Define Demand Pull Inflation
Demand-pull inflation occurs when aggregate demand within the economy increases. Often, the economy is almost at their productive capacity and therefore instead of increase productivity and supply, there is a price increase, therefore increasing inflation
Define Cost Push Inflation
Cost-push inflation occurs when the costs of production are increased (e.g. wages or oil) and the supplier forwards those costs onto consumers. As inflation is a general rise in prices over time, this increases inflation.
Define Inflation
Inflation is a persistent and appreciable rise in the general level of prices.
How is Inflation Measured?
The most widely used measure of Inflation in Australia is the Consumer Price Index (CPI). As an index number the CPI summarises the overall change in the prices of a large number of goods and services. Compiled on a quarterly basis. Inflation is measured
What is the equation for the measurement of Inflation?
CPI 2 (yr 2) - CPI 1 (yr 1)
_____________________ x 100
CPI 1 (yr 1)
Define Demand Pull Inflation
A situation where the level of prices are rising because of excess demand I the economy at the full employment level
� Too much money chasing too few goods
� High levels of demand caused by high levels of aggregate expenditure
Define Cost Push Inflation
The situation where price rises are caused by cost pressures, independent of the level of Aggregate Expenditure
� When rising production costs are passed on to consumers who the have to pay higher prices for final goods and services
Where does demand Pull Inflation Originate?
� Consumers: wage rises, interest rate cuts, tax cuts, wealth increases
� Firms: interest rate cuts, business optimism
� Government: budget deficit (financed through borrowing from PBA)
� Overseas: rising demand for our exports or rising export prices
Where does Cost Push Inflation Originate
� Rises in price of the factors of production (wages)
o When wages increase more than productivity
� Price of Imports Rise
o Could be as a result of depreciation of domestic currency (ie our dollar; how much of another currency it can buy)
� Key Raw mater
What are some examples of Demand Pull Inflation?
� Building Boom 2004-2006 high demand created shortage of skilled building tradespeople
� Mining Boom in WA forced pay rates of mining occupations
Define Headline Inflation
� Includes the effects of seasonal factors, interest rate changes and the influences of other policy changes
� It can be misleading
� Includes price movements that don't necessarily reflect the core or underlying rate of inflation
Define Underlying Inflation
� Also referred to as the 'core rate'
� Excludes the effect of seasonal factors, interest rate changes and the influence of other policy changes
� A more accurate way to measure he 'true' rate of inflation
� The rate with the volatile elements removed
What are some issues with using CPI as a form of measurement of Inflation?
� the CPI does not reflect the price movements outside of metro areas
� does not reflect changing consumer preferences (such as substituting chicken for beef if beef prices went up)
o therefore not regarded as true cost of living index
� Does not account
What are the effects on output of Inflation?
Output Effects
Inflation affects the level of output. Income and employment in the economy
Costs of Inflation
Inflation reduces the purchasing Power of consumers
Impacts Economic Efficiency and level of production in the economy
Promotes Uncertainty: Both
Who are the winners out of inflation?
Those people who are able to anticipate inflation
Households who are able to purchase real assets
Sectors of the economy with market power
Debtors (borrowers)
Government (in terms of receiving PAYG tax at higher rate)
(you need to be able to explain each
Who are the losers out of inflation
Living standards of low income earners and recipients or transfer income (pensions) will fall during periods of inflation
PAYG taxpayers
Savers
Creditors (lenders)
(you need to be able to explain each not just list - refer to notes)
Define Unemployment
� when people are willing and able to work cannot find a job (employment). The
� proportion of the labour force who are willing and able to work, but have not been employed in paid work for at least one hour in the survey week.
� Those people aged fifteen
Define Potential Labour Force
The Potential labour force is all of those people aged 15 or over not only employed or unemployed but all those excluded from the labour force
Define Participation Rate
the proportion of working age population (>15) who are either in work, or actively seeking work.
What is the formula for calculating the participation Rate?
PR = Labour Force x 100
_______________
Population >15
The participation rate can have an important moderating influence on the unemployment rate: What does this mean?
� In a boom UE falls, however as more people start looking for work the PR rises and the UE rate does not fall as much (which reduces inflationary pressures)
� In a recession, EU rises, but people give up looking for work and therefore the PR falls - so t
Define and Explain underemployment
People who would prefer to work longer than the one hour a week that the ABS uses to define paid employment
� Official statistics underestimate the degree of underemployment
� May occur because someone may have a university degree and be employed in an ar
Define The Natural Rate of Unemployment
The minimum level of unemployment which can be achieved, given the current characteristics of the labour market. It occurs when cyclical unemployment is zero; it is the sum of frictional and structural rates.
� Occurs when there is full employment in the
What are some reasons given for the fact that Unemployment is not at 0%
� The main explanation is persistent structural unemployment (when their marketable skills do not meet the needs of firms seeking to take on skilled staff)
� Impediments prevent the market from working efficiently
o Information lags and compliance costs (
How is unemployment measured?
Every month the ABS surveys 35,000 Australian households to determine the labour force status of people living in Australian households.
� A limitation of the ABS survey is that the sample size is small ( 2/3 of 1%) therefore the reported UE rate can vary
What is the equation for calculating the unemployment rate?
UE Rate: Unemployed
________________ x 100
Labour Force
Define the Labour Force
� Also called the workforce
� Made up of people aged 15 and over who are either employed, or actively looking for employment (unemployed)
� You are not considered part of the labour force if you/have
o Attending educational institution on a full time basi
What measurement issues should be borne in mind when examining employment statistics?
A number of measurement issues should be borne in mind when examining employment statistics
� The degree of underemployment
o People who would like to be doing more hours, or a different type of work though still complete 1 hour of work per week
� The deg
What are the three main types of unemployment
Economists usually further classify these into three categories each having different causes
� Frictional
� Cyclical
� Structural
Define Frictional Unemployment
uncertain matching of demand and supply across the labour market) Occurs when people are between jobs;
What are the reasons for Frictional Unemployment occurring?
It takes time and effort for workers to find suitable jobs, and for employers to find suitable employees
� Supply of jobs on offer differ in their location, working conditions, educational requirements and required experience
� Workers offer different job
What is the incidence of Frictional Unemployment in Australia?
� Depending on the phase of the business cycle, it is likely that between 1-1.5% of the workforce is unemployed due to friction
� In troughs, people may not seek work because they think jobs will be difficult to find
� In a boom there could be a lot of jo
Define Structural Unemployment
occurs when there is a mismatch of available and required skills in geographical or occupational sector of the economy.
What are the reasons for Structural Unemployment occurring?
� Occupational structure of the economy may change over the long run for a number of reasons
o New technologies (product and process invocation)
� Firms may only survive if they introduce new products, improve their quality, seek lower costs of production
What is the incidence of Structural Unemployment in Australia?
� The dominant type of unemployment in Australia
� Historical examples: assembly worker who has been replaced by robot; the blacksmith who has been replaced when automobiles became more popular; the ban teller replaced by ATM
� Has affected all sectors of
What is the incidence of Cyclical Unemployment in Australia?
� Cyclical UE is expected to follow the up and downs of the business cycle
� In periods of recession, when there is a slowdown in economic activity, UE will rise
� In periods of high spending, there is strong demand for labour and cyclical UE will fall
�
What are the reasons for Cyclical Unemployment occurring?
� The demand for labour is derived from the demand for goods and services
� It rises when there is insufficient demand to fully employ the country's resources
o When there is lower spending on durables, reductions in business investment and lower business
Define Cyclical Unemployment
cyclical or demand deficient unemployment occurs when the level of aggregate demand is not high enough to ensure production occurs at a level that ensures full employment.
What are the 'output' effects of Unemployment on the economy
� Unemployed Labour represents unused resources, so the output of the economy must be less than its potential if resources were fully utilised
� There is a gap between potential and actual output - called the GDP Gap
� Unemployment results in lower levels
What are the 'distribution' effects of Unemployment on the economy
� High levels of Unemployment increases the level of income inequality
� Unemployment affects some groups more than others
� Unemployment benefits do not provide for a comfortable lifestyle
� Effects of UE may be long-lasting
� Personal, family and social
Full Employment in Australia is considered between 4.5-5% - why is this considered 'Full Employment?'
� In Australia Full employment is considered between 4-5%
� Full employment means the lowest level of unemployment that can be sustained given the structure of the economy.
� Full employment is a situation in which all of those people who are both willing
What does NAIRU stand for
Non-Accelerating Inflationary Rate of Unemployment.
What are the IMPLICATIONS Of FULL EMPLOYMENT on the economy
INFLATION
� The further that the unemployment rate falls below the natural rate, the greater the pressure on inflation. This is a result of modern production methods.
SKILLS SHORTAGE
� There is a need for the government to assess policies to increase immi
What does the Phillips Curve show?
The Inverse relationship between unemployment and inflation.
What is the logic behind the Phillips curve? i.e why is there a tradeoff between unemployment and inflation?
The chain of basic ideas behind this belief follows: as more people work the national output increases, causing wages to increase, causing consumers to have more money and to spend more, resulting in consumers demanding more goods and services, finally ca
What is Stagflation
A situation where both inflation and unemployment are high at the same time
This occurred in Australia in the 1970s (due mainly to the
Draw the Phillips Curve
What is the current Rate of Inflation in Australia?
I am leaving you to find this one out!
What is the RBA goal for Inflation?
Between 2-3%
Why does the ABS choose to weight certain goods and services in the 'basket of goods' used to calculate the CPI
� The ABS attaches a weight to each commodity and group of commodities in the CPI regimen in order to reflect it importance in the pattern of expenditure by the average household