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For an economy other than Australia, discuss the strategies used to promote economic growth and
development

In recent decades, the Chinese government have adopted policies that involves capturing the
benets of globalisaon, primarily the increase in nancial ows through ODP and TNC's

P!: Open Door Policy 1980

China enacted upon an 'Open Door Policy' (ODP) in 1980, targeng long-term sustainable economic
growth. It specically targeted increasing foreign trade and investment through the creaon of
Special Economic Zones (SEZs) in the southern and eastern coastal provinces of China, such as
Shanghai and Shenzhen. These SEZs aracted large direct foreign investment from transnaonal
corporaons (TNCs) through a range of incenves such as low tax rates, exempon from import
dues, cheap labour and less stringent government regulaons. This led to more than 180,000 TNC's
ocking to China to take advantage of lax regulaons as well as favourable interest rates that reached
11.34% in 1989 from 5.4% in 1980. The ODP's success is further highlighted in the signicant increase
in FDI from US$250 million in 1979 to US$3.5 billion in 1990. This increase in FDI has led to a transfer
of technology and western management methods, improving overall eciency of Chinese rms,
increasing their internaonal compeveness. Foreign trade also signicantly increased with both
exports and imports growing from 10% of China's GDP in 1978 to 36% by 1996. Addionally, SEZs are
sll a key driver of the economy, accounng for 24% of GDP, 45% of China’s FDI and 60% of net
exports in 2015. Ulmately, this increase in FDI and increasing involvement in foreign trade has
improved China's access to export markets which has been a major driver of China's economic
growth over the past 20 years, which has averaged at around 10%.

P2: GFC response - US$586 billion scal smulus package 2008

The Global Financial Crisis (GFC) led to a decline in economic growth from 14.2% in 2007 to a low
6.2% in the last quarter of 2008. In response to this, the Chinese government implemented a US$586
billion scal smulus package (approximately 3% of China's GDP) in November 2008 which sought to
improve aggregate demand and economic growth in the short-medium term, specically aiming to
meet the growth target rate of 8% for 2009-10 as well as improving aggregate supply in the long
term. The scal smulus package led to new infrastructure projects such as road, railway and airport
construcon, providing 20 million workers with employment, leading to the unemployment rate
dropping to 4%. The package also led to increased domesc consumpon and investment, leading to
GDP growth of 10.4% in 2010, above the target rate of 8%. Furthermore, with export levels
decreasing by 16% from US$1.43 trillion in 2008 to US$1.2 trillion in 2009, due to major trading
partners suering from the GFC, the scal smulus package aimed for rebalancing of the Chinese
economy. China aempted to build self suciency by shiing away from business investment and
exports as drivers of economic growth and towards domesc consumpon and investment. By
targeng and smulang domesc consumpon and demand, China aimed to promote long-term
stable economic growth, by making the economy less volale to uctuaons in global economic
condions. Its success in achieving long-term economic growth is highlighted in GDP growth
remaining between 6.7% and 10.7% since the GFC.

P3: 9-year compulsory educaon policy 1986

The 9-year compulsory educaon policy implemented by China in 1986, aimed to have universal
enrolment among school-aged children (9-16) as well as full literacy amongst those under the age of
20. This would be done through an increased investment in the educaon sector which accounted
for 4% of total GDP, allocang US$565 billion annually to provide over 100 schools and educaonal
resources in numerous urban and rural districts. It has been relavely successful in achieving this
goal of full literacy with adult literacy rate rising from 65% in 1980 to 95% in 2015. It has also
increased average schooling years from 3.7 to 7.5 from 1980 to 2015. Furthermore, the college

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populaon in higher educaon grew strongly from 1.4% in 1978 to over 20% in 2019 as a result of
the policy. However, access to educaon and schooling remains uneven with the 9-year compulsory
educaon policy unaecng around 20% of the populaon, these being mostly students living in
rural areas. Students born into auent families, usually living in SEZs such as Shanghai and Beijing,
have a much greater access to high-quality educaon than those from lower income families which is
highlighted in the literacy rates of Shanghai and Beijing in 2014 being 98.52% and 96.85%
respecvely whereas the literacy rate in Tibet in 2014, a rural area, was just 60.07%. This lack of
equal accessibility to educaon has also contributed to the widening of the distribuon of income
and wealth, with income levels in urban areas 150% higher than naonal average, four mes the
amount of rural areas.

P4: New Cooperave Medical Scheme 2003

The New Cooperave Medical System (NCMS) is a Chinese government-led health insurance scheme
launched in 2003 that aimed to promote equity in healthcare where every member of the society
has equal access to health care services irrespecve of socioeconomic status. Specically, it aimed to
cover 100% of the rural populaon by 2009. This would be done through heavy subsidising on health
spending for the rural populaon, providing them with basic health services and alleviang the
nancial burden caused by sickness and poverty. It also targeted the elderly, with China experiencing
an aging populaon with 178 million people over 60 and 119 million people over 65, accounng for
13.3% and 8.9% respecvely of its total populaon. The scheme involved lile individual
contribuons and parcipants were entled to reimbursements in designated hospitals. The scheme
showed steady progression, with paents in hospitals rising sharply from 650,000 to 1,115,000 from
2005 to 2008. This shows the benecial eect the introducon of the NCMS had on the volume of
acvity undertaken by hospitals. Moreover, the eect on paent visits was generally greater in rural
and poorer areas than the richer areas, which was a main target the government wished to achieve.
Furthermore, by 2014, the NCMS has a 98.9% parcipaon rate, equivalent to 736 million people,
despite it being voluntary to join. However, despite this, the NCMS failed to achieve its main goal
providing to only 9.5% of rural residents, despite the subsidies. Large health costs sll existed with
medical expenses increasing from an average $204 in 2005 to $696 in 2014. There were also no
signicant improvements in quality of care amongst rural hospitals despite the increasing costs,
making the NCMS only moderately successful.

Explain the implicaons of appreciaons and depreciaons in the value of the Australian Dollar for
the Australian economy

Australian dollar oated in 1983, has been subjected to uctuaons due to interacons of market
forces. These uctuaons have been accompanied by posive and negave eects on the Australian
economy

Body 1: Depreciaon advantage - improved IC

 Short term - loss of export revenue
 Long term - increased internaonal compeveness
o Foreigners are able to buy the same AUD with less foreign currency
o Enables foreigners to buy more Australian exports
 Increase Australia's export volumes
 1983-2001 2% increase in export growth rate, Treasury esmates that it would've only
been 1.7% export growth rate if it wasn't for the depreciaon of the AUD

Body 2: Depreciaon disadvantage - Increased net primary income decit VALUATION EFFECT

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 40% of Australia's debt is denominated in AUD therefore most of Australia's debt is

calculated in terms of foreign currencies
 Depreciaon in AUD increases debt servicing costs in foreign currency
o Valuaon eect
 From 1990 to 2001, Australia's net foreign debt grew by 136% whereas net primary
income decit increased by 172% in the same period
o Shows that NPD has increased at a faster rate than NFD

Body 3: Appreciaon advantage - Reduces inaonary pressures

 Lowered growth in consumer prices
 GRAPH OF INCREASE IN SUPPLY
o Showing decrease in level of inaon
 More foreign currencies can be bought with AUD
o Lower producon costs for Australian rms
o Reduced import-inaonary pressures

Body 4: Appreciaon disadvantage - Dutch Disease

 Caused by the rapid demand for natural resources from emerging economies such as
China and India
 2005 to 2008, Australia's mineral export income has increased from $68 billion to $128
billion
o Increase in demand for AUD
 Australian goods less internaonally compeve
o Thus, other Australian export industries suer as a result such as
educaon and tourism
 Australian manufacturers also become less internaonally compeve
o Accelerang the narrow export base of Australia
o Mineral resources account for around 50% of Australia's exports
o Whereas services and manufacturing has decreased to 20% and 14%
respecvely
 When China and India nish industrialising (projected 2030), Australia's ability to
export will be greatly diminished
 Therefore the Dutch Disease is a serious negave economic implicaon for Australia

Explain the causes and eects of recent trends in the exchange rate in the Australian economy

INTRO:
 The exchange rate is the value of currency measured in the terms of another
 Since 1983, Australia has had a oang exchange rate, where the value is measured by
supply and demand of AUD in the forex market, which establishes an equilibrium price
o This has meant the AUD has been exposed to volality from external
shocks
 The value of the exchange rate can also be measured bilaterally (with one other) or
through the Trade Weighted Index
 Appreciaon occurs when the value of the AUD increases in value relave to another
currency
 Causes of uctuaons in the exchange rate are global and domesc economic
condions, interest rate dierenals and expectaons and speculaon
 Exchange rate has a rippling eect on Australia's internaonal compeveness, trade,
growth, unemployment and inaon

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 AUD peaked at $1.10 USD in 2011 following the resources boom, but has steadily
declined since to $0.68 currently
 5th most traded currency

P1: CAUSE - Global and domesc economic condions

Domesc
 Higher amounts of domesc acvity will impact consumer and business senment,
resulng in a larger amount of imports, which will increase the supply of our AUD on
the forex market > Depreciaon
o Australian rms can not sasfy the excess demand therefore more will
be imported
 DIAGRAM: INCREASE IN SUPPLY
Global
 Strong global economic acvity can increase the demand for Australia's exports >
Appreciaon
o Overseas rms may want to expand, requiring commodies and natural
resources to do so
 95% of AUD trading is speculave trading
o Extremely volale to global condence and condions
 Commodity boom: Increased Terms of Trade greatly from 100 to 118 in 2010 to 2011
o Underpinned by strong demand from China for mineral exports resulng
in the AUD appreciang to a historic high $1.10 USD
o Reinforces Australia's narrow export base (50% minerals)
 Currently, sustained depreciaon can be contributed to China's slowing growth as a
result of the US-China trade war, poor EU economic condions (weak manufacturing
growth) + Brexit?
o DIAGRAM: INCREASE IN DEMAND

P2: CAUSE - Interest rate dierenals

 Higher interest rates in Australia relave to the rest of the world make Australia an
aracve locaon for foreign investment, as investors seek to maximise return on their
investments
 Thus, capital inows create an increase in demand for the AUD > Appreciaon
 2011, Australia's interest rate 4.75% compared to USA, Japan and Europe with 0%
interest rates
o Contributed to AUD appreciaon to $1.10 USD
 Recently, the RBA have lowered the cash rate in order to ease the transion from
mining orientated economy to non-mining sources of growth such as consumpon,
investment and housing
o Resulted in the cash rate at a historic low 0.5%
o Contributed to consistent depreciaon of AUD
o America has increased interest rates from 0% to 0.5% and is expected to
rise
 Capital ight
o However, Australia's X rates are supported by the fact that Europe and
Japan interest rates have remained 0 for the last 7 years

P3: CAUSE - Expectaons and speculaon

 Since 1983, where Australia oated its exchange rate, it has become more subject to
volality through expectaons and speculaon

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 The exchange rate is prone to changes in investor senment

 GFC - A decrease in global demand (China) for Australia's commodies resulted in a
sharp decline in commodity exports, causing a sharp decline in the AUD from 95c US to
60c
o Exacerbated as expectaons that the AUD would connue to fall
o These expectaons also resulted in other investors withdrawing
investment in Australia , increasing supply of AUD
o RBA also cut interest rates from 7.25% to 3% in under a year, further
contribung to decrease in demand for AUD
o DIAGRAM: Decrease in demand

P4: EFFECT - Internaonal compeveness/Dutch Disease

 A lower exchange rate improves internaonal compeveness as our exports become
cheaper for overseas naons
o Also becomes more expensive for domesc consumers to import
 Therefore more incenvised to purchase domescally,
smulang growth
 A higher exchange rate will make imports cheaper, which may lower domesc
consumpon
o However, cheaper imported inputs can reduce producon costs for
rms, generang larger prots and improving their internaonal
compeveness in the long term
 The sustained appreciaon of the AUD due to the mining boom in 2011 can erode the
internaonal compeveness of other industries such as tourism, manufacturing and
services (Dutch disease)
o Eg. 50,000 retrenched in the car manufacturing industry between 2013-
16
o Services and manufacturing industries decreased to 20% and 14%
respecvely
o Whilst accelerang narrow export base of minerals over 50%
 When China and India nish industrialising, projected 2030, Australia's exports are
predicted to suer
 Recently, Australia's services sector has grown due to the sustained depreciaon of the
AUD
o Also been a recovery in commodity prices which has contributed to CAS

P5: EFFECT - Balance of Goods and Services / Trade balance

 Depreciaon worsens BOGS in the short term as less export revenue
 Medium-long term improves BOGS as exports become more compeve and reduced
imports as they become more expensive domescally
o Also reduces imports as they become more expensive
 Depreciaon in 2009 (AUD dropped from US 85c to 60c) boosted the compeveness
of mining exports, contribung to Australian's strong growth
 The current sustained depreciaon and the boost in commodity prices and demand,
has contributed to Australia's recent CAS

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 Aects the net exports of Australia thereby contribung to AD

o Also demand-pull inaon, unemployment

P6: EFFECT - Increased purchasing power > Improved standards of living + control of inaonary
pressures
 Appreciaon leads to increased purchasing power, increasing real incomes and
material standards of living
 Cost-push inaon reduced
 Imports are cheaper overseas and also hard for domesc rms to increase prices
 2011, AUD peaked at $1.10 USD due to the mining boom. This helped contain
inaonary pressures through lower import prices
o Inaon remained below 3% despite strong growth at 4.2%

P7: EFFECT - External Stability

 Valuaon eect, recent depreciaon has worsened Australia's CAD in the short-term,
however recovery of BOGS has accelerated Australia into a CAS
o First me in 44 years

P8: EFFECT - Buer for external shocks

 GFC: Depreciaon of AUD to US65c allowed Australia to increase internaonal
compeveness and export revenues, prevenng a larger increase in domesc
unemployment
o Unemployment only rose to 6% despite projecons of rising to 10% by
end of 2008

Discuss the eects of proteconist policies and free trade agreements on the Australian economy

Body 1: Taris
 Taxes on imported goods imposed for the purpose of protecng domesc industries
o Makes domesc producers more compeve by arcially making
imports more expensive
o TARIFF GRAPH
o Taris raise the price of goods and services
o Expands domesc producon
 Decline in taris from 1980 36% > 1.6% 2019
 Retaliaon eect may lead to loss of export income
 Inecient allocaon of resources as incomes transferred to inecient rms/industries

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Body 2: Subsidies
 Financial assistance to domesc producers, enabling them to reduce their selling price
and compete with ecient overseas rms
o SUBSIDY GRAPH
o Increases domesc producon/supply and employment
o Lowers price of goods
 Direct cost on government budgets (therefore subsidies can be temporary)
o Economists prefer subsidies as more likely to be removed as it costs for
government
 Reduced producvity growth
 Automove industry
 EU use of subsidies in agriculture industry, 30% of budget protecng agriculture

Body 3: Quotas
 Refers to restricons on the amount or value of goods that may be imported
o QUOTA GRAPH
 Higher cost-push inaon

Body 4: Local content rules

 Specify that goods or services must contain a minimum percentage of locally made
parts
 55% of free-to-air television must be Australian made

Body 5: Export incenves

 Assistance to domesc producers such as grants, loans or technical advice to local
businesses to export their goods and services
 Export Market Development Scheme (EMDG)
o Designed to assist Australian exporters gain more exposure in
internaonal markets allowing them to develop brand recognion and
form relaonships with potenal customers
o Funding projected to increase by $60 million over the next 3 years
o 3500 SME's on the program raised $3.8 billion in export revenue

Explain the trends and causes for Australia's current account situaon and explain
strategies/policy opons that are available to ensure it remains sustainable

Historically, Australia has had a persistent CAD for the last 44 years which occurs when net debit on
the current account exceeds the value of the net credits. These sustained CADs raise quesons about
Australia's external stability, investor condence and solvency of rms and the government. The
main cause of Australia's persistent CAD in recent decades has been due to the savings-investment
gap as well as cyclical factors such as the mining boom and China's rate of growth. However, recently
Australia has recorded a CAS for the rst me in 44 years, as a result of strong and growing
commodity prices. Policies to ensure Australia can maintain external stability in the medium term
include microeconomic policies of compulsory superannuaon to reduce the savings-investment gap,
taxaon reform and compeon policies to improve Australia's internaonal compeveness as well
as trade liberalisaon to widen the narrow export base of Australia.

The underlying and largest cause of Australia's historic CAD has been the savings-investment gap.
This is due to Australia having large naonal endowment in natural resources with a relavely low
populaon (23 million) which does not have enough to fund domesc investment. Accordingly, 15%

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of total investment in Australia is from foreign investment which are recorded as credits on the
Financial Account. This leads to greater Net Foreign Liabilies which currently stands at 60% of GDP.
Servicing of this debt with interest are recorded as debits on the current account, which have heavily
contributed to Australia's historically persistent CAD. Further, cyclical factors such as the mining
boom, have also contributed to the CAD as large sums of prot were registered as a debit on the NPY
to foreign companies such as BHP Billiton,

Historically, Australia's trade balance has also contributed to the CAD however only recently, it has
contributed to the CAS. Australia's Balance of Goods and Services (BOGS) has uctuated between
decit and surplus in the last 15 years due to Australia's narrow export base and the altering
demands and prices of commodies and natural resources. Paul Keng in the early 90s stated that
Australia is at risk of becoming a "Banana Republic" due to our narrow export base and heavily
reliance on commodies. However, recently due to external factors such as the collapse of the
Brumadinho Dam and subsequent ooding of the Vale Mine as well as the aack on Saudi Arabian oil
processing plant, leading to a reducon in oil supply, demand for Australia's exports have increased
as well as the price, which has largely contributed to Australia's most recent CAS, the rst me since
1975.

Policies
 Compulsory superannuaon
o Currently 9.5% projected 12% by 2026
 Fiscal consolidaon
o Reducon in govt. expenditure and increase in taxaon
 Budget decit shrunk from 3.2% to a predicted surplus in
2019-20
o Reduces crowding out eect
 Where domesc rms are forced to seek foreign
investment to expand
 Tax reform (reducon in company tax)
o 2016-17 budget: 28.5% > 27.5% expected 25% by 2026
o Designed to help Australian rms IC as overseas company tax is 22%
o Exporng industries will expand producon, improving trade balance
and CAD
o Facilitate expansion of producve industries such as educaon and ETMs
which could move into emerging economies such as China
 Would help diversify Australia's narrow export base and
improve BOGS > CAD
 Trade liberalisaon
o Signing of bilateral trade agreements with US, Korea, China
o Tari-free market access for Australian exports
 China-Australia FTA (2015) allowed Australia wheat
exporters to have tari-free access to Chinese markets and
also allowed Australian rms to build hotels in urbanising
China
 Increased exports > Credit on CA> Improved BOGS >
Reduce CAD
o Also reduces the price of imports, forcing Australian rms to improve
dynamic/technical/allocave eciency

Analyse the causes of unemployment and its eects on the Australian economy

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INTRO:
 Unemployment occurs when people in the labour force are not employed for at least 1
paid hour of work a week
 Full employment is one of the main economic objecves of Australia
 Unemployment rate is calculated by:
 Various types of unemployment are: cyclical, structural as well as friconal, hidden,
seasonal
 Government uses micro and macro policies to decrease unemployment
 Australia's current unemployment rate is 5.3%
 There is a growing problem of underemployment, where individuals are not workinig
as much as they want
o Labour underulisaon rate is 14%

P1: CAUSE - economic growth/AD

 Cyclical
o Refers to unemployment that results from a downturn in the business
cycle
o Economic growth/AD
 Labour is a derived demand hence changes in AD or
economic growth will aect unemployment
 GFC: economic growth reduced from 4% to 1.2% with
unemployment rising by 2%

P2: CAUSE - Stance of macro policies

 Fiscal: decreasing budget decit from 2012 to 2014 contributed to cyclical
unemployment rising to 6.2%
 Monetary: Expansionary monetary policy from 4.75% in 2011 to a historic low 0.5%
currently
 Contraconary scal and monetary stances hinder each others eecveness

P3: CAUSE - Micro reform

 Structural unemployment arises when the skills of the workers don’t match with the
demands of the employer
o Can arise from structural change within the economy
o Technological change: labour capital substuon
 Growth of computer technologies and automaon will
threaten 52% of jobs in the next 10-15 years according to
the 'Future workforce trends in NSW' report (2015)
o Global division of labour
 Trade liberalisaon (taris down 20% from 1990 to 1.3%
2017) has increased compeon for Australian exporng
rms
 This has prompted structural change
 The closure of Australian car manufacturing
in 2017: 50,000 jobs lost
 Friconal unemployment is the period when people move from one job to another

P4: EFFECT - Decline in economic output

 Economic output lowers as resources are not used to maximum capacity
o Economy operates below PPF - DIAGRAM

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o Lower output leads to lower incomes and expenditure which further

lowers AD and growth
o Producon of goods and services reduced > lower living standards
o Lowered producvity of the workforce > Lowering AS

P5: EFFECT - non-discreonary government budget

 Transfer payments increase
o Opportunity cost: lose potenal to spend on other sectors of the
economy
 Less government taxaon revenue

P6: EFFECT - Lower wage growth

 Excess supply of labour means that wage growth will be slowed
o Currently wage growth 2.3%
o Contributed to low inaon at 1.6%

P7: POLICY - Expansionary micro policies

 Expansionary micro policies can improve cyclical unemployment
 Increasing AD through scal policy will increase demand for labour and lower
unemployment
o GFC: $50 billion scal smulus assisted in Australia only increasing
unemployment by 2% compared to other OECD naons such as the US
who experienced 5% increases in unemployment in the same period

P8: POLICY - Labour market policies

 Labour market policies aim to increase the exibility within the labour force
 Movement away from centralised labour system:
o Previously, wages were determined by a central authority
o Decentralisaon has allowed wages and condions to be determined by
market forces
o Encourages collecve bargaining and individual contracts with employers
o Strong link between producvity and wage growth
 YouthPATH program
o 2016-17 budget, $840 million injecon into program
o Improve employability of young Australians
 Gonski
o $22.4 billion injected in 2012
 Improve educaon standards, parcularly in rural and
poor socio-economic areas
 Reduce long term social welfare dependency and future
unemployment

Explain the causes of inaon and its eects on the Australian economy

INTRO:
 Inaon refers to the general rise in price levels of goods and services in the economy
over me
 Inaon is measured by the Consumer Price Index, a weighted basket of goods and
services purchased by households

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 Inaon can be demand-pull or cost-push

 An inaon rate between 2-3% is ideal
o If inaon is too low, deaon is considered dangerous for economic
growth
o If inaon is too high, there will be a decline in consumer purchasing
power and economic acvity will be distorted
 To maintain stable inaon, microeconomic policies are used
o Inaon targeng sets a benchmark for inaonary expectaons
o Counter-cyclical scal and monetary policy is used to aect AD and
hence maintain price stability

P1: CAUSE - Demand pull

 Demand-pull inaon occurs when increases in AD outstrip AS
 Could occur when one component of AD increases rapidly
o Mining boom, rapid increases in investment and exports
o In 2008, eco growth reached 5% and inaon also increased to 5% from
2% in 2007
o Aer GFC, when growth was weak at 1%, inaon reduced to 2%
highlighng the link between economic growth and inaon through
demand-pull

 Strong economic growth reected by the increase in demand from AD to AD2 results in
an increase in prices levels from P1 to P2 and hence demand-pull inaon

P2: CAUSE - Cost push

 Occurs when the costs of the factors of producon increase
 As producon costs increase to rms, they 'pass on' the price to consumers by raising
the costs of their goods and services
 Since 2016, cost-push inaon has been low due to low cost pressures worldwide
(imports are cheap for Australia meaning domesc rms don't have to raise prices)
o Oil prices halved since 2014
 Wage growth has been slowed to 2.3% hence inaon is currently low at 1.6%
currently
 Imported inaon occurs when the price of imports rise
o May be caused by depreciaon in the AUD
o Firms may be subject to higher import producon costs > pass on price
to consumers

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 Inaonary expectaons, when people believe inaon will occur in the future, their
acons will contribute to current inaon
o When they think it will increase in the future, they will spend now and
demand-pull inaon increases
o High inaon environment can result in a wage-spiral as workers
demand higher wages to maintain their purchasing power

P3: EFFECTS -
 Consumers lose purchasing power and real wages
o People on xed wages most vulnerable as they are unable to demand
higher wages (eg. Pensioners)
 Unemployment will increase (Phillips curve)
o Economic uncertainty for rms, hesitant to hire workers
 Reducon in real savings and investment
o Less domesc pool of funding
 Reduces likelihood of deaon
o Deaon gives consumers incenve to purchase later, contribung to
decreased consumpon and AD
 Moderate inaon encourages consumers to spend now, increasing growth and
employment

Assess the impact of recent changes in the global economy on Australia's external stability

Intro:
 Floang of Australia dollar in 1983 Keng government
 Increasing integraon within the global economy has disrupted Australia's external
stability
 Aus is exposed to changes in the internaonal business cycle
o GFC, where nancial and trade shocks transmied into Aus > lower
growth
 Denion
o Sustained CAD
o Ensuring servicing costs of the NFL are met
o Stability of exchange rate

Body 1: Sustained CAD

 Historically, Australia has had a sustained CAD
o Net importer of capital
o Foreign liabilies require servicing costs in the form of rent, prot,
dividends and interest payments
 During mining boom, large amounts of FDI and FPI injected into Aus mining sector
resulng in a large surplus on the KAFA (80% of the mining sector was foreign owned)
 Since the mining boom, there has been a fall in Australia's terms of trade
 CAD averaged around 4% in 1980s through to 2000s
 Currently, 5.9 billion current account surplus
o As a result of surging iron ore prices, driving export income
o China has ramped up construcon to smulate a struggling trade-war
ravaged economy

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o Brazilian iron ore mines have stopped producon amid the threat of dam
collapses

Body 2: KAFA/Financial inows

 Deregulaon of nancial markets has facilitated increased nancial inows as FDI and
FPI
 Australia's debt is currently 55% of GDP (2016-18)
 Denion of FDI and FPI and eects on business
 2003-2011: FDI inows have increased dramacally due to the mining boom with 80%
of the mining sector foreign owned
 Australia has received high levels of nancial inows due to high interest rate
dierenals between Australia and overseas economies

Body 3: Exchange rate

 Since oang of the dollar, Australia has been more suscepble to volality and
changes in the global economy
o 5th most traded currency in the world
o GFC delayed investor and consumer condence
o Most advanced economies went into recession such as US
o Exports and export prices dropped dramacally

Discuss the connuing role of microeconomic reform in achieving Australia's economic objecves

Objecves:
Economic growth, unemployment, inaon (price stability), DOYW, environmental sustainability
Sustainable economic growth, full employment, price stability, DOYW
Scaold
o Limitaons of micro reform:
 Polical constraints
 Time lag: 4-5 years
 Temporary structural unemployment > automobile

P1: Reducon in protecon - Improve eco growth, inaon, leads to unemployment

 Large reducon in proteconism in Australia industry
o Introduced to improve producvity and allocave eciency
o Previously, Australia had heavy proteconist policies in agriculture and
manufacturing industries 1980 36% > 2017 1.3%
o Alongside tari reducons, Australia has eliminated most quotas and
subsidies
 SHORT TERM: reduces inaon and the costs of imported goods
o Imported inputs are cheaper as domesc rms nd it hard to compete
o Slower economic growth and increase unemployment
o Causes structural unemployment
 LONG TERM: inecient rms forced to close down as it becomes unprotable
o Domesc rms forced to become ecient and internaonally
compeve
 Increase AD and economic acvity
o Economies of scales in producve rms, increased technical eciency
o Allocave eciency improves
 Car manufacturing industry

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o Australian government spending $500 million per year for subsidies to

Australian motor industry
 Became unprotable for the government, lack of demand
for domesc made cars
o 200,000 jobs, direct and indirect lost in the short term
o Loss of $29 billion economic output

P2: Labour market reforms - Improved producvity of labour, controls inaon, worsens DOYW
 Shi from strongly regulated and centralised labour market to decentralised labour
market
o Increased exibility and producvity in the labour market
 Enabling employees to enterprise bargain and obtain individual contracts with the
prospect of greater wage or rewards
o Discouraging use of awards
o Employees under awards fell by 5% whereas enterprise agreements
increased by 5%
 Decentralised wages have linked wages to producvity
o Higher producvity allows workers to bargain for higher wages
o Ecient industries aract high skilled workers due to higher wage,
increasing allocave eciency
o Provides an incenve for individuals to improve their educaon and skills
 Increased wage exibility as employers are able to alter wages in response to external
shocks in the economy, limits cost push inaon
 Creates wage dispersion, spling the gap between the high skilled and low skilled
workers
o Gini coecient increase from 0.3 to 0.33 from 1996-97 to 2012-13

 Youth Path Program

o $840 million 2016-17 to improve employability of young Australians
o Assisted 120,000 young Australians
o Reduce long term welfare dependency and lower future structural and
long-term unemployment
 Compulsory superannuaon
o Closing the gap between high income and low income earners
o Benecial for low income earners, giving them a major nancial asset
o 9.5%
o Projected to increase to 12.5% in 2025

P3: Naonal Compeon Policy - Increase eco acvity, limits inaon

 Naonal Compeon Policy Act 1996
 Implemented the ACCC, Compeon and Consumer Act 2010 administers an-
compeve behaviour such as price xing
 Aim to drive innovaon and increase economic acvity
o Force rms to compete with each other, lowering prices and liming
inaon
 Promong compeve neutrality in PTEs
o Corporasaon and privasaon
o Privasaon of Telstra from 1997 to 2006

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o NSW Electricity and Australia Post in 2014-15, lowering costs and

inaon
 Reducing monopolies
o Banks, nancial deregulaon
o Qantas, cancellaon of two airline policy
o Sydney Water (privased)

P4: Deregulaon of nancial market: economic growth

 Floang of the dollar 1983
o AUD inuenced by supply and demand of AUD on the forEX market
 Allowing overseas banks to enter Australia
o Increased compeon in the nancial sector
 Cheaper for Australian rms and consumers to seek
investment

P5: Limitaons
 Long term implementaon me lag
o 4-5 years
o Passing of legislaon
 Polical constraints
 Short term
o Loss of economic output
o Structural unemployment (car industry)
 200,000 jobs, direct and indirect lost in the short term
 Loss of $29 billion economic output

Assess how labour market policies can be used to achieve Australia's economic objecves

Labour market policies are a microeconomic policy that targets the supply side of the Australian
economy and aims for an ecient allocaon of the labour resource to achieve Australia's economic
objecves of: strong and sustainable economic growth (3-4%), maintaining price stability (RBA 2-3%
target band), achieving full employment and an equitable distribuon of income. Historically, prior to
the 1990s, Australia has had a centralised and underulised labour market however reforms in the
past two decades such as decentralisaon has improved producvity of human capital and has
allowed for the achievement of Australia's economic objecves.

There are three main elements of labour market policies: rstly, the trade o between equity and
eciency. The government wants to promote and reward eciency within the labour market
through higher wage outcomes but also must manage equity to ensure the gap between rich and
poor is not hurng the Australian economy. Secondly, labour force parcipaon, which aims at
increasing producve capacity and aggregate supply ulmately achieving economic growth. Finally,
educaon, training and employment programs addressing both economic growth and long-term
structural and friconal unemployment.

The Fair Work Act 2009 (Cth) administers Australia's industrial relaons system which aims to
address equity. The system provides a safety net for lower income employees through industry
awards, which set out the minimum wage (currently $18.93 an hour) as well as the ten minimum

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employment standards which includes maximum hours of work and requests for exible working
arrangements. This safety net aims to 'catch' individuals below the standards of awards by providing
them with basic employment standards and a minimum wage which allows for the achievement of a
more equitable distribuon of income. This is highlighted in the sustained increase of the Gini
coecient from 0.29 in the 1980s to 0.33 currently.

Australia's progressive tax system aims at improving equity within Australia. The concept of
progressive is 'the more you earn, the more tax you pay' which aempts to close the gap between
the rich and poor. In 2013-14 the Australian government raised $176 billion in personal income
taxaon revenue, equivalent to approximately 11.5% of Australia's GDP which can be spent on social
security or infrastructure in low socio-economic areas. The eecveness of the progressive tax
system in Australia is evident as there are approximately 13 million taxpayers in Australia allowing
the government to combat income inequality eecvely. It also highlights the trade o between
eciency and equity.

Transfer payments issued by the government addresses equity by providing cash payments to
individuals who require assistance. Transfer payments aim to assist the unemployed who are seeking
work by providing them with monetary assistance temporarily unl they nd employment. A large
poron of government expenditure on social security and transfer payments has been a feature of
Australia's spending over the past decade. The 2018-19 Budget projected $10 billion would be spent
on transfer payments to the unemployed, equivalent to around 6% of Australia's total expenditure
portraying the government's focus on addressing income inequality.

The decentralisaon of the labour market involves market forces operang freely with minimal
government intervenon in determining wage outcomes. This has led to a more ecient allocaon
of resources as labour is moved to sectors of the economy that have the capacity to pay. Thus
producvity is increased as enterprise bargaining and individual contracts incenvises employees to
be more producve and gain high skills, educaon and training. It also ences individuals out of the
labour force to join based on the potenal to gain higher wages. This ulmately allows the objecve
of economic growth to be achieved.

Greater wage exibility through enterprise bargaining has also limited cost-push inaon as rm's
are more equipped to adjust to uctuaons in the economy which can be done by changing wage or
working hours. However, the decentralisaon of the labour market leads to increased income
inequality or wage dispersion as wage outcomes may be determined by the employees bargaining
power and not based on the employees producvity or skill. It also presents the issue of low wage
growth (Smulus 1) as wage growth is dependant on employee bargaining power. This highlights how
the decentralisaon of the labour market has both costs and benets in that it achieves economic
growth and controls inaon but increases inequality of income.

In the 2011-12 budget, the government injected $731 million introducing the Naonal Paid Parental
Scheme with the aim of increasing parcipaon rates to increase economic growth. The scheme
provided childcare subsidies of 18 weeks leave paid at the minimum wage to encourage parents to
join back into the labour force. This also incenvises casual and part-me working parents
(underemployed) to seek full me employment as child care is made more aordable, contribung
to an increased producve capacity and ulmately increased economic growth.

Another policy addressing economic growth is the changes to the tax free threshold in the 2012-13
budget aiming to increase parcipaon. The Gillard Government increased the tax free threshold
from $6000 to $18200, a signicant increase, encing individuals out of the labour force to join as
there is a potenal to earn more without geng taxed. These policies has assisted in the steady rise

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of parcipaon rate over the past decade, currently at 65.5% (Smulus 2) and thus addressing the
economic objecve of economic growth through increasing aggregate supply and the producve
capacity of the economy.

Recent educaon programs can be seen in 2012, where the government injected $22.4 billion into
the Gonski scheme which provides funding for all schools across Australia aiming at improving
infrastructure and resources. It also addressed low socio-economic schools by providing them with
extra funding to improve their overall educaon standards. The purpose of the Gonski scheme is to
equip the youth with a quality educaon to improve producvity of human capital in the future
which addresses the economic objecves of long term unemployment and economic growth.

Also, in the 2016-17 Budget the government injected $840 million into the Youth Paths Program. The
program aims to improve the employability of young Australians thus lowering total unemployment.
The program involves an employability skill training, internship and apprenceship placement and
direct subsidies up to $10,000 for rm's that employee young Australians on the program. Its
eecveness is highlighted by its assistance of employing 120,000 young Australians. The program
aims to lower long term social welfare dependency as well as addressing future structural
unemployment as there are constant changes to demands and skills required for employment in the
economy.

The injecon of $5 billion saw the creaon of JobAcve in 2015 by the Rudd Government a job
matching service to make the labour market more ecient. The JobAcve scheme aims to minimise
friconal unemployment and assist individuals to secure employment. The program consists of 66
employment agencies who have clear incenves to ensure successful employment to job seekers is
ecient and eecve as possible. JobAcve has assisted in the achievement of the current 5.1%
unemployment rate (Smulus 3) or the achievement of full employment, just above Australia's Non-
Accelerang Inaon Rate (NAIRU) through lowering friconal and structural unemployment within
the economy.

In essence, labour market policies that address equity, parcipaon and educaon make a signicant
contribuon in achieving Australia's economic objecves. Equity labour market policies such as The
Fair Work Act 2009 (Cth) and Australia's tax and transfer payment system has successfully allowed
the Australian government to decrease income inequality. Policies targeng labour force
parcipaon rate such as the decentralisaon of the labour market, Naonal Paid Parental Scheme
and changes to the tax free threshold has allowed for the increase in producve capacity and
aggregate supply ulmately contribung to economic growth. Addionally, labour market policies
focused on educaon, training and employment programs addresses long-term structural and
friconal unemployment and aims to improve the producvity of the labour force thus the economic
objecves of full employment and economic growth is achieved.

INTRO:
 Supply side, EAOR
 Historically, centralisaon labour market

INTRO 2:
 3 Elements of labour market policies
o Trade o between equity and eciency
 Government wants to reward eciency through higher
wages but also sought to maintain equity
o LFP
 Increasing producve capacity and AS > LT Eco growth

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o Educaon, training and employment programs

 Eco growth, LT structural and friconal U/e

P1: Fair Work Act 2009 (equity)

 Provides a safety net for lower income employees
 $19.43 an hour minimum wage
 10 minimum employment standards
 Increase in Gini from 0.29 in the 1980s to 0.33 currently

P2: Progressive tax system (equity)

 Government makes around two-thirds of its revenue from income taxaon receipts
($350 billion)
o Spent on social security, infrastructure in low socio economic areas
 13 million taxpayers in Australia

P3: Transfer payments (equity)

 $10 billion spent on transfer payments (6% total expenditure)

P4: Decentralisaon (eciency) Economic growth + unemployment + inaon

 Market forces determining wages
 Ecient allocaon of resources
 Promotes producvity
o Incenvises enterprise bargaining and individual contracts
o Incenve to gain higher skills and educaon
 Ences individuals outside of the labour force to join based on potenal for higher
wages
 Greater wage exibility has decreased cost-push inaon as rms are more equipped
to adjust to uctuaons which can be done through adjusng wages/work hours
 Leads to increase income inequality or wage dispersion as wage outcomes may be
determined by employees bargaining power not based on skill or producvity
 Low wage growth?

P5: Naonal Paid Parental Scheme (LFP) > Economic growth + U/e
 2011-12 budget $731 million to provide childcare subsidies of 18 weeks leave paid at
minimum wage
 Encourages people to join back or push for full me work

P6: Gonski > Unemployment + income/wealth inequality

 2012: $22.4 billion into Gonski scheme
 Provides funding for all schools across Australia, parcularly low socio-economic
schools > extra funding. > improve educaon standards

P7: Youth PATH program > Unemployment

 2016-17 budget, $840 million
 Improve employability of young Australians
 Involves employability skill training, internship and apprenceship placement and
direct subsidies up to $10,000
 Assisted 120,000 young Australians
 Aims to lower long term social welfare dependency and future structural
unemployment

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Analyse the eecveness of the Australian governments use of scal policy in achieving its
economic objecves

INTRO 1
Trend: Historically, the Australian governments use of scal policy has been eecve in achieving
most of its economic objecves. However, in recent years, its eecveness has been quite limited.
Role: Sustained economic growth through stabilising uctuaons in the business cycle, reallocate
resources and redistribute income
Through these roles, scal policy achieves the economic objecves of sustained growth (3-4%), price
stability (2-3%) , full employment and external balance

INTRO 2
 Fiscal policy involves the use of the governments budget to inuence the economy
through taxaon and expenditure decisions
 Involves a structural component comprised of discreonary government taxaon and
expenditure decisions and cyclical, non-discreonary decisions
 By altering levels of AD, government can inuence growth, u/e and inaon
 Expansionary and scal eects
 Current scal stance is contraconary due to governments eorts to 'cut the budget'
and scal consolidaon, however the non-discreonary cyclical factors result in an
overall slightly expansionary stance

P1: Economic growth - Automac stabilisers

 Divided between automac stabilisers and discreonary scal measures
 Automac stabilisers: progressive tax system, transfer payments
o Inuenced solely be level of economic growth
o Act countercyclically to moderate the level of growth
o In a recession, income tax receipts decrease and transfer payments
increase, thereby increasing govt spending and AD, smulang the
economy
o GFC: income tax revenues decreased by 12% whilst unemployment
transfer payments increased by 40%
 Caused the budget to move from surplus of 1.4% to decit
of 2.7%
 Reecng an expansionary scal policy - DIAGRAM
 Automac stabilisers assisted Australia in maintaining
1.8% growth despite the world economy contracng by
1.3%
o Conversely, during a boom, more individuals will be in the higher tax
bracket

P2: Economic growth - Discreonary scal measures

 Fiscal policy can directly inuence AD as government expenditure in an injecon or can
indirectly inuence AD through promong consumpon through reduced taxes or
increased social welfare
 Acts countercyclically to smoothen out the business cycle
o Especially eecve in GFC through $50 billion smulus package as
investments and incomes for low income groups
o Minimised the large downturn and recession that other major
economies faced such as US

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 Mulplier eect
o Government expenditure can be respent in the economy
 Inial government spending on building materials for a
road project is re-spent in the local economy by the
building rm
 Currently, Australia's use of contraconary scal policy has worked against the
expansionary monetary policy thereby liming its eecveness to achieve economic
growth

P2: Unemployment
 Cyclical unemployment
o Labour is a derived demand > increase in AD/growth
 The government's use of expansionary scal policy during the GFC led to
unemployment only increasing by 2% compared to US increasing by 5%
 Recent contraconary scal policy and lack of growth has led to 5.2% unemployment

P3: Income and wealth equality

 Fiscal policy plays a key role in ensuring equality in income and wealth distribuon
o Progressive tax system
o Social welfare system
 Introducon of compulsory superannuaon funds has assisted low income earners
accumulate wealth
 Despite this, disparity and inequality between wealth and income has been steadily
growing over recent years, increasing by 0.08 over the past two decades
o This has been due to the marginal rate of taxaon not being high enough
due to polical constraints and public opinion hindering government
decisions
o Also social security payments too low due to governments aempts to
cut the budget

P4: Price stability

 Whilst monetary policy is the primary government response/policy to control price
stability, scal policy can have an impact on it
 By smulang aggregate demand, it directly inuences demand-pull inaon
 Recent contraconary scal policy has led to inaon being at a low 1.6%, below the
target band of 2-3%

P5: External stability

 The government has been eecve in improving external stability
 Cung the budget improves external stability as there is lower government debt > less
borrowing from domesc and overseas
o Reduce pressure of crowding out eect
o Leaves more funds for domesc investment
o Less future debt servicing costs
o To a certain extent contributed to the Current Account Surplus (rst me
in 44 years)

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Analyse the eecveness of the Australian governments use of monetary policy in achieving its
economic objecves

INTRO:
 Monetary policy inuences the cost and availability of money and credit in the
economy
 Conducted by the RBA through its manipulaon of the cash rate in Domesc Market
Operaons
 Primary aim: to maintain price stability (2-3% inaonary target) since 1993
 Other aims: maintain full employment and sustainable economic growth

Body 1: Price stability (2-3%)

The establishment of a credible inaon target (2-3%) acts as an anchor for inaonary
expectaons
 This prevents wage spirals, as if low wages are expected by workers they will not need
to demand signicant wage increases
o Firms also expect steady prices for inputs so they keep the price of goods
and services constant
 Also ensures foreign investor condence remains high (external stability)
 The use of inaon targeng has been extremely successful
o Australia has maintained inaon since 1993 at an average of 2.6%
o Prior to inaon target, Australia's inaon exceeded up to 6-10%
inaon at mes
 During the mining boom in 2010-12, Australia experienced strong economic growth at
4.2% however subsequent cash rate increases from 3.25% to 4.75% helped contain
inaonary pressures below 3%
 Currently, the RBA have aempted to drop the cash rate in order to increase inaon,
which Is currently below the target band at 1.6%, however seems to be ineecve in
the short run, due to the long impact me long of 6-18 months.

Body 2: Eco growth

Consumpon
 Inter-temporal substuon eect

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o The rate of interest is the cost of spending now rather than later
o Directly inuence an economy's AD (consumpon)
o By changing the cash rate, the RBA can directly aect the spending
decisions done by households and business's
 Lower interest rates bring forward spending on consumer
durables whereas higher interest rates deter spending

Body 3: Eco growth .2

Business investment
o Low interest rates encourage business's to borrow in capital and expand, adding
to the investment component of AD
 Indirect result of a decrease in the cash rate can be the depreciaon of AUD, as
investors seek to take advantage of overseas interest rate dierenals

Body 4: Unemployment
 Cyclical unemployment
o Labour is a derived demand

Body 5: GFC
 Cash rate dropped from 7.25% to 3% in under a year due to the poor global economic
condions
 Expansionary monetary policy proved to be extremely eecve
o Unemployment only increasing by 2% compared to US 5%.
o Australia avoided recession with 1.3% growth
o Inaon within 2-3% target

Body 6: Limitaons
 In recent years, monetary policy has seemed to be relavely ineecve in the medium
term, especially as expansionary monetary policy has been used contradictorily to
contraconary scal policy
o Unemployment remains high 5.2% and inaon below target at 1.6%
 In the recovery period of the mining boom 2010-12, interest rates were increased to
contain inaon however this hurt non-mining sectors due to the 2 speed nature of
Australia's economy

Implementaon: Transmission mechanism

 To ghten monetary policy (contraconary) the government will buy Government
securies from banks and in return deposit funds into banks exchange selement
accounts
o Increases money supply > Decreased cost of borrowing > Lower cash
rate
 To loosen monetary policy (expansionary) the government will sell Government
securies from securies from banks, decreasing the supply of money in banks
exchange selement accounts
o Decrease monetary supply > Increased cost of borrowing > Increase cash
rate

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