ECONOMIC GROWTH:

Definition:
Economic growth is when there is a sustained increase in a countries productive capacity measured by
increase percentage GDP over a period of time.

Explain why is economic growth important to an economy?

It is the key objective of government policy as it creates jobs, raises standards of living and makes it possible
to satisfy more material wants.

Outline the main factors that influence consumption and investment levels in the economy.
Consumption is influenced by:
Consumer expectations on the future state of the economy
Level of interest rates – effects the amount consumers can borrow because of return they have to pay. This
therefore effects what they can spend.
Distribution of income on the economy. The more equitable the lower the average propensity to consume
due to having enough to save. If less equitable in income distribution, the APC will be higher for those
with low incomes as they spend most of there income on essential goods and services
Income levels and consumer preferences – degree of MPS and MPC
Investment is influenced by:
The cost of capital equipment - This depends on interest rate levels/changes, government policy changes
to investment allowances/tax deductions, the price and productivity of labour.
Business expectations – expected product demand, general economic outlook, whether new innovative
technology has hit the market and inflation levels in the economy.

State the leakages and injections equation:

S+T+M=I+G+X
Where S, T and M are leakages and I, G and X are injections

Explain the effect on the level of economic activity when

a) total leakage>total injections  decrease in economic growth as there is less money in the economy
b) Total leakages<total injections  higher economic growth as more money is in the economy to fund
higher productivity.

Define the multiplier:

The multiplier is the changes in aggregate demand that will lead to a proportionally large increase in GDP.

Explain how the concept of the multiplier is related to our understanding of economic growth.
Economic growth is caused by an increase in aggregate demand. This AD increase results in higher growth of
national income as a result of the multiplier process

State the multiplier equation and how the multiplier co-efficient is determined.
∆GDP = k x ∆ AD
k = ___1___
MPS

Discuss how the government may influence the level of aggregate demand:
Macroeconomic policies can be used by the government in the short term.
Fiscal – to increase AD the govt could run an expansionary fiscal policy where there would be an increase in
government expenditure and a decrease in taxation revenue meaning more injections are in the economy.
Alternatively if the government wishes to decrease the level of AD in the economy it can employ a
contractionary fiscal budget.
Monetary – aims to smooth out short term international business cycle fluctuations. The RBA can increase
aggregate demand by employing an expansionary stance by decreasing interest rates to encourage consumer
spending. Alternatively if the RBA wishes to decrease aggregate demand it can increase interest rates to
decrease spending and increase savings
Microeconomic reforms concentrate on long term infrastructure to indirectly increase growth to a sustainable
level. Competition policy promote competition between firms to increase there efficiency to increase
aggregate demand in the economy. Labour market reforms indirectly influence aggregate demand by
increasing the flexibility and productivity of the labour force leading to real GDP increase. Infrastructure
policies and public sector reform don’t play an important role in increasing aggregate demand in the economy.
However trade policies implemented by the government improve our trade performance. They improve
material standards of living through bilateral trade agreements which get us more imports, increasing
consumption and therefore aggregate demand. Trade policies to decrease protection lead to increased
efficiency and international competitiveness of industries meaning higher productivity and higher GDP.

Discuss the positive and negative impacts of higher growth for the economy.
External stability – higher savings comes from the higher incomes generated due to growth. Higher savings
mean lower CAD as there is less foreign debt from borrowing from overseas. BUT higher disposable incomes
are generated from higher growth leading to higher aggregate demand from imports which are registered on
the BoGS deficit. Higher growth leads to AUD depreciation due to more consumers purchasing M (more
money in supply). Depreciation leads to having to pay back more interest on our foreign debt which has a
negative impact on net income account of CAD.
Environmental management – as a result of higher standards of living of the economy an environmental
conscience is gained. However growth leads to increased use of natural resources to meet the higher aggregate
demand for goods and services by consumers on higher incomes.
Individuals – have higher real incomes meaning higher savings and higher standards of living. However the
government taxes higher incomes more.
Government – can tax more of higher income meaning it is able to use revenue to provide better social and
economic infrastructure. However taxation is taking money out of the economy leading to slower growth.
Unemployment – greater taxation by government equals better welfare support for unemployed. Decline in
cyclical unemployment due to higher aggregate demand in the economy therefore more jobs. But there will be
increase in structural unemployment due to technological and structural changes in industries to increase
efficiency.
Distribution of Income – greater inequality as rich reap growth benefits. Structural unemployment usually
felt by low skilled low income population. However government’s progressive tax system will attempt to even
out inequality.
Firms – increase aggregate demand for goods in the economy will lead to higher revenue for firms with
greater opportunities to undertake capital investment to increase efficiency. However firms may not be able to
produce goods demanded by the public productively leading to demand pull inflation making firms less
internationally competitive.
Inflation – high demand and overuse of natural resources can lead to demand pull inflation.

Outline the main features of the international business cycle.

Synchronisation of growth rates of economically integrated countries as a result of globalisation. Has led to
global booms and recessions

Briefly discuss how the current economic cycle compares with previous business cycles.
We are currently in our 14th successive year of growth in Australia making this one of the longest cycles of
growth on record with usual economic cycle lasting 7 years. Our growth rate is currently 3.6% up from the
-1% we had in 1990-91 and down from the 5.75% growth rate we had in 2000.
ENVIRONMENTAL MANAGEMENT

Describe the term ‘natural environment’

The natural environment is the whole interaction of climate, soils, plant and animal life.

Discuss why environmental management is often at conflict with other objectives?

Economic growth usually comes at the expense of environmental management. The concept of most
economic objectives in the economy is to maximise the benefits of economic growth in the economy and to
increase the material standards of living for its people. However for economic growth to occur the economy
needs to maximise its resources (natural factors) to increase its productivity. This leads to renewable and non-
renewable resources. Production of most goods leads to externalities which are usually negative such as
pollution and salinity from over farming. Economic objectives take into account increasing material standards
of living in the economy but not the welfare of the environment that is needed to live in.

Define the term ‘ecologically sustainable development’:

Concept of maintaining a level of quality and growth that doesn’t result in long term damage to the
environment or depletion of limited resources.

Describe what is meant by a ‘public good’

A public good is a good that cannot be excludable to other members of society. Everyone can enjoy the
benefits of a public good even if they haven’t paid for it.

Briefly examine the economic problem of ‘free riders’

Free riders use public goods without paying for them but can’t be excluded from using them

Identify what methods governments may use to control pollution levels.

Research and development into using means of energy that don’t create pollution eg. Solar and wind
energy.
Trading permits for pollution. Setting a maximum pollution level for each industry. Companies not willing
to cut pollution emissions in that industry have to trade/buy permits of firms in the industry who are
willing g to cut pollution.
Tax on car petrol to encourage public transport use to reduce car emissions
Legislative requirements on pollution for producers.

Explain what is meant by an externality giving an example

An externality is a spill over effect of economic activity which is not measured in the production costs or
revenue. It is most likely to be a negative externality such as air pollution but may be a positive externality
such as increase employment opportunities.

Outline how market failure occurs in relation to managing the environment.

Market failure is the failure to measure all the costs of production especially in society in the form of
externalities. As a result the market price of the good is lower than the optimal social price leading to
overproduction of these goods, hence environmental damage.

Discuss what is meant by the distinction between ‘renewable’ and ‘non-renewable’ resources.
Renewable resources are those who naturally replace themselves over time. Non-renewable resources are
limited in there numbers as they can’t be regenerated in a short time frame. It is important these 2 categories
are distinguished from each other as the exploitation of non-renewable resources now will mean there won’t
be any available for future generations. Currently 4/5 our energy requirements utilise non-renewable
resources.
INFLATION

Define ‘inflation’
Increase in the general level of process in the economy

Explain how the inflation rate is calculated.

The Consumer Price Index (CPI) is the measurement of movements in retail prices of a basket of weighted
commodities that make up a significant proportion of an average wage earner’s household expenditure. The
rate of inflation measures any changes in CPI over the year indicating whether there has been an increase or
decrease in the cost of living.
Rate of Inflation = CPI2 - CPI1 100
X
CPI2 1

Outline the main causes of inflation

a) Demand pull inflation – when aggregate demand is growing while the economy is nearing its supply
capacity so that the higher demand spills over into higher prices rather than more output. May be a
result of insufficient supply of resources
b) Cost push inflation – when there is an increase in production costs (eg higher oil prices or unions
pushing for higher wages) that producers pass on to consumers in the form of higher prices thus
increasing the rate of inflation
c) Imported inflation – occurs when there is an increase in the price of imports either due to inflation in
the economies of out trading partners or because of a depreciation of the AUD which results in higher
prices to consumers for imports of the import inputs used in manufacturing of domestic goods.
d) Inflationary expectations – when inflation may be perpetuated by the expectations of workers or firms
that it will occur. Eg if workers expect higher inflation rates they may demand higher wages to
compensate for rates. This leads to higher production costs which mean cost push inflation to
consumers.

Discuss the reasons for Australia’s low inflation rates over recent years.
1) Use of RBA inflation targeting – RBA began to target inflation using monetary policy in 1992 and has
since been altering interest rate levels to keep prices in line of the 2-3% target.
2) Very little wage growth over the past decade due to decreased union power and pressure.
3) Strong productivity growth has resulted from microeconomic reforms and the increased competitive
pressures that go with them.

Identify the type of inflation most likely to occur if businesses raise there prices due to higher wage costs.
Cost push inflation

Explain the role of inflationary expectations in determining the level of inflation.

If workers expect higher inflation rates they may demand higher wages to compensate for rates. This leads to
higher production costs which mean cost push inflation to consumers.

Explain why it is difficult for government policies to successfully address full employment and price stability
at the same time.
Having simultaneous full employment and price stability defies the principles of supply and demand.
If there is strong aggregate demand in the economy it will lead to higher employment opportunities to meet
the demand. However higher employment means higher production costs therefore leading to cost push
inflation. This could be caused by the government implementing a fiscal deficit in an attempt to stimulate
growth. If government then wanted to decrease the rate of aggregate demand it would employ a
contractionary fiscal policy. There would be less demand for goods leading to equilibrium price (deflation)
but this would result in increase cyclical unemployment as there is no demand for labour. The conflict
between full employment and price stability is illustrated by the Phillips curve.

.
Outline the likely impacts of higher inflation on the Australian economy:
-distortion of resource allocation
-redistributes income
- reduces international competitiveness
X – Worsens CAD as our X are not competitive as they are higher in price than those from other countries
who are absent from inflation. M are cheaper therefore we M more rather than buying for domestic goods,
increasing BOGS deficit and CAD
G-
U – Increase inflation = decrease unemployment – inverse relationship.
I-
D – Greater inequality.
E
F – Inefficient allocation of resources
I – lower purchasing power, greater inequality in community leading to social unrest.
G – Deterioration of budget outcomes leading to higher debt interest in the future????????????

Discuss Policy options to maintain low inflation in Australia:

Fiscal – Contractionary stance will decrease AD putting a downward pressure on demand pull inflation.
However low inflation is not the main fiscal objective.
Monetary – main tool to control inflation with successful implementation ensuring we have sustained low
inflation with RBA’s 2-3% inflation targeting. RBA uses DMOs to influence the level of investment and
consumption and thus AD. Increase IR will increase the cost of borrowing therefore decreasing consumption
and investment and reducing demand pull inflation. The RBA’s excellent record with inflation targeting has
decreased inflationary expectations.
Competition Policy – reforms under the national competition policy aim at establishing the maximum
amount of ‘workable competition’ across the economy, and as a result have lowered business costs and
increased productivity ensuring lower cost push inflation.
Labour market reforms – enterprise bargaining has significantly contributed to Australia’s low inflation rate
as wage rises are now based on productivity improvements. Productivity growth increased from an average
2% in the 1980s to 3% in the 90s allowing for increases in real wages without putting pressure on cost-push
inflation.
Infrastructure policies – deregulation in transport, communications and utilities have reduced business costs,
decreasing cost push inflation.
Public Sector Reforms – privatisation and outsourcing of government work to the private sector increases
the efficiency with which these services are provided and decreases costs. Major public reforms include the
privatisation of Qantas, the Commonwealth bank and 49.9% sale of Telstra.
Trade Policies – Reduction of trade barriers increases competitive pressures between local and international
forms, encouraging the adoption of new technology to cut costs in order to remain competitive. Reduced
protection allows for cheaper imports for individuals and firms, significantly reducing the level of imported
inflation.
UNEMPLOYMENT

Define ‘labour force’

The section of the population aged 15 years and over who is neither working nor actively seeking work.

Define the ‘labour force participation rate’ and explain how it is measured.
The labour force participation rate is the percentage of the working age population who are either working or
actively seeking work.
Labour force X 100
LFPR (%) = Working age pop 1

Discuss how unemployment is measured and how official unemployment statistics may understate the true
extent of the unemployment problem in Australia.
Unemployment is measured using the following formula:
Number persons unemployed X 100
Unemployment rate (%) = Total labour force 1
The unemployment statistics may not be an accurate measure of the true extent of unemployment in the
economy due to the factor of hidden unemployment who are those on the economy who are unemployed and
not seeking employment.

Outline the recent trends in unemployment in Australia

There has been a downward trend in cyclical unemployment in recent years due to strong domestic economic
growth as we now approach the NRU. Currently at 5.8% (below OECD average) having from a high 10.7% in
1991-2 during the recession. However our unemployment performance faces ongoing problems with
structural unemployment remaining high and underemployment increasing due to labour market reforms and
casualisation of the workforce. Long term unemployment still a major problem in the economy making up
23% unemployment.

Outline the main types of unemployment that may occur in the economy.
Structural Unemployment – describes those persons unemployed due to mismatch of labour skills with those
demanded in the economy. Occurs due to technological change and rapid changes in consume demand where
labour skills cannot adapt quickly enough to these changes.
Cyclical Unemployment –result of a downturn in the business cycle.
Seasonal Unemployment – temporary unemployment caused by seasonal fluctuations in the demand and
supply for labour eg. Fruit pickers.
Frictional unemployment – those unemployed due to time lags in the transition between jobs.
Hidden Unemployment – people who can be considered to be unemployed but don’t fit the official definition
of unemployment thus not reflected in the statistics.
Long-term unemployment – those who have been without a job for more than 12 months. Usually a result of
structural unemployment.

List the factors that may lead to higher unemployment.

1. low level of economic activity – demand for labour is derived from AD or goods and services
2. constraints on economic growth
3. macroeconomic stances – contractionary = increase
4. rising participation rates
5. productivity changes – decrease productivity = increase unemployment
6. structural change and technological change
7. labour market inflexibility
8. inadequate training and investment
9. rapid increase in labour costs – labour prices itself out of a job
Discuss the causes of unemployment in the Australian economy.
Factors:
External issues – Tariff reductions throughout the 90s led to an increase in structural unemployment in
import competing industries especially in the manufacturing sector. Attempts by firms to set up production
facilities overseas to take advantage of lower labour costs can increase structural unemployment in the short
term. Recent AUD appreciation decreases the IC of out exporting industries, increasing the risk of job losses.
Growth – the demand for labour is derived from the level of aggregate demand in an economy. A downturn in
the level of AD (occurring in periods of recession) will lead to decreased demand for labour and will increase
cyclical unemployment. Recent Australian experience has been 13 years of consecutive economic growth,
reducing the unemployment rate down to 5.8% 2003-4 and almost eliminating cyclical unemployment.
Unemployment – long term unemployment can make it harder for workers to enter workforce due to loss of
job-related skills. In this way, cyclical unemployment can turn into structural unemployment thereby
increasing the NRU (‘hystereses)
Inflation – Phillips Curve analysis suggests and inverse variation between unemployment and inflation. High
levels of inflation may lead to governments using contractionary policies thereby decreasing economic growth
levels and therefore decreasing labour demand increasing unemployment. However microeconomic reform in
Australia has allowed for the simultaneous achievement of low inflation and decreasing unemployment.
Distribution of Income – a more unequal distribution of income will decrease consumption levels as low
income earners tend to have a higher MPC. Lower consumption will decrease aggregate demand and thus the
demand for labour, increasing cyclical unemployment.
Actors:
Firms - Many industries have introduced labour saving technology. Decreasing the demand for low-skilled
workers and contributing to structural unemployment in Australia. However this has been offset by increase in
highly skilled employment in the technology focused industries. Labour market rigidities such as high
minimum wages and excessive labour market regulations may reduce the willingness of firms to hire or keep
workers due to increased labour costs. Increases in labour productivity will encourage employers in the long
term to hire workers as they can increase production without adding to average production costs. Labour
productivity has increase from 2% average in 1980s to a 3% average in the 1990s.
Individuals – long term unemployed individuals find it much harder to join workforce as they may lose their
motivation or job-related skills and employers become more reluctant to hire them. Over 1 in 5 unemployed
people in Australia are classified as long term unemployed.
Government – macroeconomic stance can have an adverse impact on unemployment in the short to medium
term. Contractionary fiscal and monetary policy will lead to a reduction in AD in the economy which will
increase cyclical unemployment. Expansionary policies with lead to a reduction of cyclical unemployment
due to the increase in AD. Long term microeconomic reform agenda often involves significant increases in
short term structural unemployment as firms adjust to increased competition. However in the long term the
growth of efficient industries should result in a net increase of jobs in the labour market.

Outline the economic and social costs for Australia of a sustained high rate of unemployment.
X - External stability issue due to lower MPS = less national savings. Private sector can’t borrow from govt as
they have higher expenditure due to welfare problems leading to borrowing overseas = net income burden
with returns = higher CAD.
G – Higher unemployment leads to lower wages. This leads to decrease AD for goods and services and lower
growth. Leads to lower SOL. Reduced capital production = lower chance of future productivity therefore low
future growth. Higher MPC of consumers with lower income; lower savings. Money in the economy spent
dealing with social costs rather than increasing growth
U – Less employable in future due to loss of skills.
I-
D - Greater inequality as usually lower income groups who are unemployed. Higher MPC of low Y
E - N/A
F – Resources not used to full capacity therefore operating within PPC. Reduced investment
I – increasing taxation burden. Lower wage growth for those whom are still employed. Increasing social
problems. Increased individual debt levels.
G – Have to pay more for expenditure on welfare payments leading towards higher deficit. Less income for
individuals equals less tax revenue.
Explain what is meant by the ‘natural rate of unemployment’:
Employment rate when the economy is at full employment and which can’t be eliminated by stronger growth.

Discuss how government policies can influence the rate of unemployment in the economy,
Macroeconomic:
Fiscal – Expansionary fiscal policy will increase economic growth and reduce cyclical unemployment.
Monetary – a decrease in IR levels will increase economic activity thus increasing the demand for labour in
the economy, reducing cyclical unemployment.
Microeconomic
Competition Policy – Increase competition between competitors may lead to industry shrinkage or
technological change, increasing unemployment. However ‘workable competition’ may ensure domestic
competition doesn’t reach the point of massive unemployment increases
Labour Market Reform – specific labour market programs can reduce structural and frictional
unemployment eg. Work for the dole and Job Network. Reduction of minimum wage level would decrease
unemployment as producers could afford to higher more people. Increase flexibility of labour market through
enterprise bargaining.
Infrastructure policies – increase finding into education to ensure the appropriate skills are supplied to meet
demand.
Public sector reform –
Trade policy – decrease trade barriers may lead to increase international competition and in the short term
lead to an increase in structural unemployment as industries switch to technology to become more efficient or
industry closes. However in long term economic growth and expansion will offset the initial unemployment
increase.
EXTERNAL STABILITY

Define ‘external stability’

Where external indicators of CAD, foreign liabilities and the exchange rate are at a sustainable long term level
where they won’t have a negative economic consequence.

Describe a situation of external instability.

High CAD of more than 6% GDP, high level of foreign liabilities equalling to more than 50% GDP and a
volatile exchange rate.

Why is our external stability important?

Australia’s external stability is important as to maintain overseas investor confidence. If overseas investor
confidence is lost it can result in serious effects for Australia including a depreciation of the AUD, a
withdrawal of investment funds, higher interest rates and slower economic growth. External stability is
increasingly important in recent times as we pursue economic integration as we are more reliant on higher
trade and financial flows with other nations.

Briefly describe at what level the current account deficit may be sustainable.
Average below 3% GDP in mong term with a short term average of less than 6%

Examine recent trends in the size of the CAD

The current account deficit has been a sustained deficit over the past 10 years wavering around -2.7% to
-6.0% currently. The CAD has reached the highest level ever in dollar terms currently $47bn in 2003-04 up
from $22bn in 2001-02. The balance of goods and services has fluctuated over time showing its response to
cyclical factors. It has moved from high deficits to low surpluses currently at a 20 year high of -24.1bn
reflecting the effect of drought on our X, our narrow export base and slow world growth which has to
compete with our strong domestic growth (terms of trade deterioration). The net income component is
consistently a deficit now at a high level of -23.3bn reflecting the returns we pay on our high debt levels

Explain the difference in the economic effects of a rising levels of foreign debt and foreign equity.
Foreign debt is Australia borrowing money from overseas to pay off existing debts. Interest has to be paid on
the debt. This leads to debt increasing accumulating on the net income account of the CAD. This has been
seen as the case over the past 20 years as our net income deficit has been increasing. This increases our CAD
and makes us look economically unfavourable to investors meaning less investment here and retreat of
investors already here leading to decrease in economic growth. Foreign equity is the total value of Australian
assets owned by foreigners, not adding directly to our foreign debt. We don’t have to pay back the price of the
asset only the returns such as profit, dividends on shares etc. Foreign equity has less of an impact on the CAD
as it doesn’t create a debt trap scenario.

Examine the recent performance of the Australian dollar.

Record low of US$0.47 was reached in April 2001 a period when the AUD was seriously undervalued. This
was during a long run depreciation which rebounded in March 2004 when AUD reached US$0.80. Currently
the AUD is _______ (70c has been the long run average).

Outline how the Australian dollar may pose an external stability risk.
The J-curve theory stipulates that a sustained reduction in the value of the currency should improve a
country’s balance of payments because exports will rise and locally produced goods are bought in substitution
of M. However this ignores the valuation effect where a rise in foreign debt will occur because of the lower
dollar which would significantly impact the CAD. AUD appreciation effects our X, decreasing them relative
to the cheaper imports we but leading to BoGS blow-out. In 2001-02 the CAD was $21.6bn (3%GDP)
because of sustained depreciation of AUD. But in 03-4 the CAD blew out to $47bn (6%) because of AUD
appreciation reducing the IC and X growth. This reflected in 3% BoGS.

Outline the policies that the Australian government has used to address the external stability issue.
Macroeconomic
Fiscal – long term focus on the underlying causes. Process of fiscal consolidation (balanced budget over the
cause of the economic cycle) aims to reduce the negative impact of budget decisions on domestic investment
levels and foreign debt (avoiding the “crowding out effect”). The government has also initiated measures to
increase national savings through the introduction of compulsory superannuation. This will decrease foreign
debt levels and improve Australia’s persistent CAD (decreasing private sector borrowing from overseas).
Specific government reforms can be used to promote a diversification of Australia’s export base also
addressing Australia’s current account imbalance. For example government changes to specific sectors (such
as the wine tax rebate in 04-04 or the deregulation of the tertiary education sector) will increase Australia’s
export earnings in these sectors.
Monetary – is generally ineffective in addressing external stability. An increase in interest rates may reduce
import spending but will also lead to increased financial flows, increasing foreign liabilities and an
appreciating AUD, hurting our X competitiveness.
Microeconomic reform:
Competition Policy – competition may lead to closure of smaller industries. This would lead to fewer exports
from the industry and more imports from consumers to make up for the loss of good providers worsening our
terms of trade. However in the long term competition policy would improve our IC and improve our CAD due
to more efficient export industry.
Labour market Reforms – Incentive to increase efficiency through enterprise bargaining. Will improve our
export industry competitiveness improving our external stability
Infrastructure Reforms – deregulation of tertiary education sector will increase our export earnings in the
sector.
Trade policy – in the short term a reduction in protection will lead to a deterioration of the trade balance due
to increasing M levels. In the long term the increased efficiency and productivity will improve the export
industry competition and improve the trade balance.

Critically evaluate the argument that the CAD and foreign liabilities are not a significant problem in
Australia.


Explain the concept that the CAD is the result of a shortage of domestic savings. Discuss the extent to which
you think the CAD reflects a shortage of savings and to what extent a poor trade performance.
DISTRIBUTION OF INCOME

Distinguish between income and wealth

Income is the amount of funds or other benefits measured in money terms that flow to individuals, households
etc from the interaction of market and non-market sources whilst wealth is a measure of the assets (eg.
Residential or business capital etc) held by individuals or groups in society.

Explain how the following can be used to measure the degree of inequality in the distribution of income:
a) the Lorenz curve (explain using diagram)

The further the Lorenz curve is from the line of equality, the greater in degree of income inequality in society

b) the Gini Coefficient:

A__
Gini coefficient = A + B
The Gini coefficient ranges between 0 and 1. The smaller the Gini coefficient, the more even the distribution
of income in the society.

Outline how age and gender can influence the distribution of income
Those of a younger age have less skills and experience in the workforce meaning there wage is lower.
Incomes are the highest between 25-54yrs of age as these are the main years a person works. The 35-44yr old
bracket contains the highest mean income of approximately $960/week. The 15-19 yr old bracket is the lowest
with mean income of 395/week. Income increases to middle working age then decreases as workers get older
as more people retire and rely on pensions. The factors indicate that inequality is present between the high
middle working age bracket and the lower younger and older workers.
Still in modern day society incomes between sexes differ with women earning on average 62.5% of what men
were earning in 2002-3. This is due to the ‘human capital factor’ and the past attitudes of society that have
previously limited opportunities or women to gain skills and work in the workforce. These facts indicate
income inequality between men and women.

Examine which groups tend to be adversely affected by inequality according to occupation, education and
cultural background in Australia.
Occupation – those with lower skills and experience are subject to occupational income inequality as the
managerial positions and professional occupations gain higher incomes. This indicates high incomes result
from higher education
Education – the higher the education, the higher the income and wealth.
Cultural background – Overall people born overseas have a slightly higher average mean income than those
born here (1.5% higher). However this also depends on region of migration (US migration mean Y = $31,780;
Asia migrants mean Y = $27,590), whether an English speaking background is apparent (lower Y if migrant
doesn’t speak English) and how long the person has resided in Australia (longer = higher Y). Indigenous
Australians mean Y = $365/wk compared to $493/week of rest of Australian population.
Discuss the recent trends in the distribution of income in Australia in recent years.
Australia is currently experiencing and increase in inequality shown by an increasing Gini coefficient
currently 0.311 rising from 0.296 that was in the mid 1990s.

Outline the economic costs and benefits associated with income inequality.
Benefits:
 Incentive effects
 Encourages labour force to gain a higher education in order to gain a job with a higher income
 Encourages labour force to work longer and harder to gain a higher pay. This means there is greater labour
productivity meaning greater GDP per capita and greater growth.
 Greater mobility of labour leading to more efficient allocation of resources and higher economic growth
 Encourages greater entrepreneurial risk through higher income rewards.
 There is a potential for higher savings leading to higher capital formation. This will lead to less reliance
on foreign capital as domestic funds can be used for investment, decreasing the net income component of
the CAD.
 The government can tax higher income earners more to gain revenue, leading to more favourable budget
outcome
Costs:
 Less satisfaction with income as higher income earners won’t appreciate the value of there money as
much as lower income earners
 Lower consumption and investment as low income earners have a higher MPC on essential needs. There
is less consumption in general decreasing economic activity. The decrease demand for goods and services
will increase the unemployment rate which will increase inequality further as well as decreasing business
investment and decreasing the standards of living.
 Creates conspicuous consumption creating culture where individuals worth is based on there income and
wealth.
 Creates poverty and social problems with social division between high and low income earners.
 This leads to higher costs of welfare supports. This increases the demand for government revenue
deteriorating the budget balance.

Outline the social costs and benefits of inequality.

There a little to known benefits of inequality in society, with the social costs being obviously prevalent:
 There may be inequality of opportunity with higher incomes being able to gain a higher education which
would increase inequality further.
 Social class division would be created leading to social and economic instability.
 The vicious cycle of poverty is created as a result of income inequality with lower incomes gaining
limited opportunities. High poverty creates externalities of increase crime, suicide and disease leading to
lower standards of living.

Discuss government policy options to improve the distribution of income and wealth in Australia
Macroeconomic policy:
Fiscal Policy – is the most effective tool for addressing the distribution of income. It has a direct impact
through the use of the progressive tax system to generate revenue with government welfare payments then
redistributing income back into the economy (eg unemployment benefits). However recent changes in fiscal
policy have had a mixed impact on income inequality. In the 2004-05 budget tax cuts for higher income
earners has made the tax system less progressive. However this has partly been offset by increased family
welfare payments to lower income earners. The government’s introduction of compulsory superannuation has
had a positive impact on the distribution of income forcing all workers to accumulate savings. Changes in the
2004-05 budget were designed to increase contributions to superannuation further through the expansion of
the co-contribution scheme.
Monetary – has a limited impact upon income distribution. They impact indirectly. An increase and interest
rates will redistribute income from low income earners (who are generally borrowers) to high income earners.
Microeconomic reform:
Competition policy – higher levels of competition will increase inequality in an economy due to high
structural employment from technological change made by firms. However by creating workable competition
inequality will remain stable.
Labour Market reform – high minimum wage reduces the extent of inequality in the economy but may also
lead to increase in unemployment which would offset reduction leading to inequality increase.
Trade Policy – the removal of tariffs from goods and services will improve the distribution of income as
overseas wishes to buy more of our goods which are cheaper leading to increase income for those in the
export industries. However if Australian protection is removed, M competing industries will suffer leading
towards an increase in unemployment in the sector and an increasingly unequal income distribution in the
economy.