, and the more efficiently they are used, will increase our productive capacity. New discoveries of resources, or increases in research, education and technology allowing them to be used better, will increase AS. 2. Business profit levels: When business profits are high, businesses invest in more capital equipment, allowing them to produce more in the future. 3. All production costs: When production costs (Real unit labour costs (wage costs per unit), interest rates, costs of materials, exchange rates causing materials from overseas to be more expensive) go up, business profits fall and AS falls.
4. Labour force participation rates: The more labour available, the cheaper it is, and the more labour resources businesses can afford in order to produce, so production and AS increase. 5. Government aggregate supply-side policies: E.g. on immigration, tariffs, subsidies, incentives, tax breaks, legislation like carbon trading scheme, deregulation, privatisation, all impact on resource allocation, costs, employment, incomes and living standards.
Consumer confidence above average range from 103-117. Business confidence also very strong. Caused high (C) and (I), boosting AD.
Massive fall in consumer optimism down to 85 points. Businesses wary of falling demand, cut investment. Large drops in (C) and (I).
Overseas Activity
Major trading partners having boom periods, boosted demand for exports. Record high Terms of Trade index 130 points meant value of exports rose relative to imports.
Impact of Global Financial Crisis recessions for most major trading partners. Caused large drop in demand for exports.
Population Growth
Surge in Australias birth-rate and increase in immigration causes population to grow at 1.3 1.6%, above normal growth. This causes stronger demand for (C) and higher levels of AD. Contractionary policy to reduce (G) and hence AD growth in order to prevent inflation. RBA interest rates also very high.
Drop off in immigration (skilled workers program) causes population growth to slow, reducing AD growth.
Slow rises in consumer confidence, aided by RBA interest rate rises. Massive rises in business confidence. Caused increases in (C), (I) and (M). Demand for exports (particularly from China) rose as overseas countries recovered from recession, hence boosting exports and AD. Still small levels of population growth not helping the recovery.
Government Budgetary Policies and RBA Monetary Policies SUPPLY SIDE FACTORS Government Policies for AS
PEAK: 2005-08 Tax reform to lower business costs. Efforts to procure more resources to expand productive capacity, allowing AS to increase. Fall in average annual change of RULCs of about 0.7%. Caused extra business profitability, increasing business investment and hence productive capacity.
Expansionary policy to avoid recession and aid recovery $22 billion infrastructure plan, stimulus package. RBA interest rate down to record low. TROUGH: 2008-09 (Global Financial Crisis) Increased incentives to businesses to keep AS up, including tax rebates, subsidies, and business car program. Fall in average annual change of RULCs of about 0.7%. Caused extra business profitability, increasing business investment and hence productive capacity.
Expansionary policy still in place to aid recovery. Interest rates rising to prevent growth becoming too strong. RECOVERY: 2009-10 Reduced business incentives and grants, but there are still some in place to help lift AS. Fall in average annual change of RULCs of about 0.7%. Caused extra business profitability, increasing business investment and hence productive capacity.
Bottlenecks
Serious bottlenecks and shortages limited growth in Australias productive capacity. Especially in areas of skilled labour and infrastructure. Small growth in labour productivity (1.1% pa) caused small growth in productive capacity and hence AS.
Productivity Cycle
Government announced plans for major infrastructure projects and skilled migrant program to increase productive capacity and hence future levels of AS. Less business investment in capital equipment and labour due to GFC caused drop in productive capacity, lowering AS.
Continued expansion of infrastructure projects to increase productive capacity and hence AS.
Increased business investment and government infrastructure projects expand productive capacity and hence AS.
CHAPTER 3 NOTES
Government goal of low inflation
Definitions
Inflation: Sustained increase in prices of goods and services over time. Deflation: When the prices of goods and services are decreasing over time. Disinflation: When there is inflation, but at a decreasing rate.
Measuring inflation
The ABS measures inflation quarterly using the Consumer Price Index. The index takes a base year (1989-90) of 100 points, and calculates the percentage rise each year. The index is based on the regimen the basket of approx 100,000 commonly used goods and services, subdivided into categories, e.g. food, transportation. The ABS reviews and changes the regimen periodically. Items in the regimen are given different weightings in the calculation to account for their relative importance, e.g. food and housing are worth more than alcohol. The prices surveyed are those of major retailers, e.g. Coles, Myer. Annual CPI rise (%) = Limitations of the CPI as a measure of inflation: 1. The CPI is not representative of all households, as it is biased towards metropolitan households. Additionally, some items in the regimen may not be applicable to some households. 2. The effect of one-off volatile events could affect the index, e.g. the prices of fruit can be affected by sudden floods or droughts. The underlying price index takes this into account by removing volatile items from the regimen. 3. The base year is arbitrary, and may have been particularly high/low, affecting the future CPI calculations.
<2% or negative inflation is not desirable would indicate that there is little to no economic growth. Effects of high inflation on living standards: 1. High inflation puts local producers and exporters at a competitive disadvantage compared to overseas producers, as high inflation increases their prices. Hence there are lower profits, forces closures and redundancies, reduces living standards. However importers may see benefits. 2. High inflation undermines economic growth, as it erodes consumer and business confidence and causes increased interest rates. 3. High inflation encourages inefficiency in resource allocation, as those with wealth will invest in speculative assets, e.g. property and shares. While this increases their own living standards, it reduces the amount of investment in productive assets. This eventually harms economic growth. Increase in speculative investment as opposed to productive investment. 4. Fixed income earners cannot cope with the rising prices as their incomes cannot increase to compensate for them, hence their living standards suffer. However speculators can make large gains during times of high inflation. 5. Higher interest rates will affect variable mortgages, reducing the living standards of those with large mortgages.
Interest rates were at record high; this was the RBA strategy to reduce inflation.
The previous high interest rates reduced inflation. Interest rates were dropped to keep up demand during the GFC, so as to keep inflation from falling too low. During the GFC the demand for our exports dropped. This caused inflation to ease.
During peak was very high. This caused a lot of demand for exports which caused inflation to rise,
could lead to an increase in inflation. Supply side Factors affecting rate of inflation Rising oil prices Peak 2007 Mid 2008 Demand continues to outstrip supply during boom period. Supply restricted due to political conditions and wars. Exchange rate rose strongly making imports cheaper for Australians. Buy raw materials from overseas, thus production costs are low. This eased cost inflation Under the fair pay commission: Increase in the min wage by $60 a week, adding to production costs and rising inflation prices. Enterprise bargaining system: Increase of around 4% due to growing labour shortages contributing to cost pressures and inflation. Costs grow sharply at an average of over 10% per year, adding to cost inflation. Commodities boom, prices high. Mainly due to overseas countries like China. RBA increased interest rates adding to production costs and cost inflation. Trough Mid 2008 - 2009 Cost inflation in production of oil decreased therefore allowing an increase in supply allowing prices to fall. Australian $ fell due to poor economic patterns, which increased cost of importing materials and equipment. These rises were passed onto consumers. This accelerated cost inflation. Wage prices were negotiated based on productivity rises, thus easing cost pressures on firms. Recovery 2009 - 2010 Recently prices have continued to rise since supply has been restricted.
Exchange rate rose strongly making imports cheaper for Australians. Buy raw materials from overseas, thus production costs are low. This eased cost inflation Wage prices were negotiated based on productivity rises, thus easing cost pressures on firms.
Wage costs
Cost of materials
Due to poor exchange rate conditions, cost of imported materials rose. Commodities boom disappeared during the trough due to GFC. Interest rates were low. The RBA had an expansionary stance. Therefore cost inflation was reduced.
Interest rates
Interest rates are being steadily increased by RBA, with goal to return to neutral stance. This increased cost inflation.
Unemployed: Member of the labour force without paid work for at least one hour per week. Unemployment rate (%) = Underemployment: Receiving paid work but not as much as preferred. Underutilisation rate (%) = Hidden unemployment: Persons discouraged from actively seeking a job, but would like one. Disguised unemployment: Employed people who would like more work, or work in a different and more productive capacity. Types of unemployment: 1. Cyclical unemployment unemployment related to weak aggregate demand. 2. Natural unemployment a. Structural unemployment, caused by firms changing their business structure or producing methods. b. Seasonal unemployment, caused by jobs being out of season, e.g. ski instructor during summer. c. Frictional unemployment, being unemployed whilst between two jobs, d. Hard-core unemployment, where personal factors e.g. criminal record prevent person from getting a job.
Measuring unemployment
Labour force survey: All unemployment statistics are collated by the ABS through their national survey. Limitations of the survey: 1. Small sample size only 0.7% of population surveyed, may produce inaccuracies. 2. Arbitrary definitions of employment - why is 1 hour a week employed? 3. Hidden unemployed not accounted for as they are not actively seeking work, they are not counted as part of the labour force. 4. False information people may lie to survey to protect their own interests e.g. welfare.
Peak (2007-08)
Trough (2008-09)
Recovery (2009-10)
Very high levels, responsible for a rise in AD, and hence unemployment fell. Interest rates at record high in order to slow AD. Slowing of AD growth stopped unemployment from falling too far.
Interest Rates
Confidence fell, causing a drop in AD and hence higher unemployment. Interest rates at low levels in an attempt to boost AD growth and hence decrease unemployment.
Confidence rising slowly, causing small rise in AD and hence little effect on employment. Rates rising during recovery period to return to neutral stance, so as not to allow the economy to grow too quickly. This has prevented unemployment from falling too quickly.
High levels of economic activity meant high demand for our products, especially commodities; hence employment rose to help meet the demand.
The large drop in demand for exports caused by the GFC resulted in higher unemployment, particularly in the export industries. Business Confidence fell, causing a drop in AD and hence higher unemployment.
Business Confidence
Very high levels of business confidence, causing growth in AD which in turn lowers unemployment.
High demand for commodities from countries such as China and India means that unemployment has fallen, as employment in commodities and export industries has increased. Business Confidence is booming, creating stronger AD and helping to decrease unemployment at a quick rate.
Supply side factors affecting cyclical unemployment Labour shortages and immigration
Peak (2007-08)
Trough (2008-09)
Recovery (2009-10)
Wages - RULCs
Despite the increased participation and immigration rates, there was still strong demand for labour. Gradual decrease in RULCs cause producers to hire more workers, lowering unemployment. Rise in interest rates during this period caused costs for producers to rise, leading to them laying off workers, raising unemployment.
Labour shortages disappeared to the global recession, so this did not cause unemployment to rise. Gradual decrease in RULCs cause producers to hire more workers, lowering unemployment. The fall in interest rates caused business costs to lower, allowing companies to hire more workers. This helped slow the rise in unemployment. Falling profits forced firms to lay off large number of workers, causing unemployment to rise.
Reduced immigration intake means that there is still strong demand for labour. Gradual decrease in RULCs cause producers to hire more workers, lowering unemployment. The small rise in interest rates is too small to have made a significant impact on production costs so it has little effect on unemployment. As profits begin to rise there is no longer a problem with redundancies, so unemployment is kept stable. However there are still local jobs being given to overseas workers, causing unemployment to rise.
Interest rates
High profits for local producers meant that there was little need for structural change, so there were few lay-offs, leading to low unemployment. However the growing practice of relocating workforces to China has increased unemployment.
net total (credits minus debits) of each of the four sections. Typically the account runs at a large deficit (currently ~ $71b), mainly due to the large debit balance of the Net Income section. 2. The Capital and Financial Accounts: 1. The capital account is made up of the transfers of all capital funds, typically transferred by migrants moving their bank accounts, as well as non-produced, non-financial assets such as patents and trademarks. The balance on the capital account is the net result of the capital transfers and the net acquisition of non-capital assets. 2. The financial account is made up of net investments (direct, portfolio, or other), being the total invested in Australian businesses (credits) less the total invested by Australians in overseas businesses (debits), and the Reserve assets, which are the transactions made by the RBA and the Federal government. 3. There is a Net Errors and Omissions Account, which takes into account all supposed errors and ensures that both sides of the balance of payments account balance. Net Foreign Debt: This is the total amount owed by Australians, both by the government (public sector) and by businesses (private sector) to overseas institutions, less what is owed to Australian institutions by overseas entities. The exchange rate: The price received for the Australian dollar when buying other currencies. The price is subject to normal demand and supply rules, meaning that an appreciation in the A$ is caused by more demand (due to high overseas activity, selling of exports, low interest rates, improved terms of trade) and/or less supply, and a depreciation in the A$ is caused by less demand (due to poor overseas economic conditions, low interest rates) and/or more supply (due to high domestic economic activity). The Trade Weighted Index: The TWI is the average exchange rate for a basket of foreign currencies, weighted for their relative importance for Australia. The higher the TWI, the more Australia is receiving on average for the A$. Terms of Trade: The price Australia receives for our exports, relative to the price paid for imports.
On the other hand, a too high exchange rate for the A$ causes exports to slow and imports to grow, leading to a slowdown in AD and hence unemployment. NFD component: Having a high NFD, caused by low levels of domestic savings, means that companies and the government must borrow from overseas in order to raise capital. This borrowing requires repayments as well as interest costs, limiting the amount of investment that can be done in Australia due to the high interest costs, as well as pushing up prices here. In general, goal of external stability is NOT compatible with goals of economic growth and full employment. This is because during times of strong economic growth, and hence full employment, we see fast growth in imports and investment in Australia, worsening the CAD and perhaps the NFD.
Consumer Confidence
Business Confidence
Interest Rates
High confidence in this period resulted in higher spending on Imports, so the CAD rose to a record 5.9% of GDP. High confidence in this period resulted in higher spending on Imports, so the CAD rose to a record 5.9% of GDP. High interest rates during this period caused investment in our banks from overseas, leading to the A$ appreciating. This led to the CAD worsening as our exports were less competitive. Strong demand for our exports from China, raises exports and hence lowers the CAD. Also increases demand for A$, causing it to appreciate.
Lower consumer confidence caused lower spending on imports, so the CAD fell to 4.4%. Lower business confidence caused lower spending on imports, so the CAD fell to 4.4%. Despite lower interest rates in Australia, rates were still higher than overseas so there was still demand for A$ to invest, leading to an appreciation of the AUD. Slight decrease in demand for exports, slows drop in CAD. Lessened demand for A$ slows appreciation of AUD.
High business confidence during recovery causes increase in investment including foreign imports, raising the CAD. Rise in interest rates before any other country causes increase in foreign investment, causing A$ to appreciate, and hence CAD to become bigger.
Demand from India and China as high as ever, reducing upward pressure on the CAD.
Supply side Peak (2005-08) Trough (2008-09) Recovery (2009-10) factors affecting External Stability Real Unit Gradually decreasing but still Gradually decreasing but Gradually decreasing but Labour Costs high wage costs reduce still high wage costs reduce still high wage costs reduce Australias competitiveness Australias competitiveness Australias competitiveness and productive efficiency. This and productive efficiency. and productive efficiency. means more imports and This means more imports This means more imports fewer exports, increasing the and fewer exports, and fewer exports, CAD. increasing the CAD. increasing the CAD. Oil Prices Very high oil prices during this Oil prices fell dramatically, Slow increase in oil prices period, peaking at around causing import costs for oil gradually raises import US$150 a barrel, pushed up to be lower, hence costs of production, import costs of oil necessary reducing imports and the increasing imports and the for production, causing overall CAD. CAD. imports to rise and hence increasing the CAD. Exchange Rates Steadily rising exchange rate Large fall in the value of Rising though volatile A$ is between the A$ and the USD the A$ compared to the causing import prices to meant that imports were USD meant that imports fall, helping to reduce the cheaper for Australian for Australian production CAD. production, resulting in a became more expensive, lower CAD. increasing the CAD. A factor with a significant impact on the NFD is the low level of domestic savings, which forces the government and businesses to borrow from abroad. Factors which encourage domestic saving should work to decrease the NFD.
equitable the distribution of income is. A Gini of 1 would indicate total inequality, whereby 1 person is earning all the income. The Poverty Line Another measure of relative income is the poverty line. In Australia we use the Henderson poverty line, which is an estimation of the lowest income that one could survive on with even the most basic of living standards. Anyone earning less than this amount is said to be below the poverty line, and hence in poverty. The amount of income is measured using disposable household income, i.e. after tax but before the addition of indirect benefits. The poverty line is constantly adjusted to take into account inflation. The poverty line is also adjusted using equivalence scales to measure equivalised income depending on the size of the income unit, i.e. a larger income unit will need a higher level of income in order to survive. Limitations of measuring personal income distribution: 1. Definitional problems relating to the definition of poverty and equity. For example there may be great inequality, with a high Gini coefficient, yet still equity as everyone has a sufficient income to live on. 2. Statistical problems relating to survey error and misinformation. 3. Subjectivity of poverty measures, e.g. exact placement of Henderson poverty line.
The drought, which has caused the agricultural sector to suffer large losses, has also contributed to income inequality.
UNIT 4 NOTES
CHAPTER 4
Definitions
Budgetary (fiscal) Policy: Relates to the anticipated changes in the level and composition of government receipts (revenues) and outlays (expenses) for the coming budgetary period. Direct taxes: Taxes which are levied directly onto the income of individuals and companies. Indirect taxes: Taxes applied on the sale of goods and services or added to the price of other items. Tax mix: The balance between direct and indirect taxes as a source of government revenue. Currently ~68% of revenues come from direct taxes, and 26% comes from indirect taxes. Tax base: Refers to how broadly the particular tax is applied. For example, the GST is applied on most but not all goods and services. Tax burden: The rate at which the tax is applied. Hence higher income earners face a larger tax burden than low income earners. Discretionary stabilisers: Stabilisers which are actively put into place via deliberate decisions from the government or treasurer. Automatic stabilisers: Stabilisers which automatically work counter-cyclically to reduce the effect of upswings or downswings in the business cycle.
The PAYG income tax is a direct tax on incomes which makes up around 40% of all government revenue. The tax is progressive, meaning it is applied at a higher rate the more you earn. The top bracket has been reduced over time from 75% to 45% on incomes above $180,000. The company tax rate is a proportional tax levied at 30%, regardless of profits. This has come down from 49%, as it was in 1986, and is scheduled to fall further to 28% by 2015. The capital gains tax (CGT) is a direct tax on all gains made on capital, such as property and shares. The CGT is applied at a rate of half the rate of the appropriate income tax, and hence has an effective top rate of 23.25%. Indirect taxes make up another 26% of government revenue. These taxes include the GST, excise taxes, and customs duties or tariffs. The GST is a tax levied on most goods and services at a flat 10% rate. Items exempt include those that are basic necessities, such as certain food items, residential rent, and utility bills. This tax is generally considered regressive, as it takes a larger proportion of income from low income earners than that of high income earners for the same item. Excise taxes are those levied on certain goods such as alcohol and tobacco, petrol and coal. It is charged at a flat rate per kilo. These raise around 9% of government revenue. Taxes should fulfil 3 principles: They should be simple (understandable by all those who it applies to), fair (encourage equity and fairness) and efficient (should not have a significant impact on decision making, otherwise they are interfering in the free operation of the market). Non-tax revenue includes all things that are not tax, such as asset sales, repayments of loans by states/other governments, HECS repayments, Government Business Enterprise profits and license revenues. These make up approximately 8% of government revenue. Expenses Government expenses (G1+G2) are broad and wide ranging. They include transfer and welfare payments (typically 33% of all spending), spending on health (16%), education (10%), transport (2%) and defence (6%), as well as spending on national infrastructure and government operational expenses (6%). G1 expenses are those such as salaries and operating expenses for administration, as well as day-to-day spending on health, education, and defence. G2 expenses are those such as infrastructure building and purchase of equipment. Transfer payment expenses are not included in G1 or G2 as they are technically spent by the recipient, not the government. Recording them as G1 or G2 would mean they end up being counted twice in AD, as they represent a part of C as well. The aim of expenses is generally to provide services to the community, either completely free or at a subsidised price. The user-pays principle, which means users are charged at least some part of the cost of a government service, is increasingly common.
Budget Outcomes
There are three types of budget outcomes: 1. Balanced budget: This is when expenses roughly equal revenues, meaning that there is no deficit and no surplus. This is indicative of a neutral stance, as the government is looking to
neither stimulate nor restrain economic growth. This type of budget has little effect on economic growth, inflation, or unemployment. 2. Budget deficit: This is when expenses outweigh revenues, meaning that there is a deficit. Typically this outcome will be used during a period of poor economic growth; hence it is indicative of an expansionary stance. The extra cash flowing into the economy as opposed to coming out of it will help to stimulate AD in order to steer clear of a recession and help the economy to rebound. Deficits can be financed in three different ways: a. Overseas borrowing: The government could borrow money from overseas, either from other governments or from banks. The problem with this approach is that it increases the Net Foreign Debt and worsens the Current Account Deficit, so it is bad for external stability. b. Borrow from the RBA: The government could either use up the savings it has deposited with the RBA during surplus times, or it could sell the RBA bonds. This is effectively printing more money, and is seen as a very expansionary stance. c. Borrow from the public or financial sector: The government could raise funds by selling bonds or securities directly to the public. This was the main method used during the GFC. However, this may cause a crowding out of the financial sector, and cause raised interest rates which in turn may cause depressed public spending and investment. 3. Budget Surplus: This is when revenues outweigh expenses, meaning there is a surplus. This will typically be the policy during times of strong growth, as the government will try to restrain AD so as not to cause inflation. As such, this is indicative of a contractionary stance. By removing cash from the economy, the government aims to reduce spending and hence inflationary pressure on AD. The government has three options of what to with the surplus: a. Repay debt: The government could repay any debt it has accumulated through previous deficits. b. Save with the RBA: The government could save the money with the RBA for use during deficit times. c. Add to the balance in special funds: The money could be used to set up the special funds such as the Building Australia Fund, the Education Investment Fund, or the Hospitals fund. It is hoped that through good investment the values of these savings will increase over time. Effect of one off events: One off events can have a huge impact on the predicted budgte outconme, eg the GFC in 2008 changed the projected budget outcome from a $21b surplus to a deficit of $32.1b. This change was caused by the advent of both automatic and discretionary stabilisers implemented to respond to the crisis. The Headline Balance: This is the cash differential between total cash received and total cash spent by the government. This may make the outcome look more impressive, due to the impact of one-off events such as asset sales. The Underlying Balance: The Headline balance less the impact from one off events. The Fiscal Balance: The fiscal balance is calculated through the accrual approach, meaning revenues earned but not received as well as expenses accrued but not paid are also calculated as part of the balance. The government will have a long term aim to maintain a fiscal balance over the duration of the business cycle, meaning that all deficits are paid for by the surpluses gathered, leading to a neutral balance over the long term.
Stabilisers
Stabilisers work to counteract upswings and downswings in the economy, so that the effect of booms and troughs is not so severe. There are teo types of stabilisers:
Automatic stabilisers: These are naturally counter-cyclical, and work without any government intervention. The main two examples of these are PAYG income taxes and welfare. During a boom, incomes naturally rise and employment goes up, so there is automatically more tax revenue and less welfare payments, contributing to a budget surplus and a more contractionary stance, as is appropriate to counteract a boom. During a trough, incomes and employment decrease, so tax revenue decreases and welfpare payments increase, contributing to a deficit budget and a more expansionary stance, counteracting the trough. Discretionary (structural) stabilisers: These are stabilisers implemented by the government in order to combat changes in the economy when automatic stabilisers are not deemed sufficient.
Weaknesses of using budgetary policy to pursue the goals of sustainable economic growth and full employment: 1. Long time lags before the impact of some discretionary stabilisers is felt, such as with infrastructure spending, may result in the policy becoming pro-cyclical rather than countercyclical. 2. Financial constraints on the budget preventing the deficit from becoming too large may thwart the governments plans for spending during a recession. 3. Incompatibility between goals, such as the need for strong growth and employment at the same time as low inflation, equity, and external stability, may cause the pursuit of one goal via budgetary policy to be detrimental to the pursuit of a different one.
4. Political constraints, either from the Upper House blocking policies, the States blocking policies, or the possibility of a voter backlash may prevent the government from putting out necessary policies. 5. The reaction of the nation to budgetary measures such as a deficit to boost economic growth may not be as strong as desired, so the policy may not have the desired effect.
External stability
The government will always look to promote domestic stability through budgetary policy. However, in times of poor economic growth, expansionary policies such as deficit budgets which are harmful to external stability will still be prioritised. The government will accept that a CAD:GDP ratio of about 3-4% is inevitable and well be caused by structural issues, such as poor cost competitiveness, the large NFD, and the savings-investment gap. However, anything above that will be considered a cyclical issue, whereby it will rise during booms and fall during troughs. Budget Surpluses: These help to reduce the NFD, as the government can use the surplus money to pay off debt. This also helps with the CAD as the repayments and interest payments are smaller. They also affect the CAD as they help to contract AD, which reduces the amount of imports being bought, and also frees up domestic products for export overseas. Budget Deficits: These are generally very bad for external stability, as the increase in government debt can cause an increase in the NFD, whilst the expanded economy as a result of the deficit could cause a spillover into imports, reducing the CAD. In general, the goals of economic growth, low inflation and full employment are incompatible with the goal of external stability, so policies to help one will harm the other. Specific policies and their effect on external stability: 1. Cuts in PAYG taxes / increases in welfare cause an increase in consumption, both domestic and overseas, increasing the CAD. 2. Government spending on imported goods spending on areas such as defence which involve large quantities of imported goods increase the CAD. 3. Government overseas aid money spent on aid overseas increases the CAD. Policies to increase national savings: One of the main causes of Australias large NFD, as well as the resultant CAD increase, is the savingsinvestment gap. This means that the level of national savings in Australia is not sufficient to provide capital for investment by Australian governments and businesses. This requires businesses to look overseas for capital to use for investment, hence increasing the NFD. Therefore, any policy which helps promote national savings will help with the goal of external stability by narrowing the savings-investment gap. Such policies include: 1. Superannuation co-contribution scheme: The government matched any super contributions up to $3,000, which encouraged people to save with super funds. 2. Tax breaks for super contributions. 3. Reduced taxes to allow families to save more. 4. Tax cuts on interest earned on savings (50% off first $1000).
Weaknesses of using budgetary policy to pursue the goal of external stability: 1. Long time lags between the need for a policy, its implementation, and its desired effect may reduce the effectiveness of the policy. 2. Conflict with other goals, particularly the need for strong economic growth and low unemployment, may cause policies which help with external stability harm the pursuit of another goal. 3. Structural causes of the CAD may not be tackled by budgetary policy.
services rise for users, decreasing the access of the poor to these services and hence harming the pursuit of equity. Recent budgetary policies to combat the GFC, such as the Building Australia Fund, the Education and Investment Fund and the Health and Hospitals Fund should improve the quality of service provided on the public system, improving the access to basic services for the needy. Incentives to promote superannuation savings have also impacted on equity, as by encouraging people to save more for retirement using policies such as the co-contribution fund and the increased compulsory contribution, the government helps to ensure that people have enough of an income to support them after retirement, thereby improving their access to goods and services and improving the pursuit of equity. Weaknesses of using budgetary policy to pursue the goal of equity in income distribution: 1. Limitations on the effectiveness of direct taxes to reallocate incomes, particularly caused by the ever-decreasing tax rates on personal and business incomes, prevent the redistribution of income. In addition, black market income cannot be taxed. 2. Weaknesses of welfare payments, either because of tightening of access to payments are because of the extremely low amounts, mean that they are not as an effective means of redistributing income. 3. Regressive taxes such as the GST and excise taxes have a larger effect on the poor than the rich. 4. Indirect taxes have limitations as the increased use of the user-pays principle and funding cuts for public services mean they are not as effective in providing services to the poor. 5. Conflict with other objectives, financial constraints, time lags see other goals.
CHAPTER 5
Monetary policy is a macroeconomic tool wielded by the Reserve bank of Australia designed to manage the level of Aggregate Demand. It involves the regulation of the nations money and the rate at which money flows into the economy via the financial sector, particularly through the application of market operations designed to influence the cost of credit.
Definition of money
Money consists of items that can be used as a measure or store of value, or a medium of exchange. The Money Supply or the amount of money in circulation is measured by the RBA. The volume of all coins and notes held by the non-bank public as well deposits of banks with the RBA Plus the volume of operating and fixed bank deposits Equals M3 Plus net deposits of savings in non-bank financial institutions (NBFIs) Equals Broad Money. The process of credit creation is when one person deposits money into a bank, which is then lent out to another person. That person spends the money, and the recipient also deposits it into his bank. Thus there have been two deposits with the same amount of money, and hence credit has been created.
The percentage that a bank can lend out of all of its receipts is set by the Australian Prudential Regulation Authority, who ensure that banks retain a minimum amount of funds needed to pay off short-term claimants, and is currently 12.5%
The banks then pass these rises in their own borrowing costs onto the consumers so as to protect their profits and reduce their own borrowing, which sees interest rates on mortgages, overdrafts, credit cards, variable loans etc rise. Through the transmission mechanism, these rises in interest rates on loans cause less spending by consumers and businesses as they have less discretionary income, which results in less C, I and M, and therefore less demand-inflationary measures. The RBA has caused a reduction in the inflation rate, through employing a contractionary stance to slow spending. In order to employ an expansionary stance to boost spending when the situation requires it, the opposite process is used, whereby the RBA buys government securities so as to increase the supply of credit, thereby reducing the cost of credit and interest rates and therefore increasing spending. Effect on the economy of changing the cash rate: 1. Savings and Investment Channel When interest rates increase, it costs more to borrow money. This means that the effective cost of certain things, such as houses will be much higher. Higher interest rates will also mean that the return on savings is higher. As such, people are encouraged to save (ie delay expenditure) so that they can gain a higher return. These two things work together to reduce the level of consumption and investment in the Australian economy. 2. Cash Flow Channel There is also a direct impact of increasing interest rates on the cash flow of businesses and individuals with existing loans. When interest rates increase, the discretionary funds available to these people will be lower. As such, any change in the cash rate will have flow on effects for the cash flow of people and businesses in the economy, and this in turn will affect their ability and willingness to spend. 3. Money and Credit Channel Whilst the first two channels consider the cost of borrowing, here we are looking at the availability of borrowing. In brief, when interest rates increase it is more difficult to obtain funds for borrowing, and therefore new borrowers are less likely to arise. With fewer new loans in the market, the increases in consumption and investment expenditure may not be able to be maintained, and as such aggregate demand will either fall, or increase at a slower rate. 4. Asset Prices Channel A change in interest rates will have flow on effects for the value of certain assets within the economy. Any asset considered an investment (such as shares) and also property will be affected by changing interest rates. For example, if interest rates fall then demand for these assets will increase. With an increase in demand, the value of these assets will also increase. With a stronger asset base, many people will be more inclined to spend the funds that they have available, and as such aggregate demand will increase. (The true impact of this channel is uncertain, however an understanding of this process can be very beneficial if you want to be an investor!) 5. The Exchange Rate Channel Changing interest rates can have a strong impact on the value of the Australian dollar in the foreign exchange market. When interest rates increase investors around the world will want to invest in Australian securities to benefit from these increased returns. To make these investments, they will need to change their money into Australian dollars, increasing demand for our currency. This may lead to an appreciation of the Australian dollar, and in turn this may reduce demand for our exports. Once again, this could lead to a decrease in aggregate demand.
Another policy option open to the RBA is a dirty float, meaning they either buy or sell large quantities of Australian dollars so as to stabilise erratic and uninformed fluctuations in the exchange rate. Ever since the floating of the A$ in 1983, the dollar has been open to normal demand/supply market rules, whereby an increase in demand/decrease in supply will cause the A$ to appreciate, and vice
versa. Therefore in order to cause an appreciation in the dollar the RBA will buy large amounts of dollars using its foreign currency reserves so as to make the dollar scarcer and therefore increase in price. In order to cause a depreciation in the dollar, the RBA will sell large amounts of dollars, having the opposite effect. Effect of a dirty float: A rise in the value of the dollar could cause increased import spending and reduced exporting, increasing the CAD and decrease AD, whereas a fall in the value of the dollar would cause a rise in exports and a fall in imports, causing a reduced CAD and higher AD. Connection between interest rate and exchange rate: An increase in the interest rate makes it more profitable for foreign investors to invest money in Australia due to the higher returns (as Australia generally has higher rates than overseas) therefore causing more demand for the dollar and therefore an appreciation, whereas a decrease in the interest rate may lead to money being invested elsewhere, causing a decrease in demand and therefore a depreciation. The final policy option open to the RBA is persuasion. This means that the RBA uses its considerable influence on financial markets to affect a change. For example, if the RBA desires an increase in spending to boost employment, it could release a statement with a positive outlook for the future of the economy, which would encourage businesses to increase investment spending and may cause increased household consumption.
Specific actions of monetary policy: 2006-08: During this period, in which Australia had an economic boom resulting in low unemployment (4.8%) strong economic growth and high inflation (4.5%), the RBA adopted a contractionary stance, evidenced by their 12 rises in the target cash rate, from 4.25% in 2002 to 7.25% in 2008. This was designed to slow aggregate demand and therefore inflation. The RBA also used its policy of persuasion, as the RBA governor repeatedly stressed that household debt was out of control, hoping to slow household spending. A policy the RBA could have used would be to employ a dirty float to raise the value of the dollar, which would have resulted in lower exports and more imports, thereby slowing AD. 2008-09: Following the GFC which saw a rise in unemployment (to 5.8%) a drop in economic growth (to -0.25% in one quarter) and a drop in inflation (to 1.5%) the RBA attempted to stimulate economic growth by lowering the cash rate. The RBA dropped the cash rate 6 times in quick succession, bringing it down from 7.25% to 3% (although this was still much higher than most overseas interest rates) in the space of a year.
Independence of politics
Precision/bluntness
Effectiveness
single sector of the economy, even those with different economic situations which might not have needed the change. Monetary policy is not always effective, as changes in the cash rate do not always have an effect on peoples spending. For example, despite high interest rates in 2006-08, AD still grew and inflation was still high.
reforms) and target and affect only what the government wants it to. In contrast, automatic stabilisers as well as discretionary budgetary policies are generally considered to be very effective in impacting the economy in the desired way.
CHAPTER 6
Definition of Aggregate Supply policies: Aggregate Supply Policies are those government policies which seek to make supply-side conditions more favourable for Australian producers, so as to improve levels of production, efficiency, competitiveness, and Australias productive capacity. This is achieved by increasing the amount able to be produced by the economy. Aims of AS policies: In general, these policies will work to promote all of the government goals for the economy. 1. Sustainable growth: This goal is promoted due to the increase in productive capacity, which allows the economy to increase. Without an increase in AS, the economy is prevented from growing without significant inflationary pressures. These policies generally aim to increase production through encouraging efficiency. Types of efficiency: Allocative efficiency means that resources are allocated to the areas which best serve the needs and wants of society, as well as the nations productive interests , such as industries where there is a comparative cost advantage. Productive (technical) efficiency means that businesses use the most efficient means of production, both in terms of cost and use of resources, by utilising best international practices and the most efficient technology. Inter-temporal efficiency is the need to ensure that we have an efficient spread of resource use in the long term, so as to ensure that we have a balance between the consumption of resources immediately as well as a saving of resources for future investment. Dynamic efficiency refers to the ability to adapt quickly and at low cost to changed economic conditions and thereby maintain output and productivity performance despite economic 'shocks'. Dynamic efficiency is pursued through microeconomic reform and increased competition, which provide incentives for businesses to innovate and adapt.
2. Low inflation: This goal is promoted mainly by increasing productivity and cutting the costs of production, through encouraging greater efficiency. This results in lower final prices, thereby reducing cost inflation. 3. External stability: AS policies can be used to promote the goal of external stability and a moderate CAD by reducing our imports, increasing exports and reducing net foreign debt. This is achieved through policies such as infrastructure projects and immigration, which expand Australias productive capacity, meaning that there is less need for importing and more available fro exporting, which improves the CAD. Policies which reduce the NFD are those which promote saving, such as the superannuation co-contribution scheme. 4. Full employment: This goal is promoted as by creating more favourable supply side conditions, the government ensures that profits are higher and that there are less business closures. This helps create jobs and reduce structural unemployment. However, short-term structural unemployment is a common result of AS policies. 5. Equitable distribution of income: Basic access to goods and services are promoted by AS policies through the achieving of lower cost inflation, lower unemployment, increased income per capita, increased social indirect benefits, and the possibility of increased welfare due to the higher tax revenues brought about by the greater efficiency. Through the pursuing of these five goals via AS policies, the government aims to bring about higher material and non-material living standards for Australians.
Trade liberalisation is the process of removing the restrictions on trade between nations, and the promoting of Free Trade Agreements. Such restrictions include: o o o o Tariffs a tax on all imported goods at the time of import. Subsidies payments to Australian industries to enable them to compete with overseas producers, for example to the car industry. Import quotas quotas on the maximum amount of any good that can be imported. Anti-dumping laws laws preventing the dumping of large quantities of goods into Australia at or below cost price.
The purpose of trade liberalisation is to increase efficiency in Australian producers. Prior to trade liberalisation, domestic producers were largely protected from overseas competition, as the tariffs and import quotas meant that overseas goods could not compete with Australian made goods. This meant that they could be efficient, not cost-effective, and generally unproductive. However, trade liberalisation mean that the prices and availability of goods from overseas has dropped significantly over time, forcing Australian producers to become more efficient and cost effective in order to lower prices to a level whereby they could compete with the overseas producers. Tariffs have been cut from 35% in 1970 to around 5% now, although it varies per industry sector. Subsidies have been cut from $25b in 1970 to >$2b now. There are now 5 FTAs, up from 0 in 1970 with New Zealand, Singapore, Thailand, the US, and Chile.
Impact of trade liberalisation: TL has reduced cost inflation, by encouraging greater efficiency and the reallocation of resources to areas where Australia has a comparative cost advantage, meaning that we are better suited to those production types than overseas, hence allowing us to become competitive and reducing prices. In the short-term, TL may have reduced economic growth, as the growth in imports saw reduced AD and possible business closures, which cause lower AS and GDP. This may have also seen short-term increases in structural unemployment, as businesses attempt to restructure to become more efficicent, or close down altogether. However, in the long term, the reallocation of resources to areas of comparative cost advantage, as well as the increased exports and greater efficiency, has caused Australias rate of sustainable economic growth grow, as well as unemployment figures to fall. In the short term, TL may have worsened the CAD, by making imports more attractive and hence increasing our import spending. However, in the long term, with greater efficiency there are more goods made locally at more competitive prices, which both reduces importing and increases exporting, thereby improving the CAD. The long term effects of lower inflation, lower unemployment, and greater economic growth has been to increase equity in income distribution by ensuring that more people have adequate incomes, thereby increasing living standards. However in the short term, the increased unemployment may have caused a drop in living standards.
These projects were usually paid for by the government. The impact of this was that projects often come in above budget, causing a burden on the governments budget and possible national debt. Recently the trend has been for a public/private partnership when building infrastructure projects, meaning that they are more likely to be cost effective as private companies will always be looking to turn a profit. In general, increased infrastructure will allow the level of aggregate supply to grow, as with more infrastructures there is more scope for production. When Australias economy is running at full capacity, (i.e. on the Production Possibility Frontier) as it was on 2005-08, increasing infrastructure reduces bottlenecks and restraints which are preventing further production, thereby allowing the economy to expand without demand inflation. When the average age of the nations infrastructure is high, this indicates outdated and possibly broken infrastructure, which would limit the amount of use that could be generated from them. Recent infrastructure projects, such as the deepening of the Port Phillip Bay and the National Broadband Network, will expand Australias Aggregate Supply, as they allow for more production. Specialist infrastructure funds, such as the Building Australia Fund, Health and Hospitals Fund, and Education Investment Fund, have been set up to increase and renew infrastructure in specific areas. Asset sales, as well as privatisation of GBEs, (such as Telstra, Qantas, Commonwealth Bank) can also increase productive capacity, as private businesses will always be motivated to return a profit. As such, they will work with greater efficiency and productivity and have better access to capital needed for investment, thereby increasing AS.
Impacts on economic goals: Lower taxes and interest rates, as well as better infrastructure, should see cost inflation fall. The increased AS produced by these measures should increase the sustainable rate of economic growth and employment. Increased supply and efficiency should increase the competitiveness and availability of our exports, thereby reducing the CAD. Equity and living standards are thus improved due to the increased purchasing power and increased incomes.
Immigration increases productive capacity, improves our sustainable rate of economic growth, and helps lower cost inflation, as demonstrated by the graph:
Economic growth per capita would likely slow by around 0.1%, causing reduced material living standards. This effect would be more pronounced in carbon-intensive industries such as energy and mining. Short term unemployment could result from businesses being forced to cut costs due to the CPRS, however in the long term many jobs would be created in other industries such as the production of green technology and energy. The CPRS could cause Australian businesses to become less competitive due to the higher production costs, thereby reducing exports and increasing the CAD. Intially, income distribution and living standards would worsen due to the poorer economic conditions. However a range of government strategies would try to offset this, such as using the extra tax revenue to increase welfare.
However some AS policies cause short term decreases in equity and living standards, such as when trade liberalisation and the CPRS cause unemployment and reduced incomes.
Notes written by Yitzi Kennard 2010. Compiled from Economics Down Under 6th edition, and http://economics.mrwood.com.au/