State of the Australian Economy Performance against macroeconomic objectives

The domestic or internal performance of the economy can be judged against a number of broad goals or objectives.

  • ECONOMIC GROWTH (steady, sustained growth - as much as possible, for as long as possible without causing problems elsewhere)
  • LOW UNEMPLOYMENT RATE (5% or below)
  • LOW INFLATION / PRICE STABILITY (2% to 3% per year over the economic cycle)
  • EQUITABLE INCOME DISTRIBUTION
  • EFFICIENCY OF RESOURCE ALLOCATION

Given the global nature of the Australian economy, the Government and Reserve Bank do not attempt to achieve specific international or external economic objectives.

However, they monitor external indicators because external shocks can threaten domestic economic performance. External indicators include:

  • BALANCE OF PAYMENTS FLOWS e.g. Current Account, Trade Balance
  • EXCHANGE RATE MOVEMENTS e.g. Trade Weighted Index
  • LEVEL OF FOREIGN LIABILITIES e.g. debt and equity
  • TERMS OF TRADE

ECONOMIC GROWTH

  • Growth macroeconomic objective? Steady, sustained economic growth. Growth below 3.5% is probably too low to maintain employment levels. Growth above 4.5% is probably too high to maintain price stability.
  • Why is growth important? For employment and living standards
  • What is the main indicator of growth? Rate of change in Real Gross Domestic Product
  • What is happening to growth? No recession (since 1991), downward trend since 2008, recently below longer-term average, quarterly rates fluctuate.
  • Accuracy of data: Reasonable for changes in production over time despite measurement issues.
  • Limitations of data: Doesn't show the level of GDP or how income is distributed. It doesn't measure the standard of living or indicate the quality of life.

INFLATION

  • Price stability macroeconomic objective? Rate of inflation within 2% to 3% per year. Price stability.
  • Why is it important? Price stability complements all other objectives in long term
  • What are these indicators? Rate of change in the Consumer Price Index (CPI) and underlying measures (which exclude outliers and volatile prices)
  • What is happening to inflation? Downward trend since 2008, now below 2/3% target range. Rate fluctuates quarter to quarter.
  • Accuracy of data? Some measurement issues, measure OK as change in cost of living for typical metro household
  • Limitations? Doesn't measure changes in standard of living (doesn't include changes in wages and tax) or cost of living (people can shop around and change products)

LOW UNEMPLOYMENT

  • Employment macroeconomic objective? Full employment (or zero cyclical unemployment)
  • Why important? Unemployment leads to a number of economic and social costs.
  • What are these indicators? Indictors of the actual rate of unemployment and underemployment rate
  • What is happening in the labour market? The unemployment rate is falling but the underemployment rate is rising
  • Accuracy of data? Underemployment rate catches disguised unemployed but not people who have left the labour force
  • What it doesn’t show? Size of labour force, participation rates and productivity rates
  • Participation rate = labour force / working age population
  • Employment to working age population (as name suggests)
  • Difference = People in labour force that are not working.

EQUITABLE INCOME DISTRIBUTION

  • Indicator 1 - Palma Ratio: Defined as the ratio of the income share of the richest 10% of the population's divided by the share of the poorest 40%.
  • Indicator 2 – Gini-coefficient: Based on comparison of graphical representation of actual income distribution with line of equal distribution.
  • Not regularly updated: Data is time consuming and costly to collect, data on income distribution is not updated on a quarterly or even annual basis. Data suggests income distribution has been getting more even since global financial crisis.
  • Fairness is a normative concept: What income distribution is appropriate is opinion based.

EFFICIENT USE OF RESOURCES

End of presentation

Created By
Andrew Tibbitt
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