BEA111 - Introduction to Markets and the Economy Assignment 2

Assignment Task

Question 1

a. The attached Excel file, GDP Data , provides the Australian Nominal and Real Quarterly GDP figures for Mar 2015 to Dec 2023 (values are in millions of dollars).

Use the GDP data to answer the following questions.

1. Create a table like Table 1.1 and calculate the four measures from March 2016 to December 2023.

Please take note to measure the

• quarterly growth rate: you need to take the difference from one quarter to another. For example, the quarterly growth rate for March 2016 =

(Mar 2016 value – Dec 2015 value) X 100/Dec 2015 value

• annual growth rate, you need to take the difference from one year to another. For example, the annual growth rate for March 2016 =

(Mar 2016 value – Mar 2015 value) X 100/Mar 2015 value

Why does the real GDP growth rate differ from the nominal growth rate? Referring to the real GDP growth rate (quarterly and annual) that you reported in the above table, what can you say about the Australian economic outlook during the pre-, during and post-COVID-19 era? Where will you place the Australian economy on the business cycle for each of these periods?

Nominal GDP represents services at the current price, whereas real GDP values the production of products and services at a fixed price.

ii. Create a table like Table 1.2 and calculate the GDP deflator and the quarterly and annual changes in the price level from March 2016 to December 2023. The formula for quarterly and annual change is similar to the one described in (i)

Table 1.2	GDP Deflator	Percentage Change (Quarterly)	Percentage Change (Annual)
	99.88

 

What is a GDP deflator? Which period saw the lowest and highest percentage increase in the price level as measured by the GDP deflator? Explain your answer. (Hint: compare the quarterly measure and annual measure). 

 A GDP deflator is the current price level in relation to the base year's price level. It indicates the portion of the nominal GDP increase that may be attributed to price increases as opposed to increases in output volumes.

b. The GDP is commonly used to measure a country’s economic progress and standard of living. Read the article A Brief History of GDP - and what could come next and explain why GDP has its limitations and what nations should concentrate on to go beyond the GDP measures to sustain their population's wellbeing and welfare

Question 2

a. The table below provides the March 2023 and 2024 seasonally adjusted labour market data for Australia and Tasmania, but some information is missing.

• Complete the table by filling in the missing figures.
• Why might Tasmania’s participation rate be lower than Australia’s?
• Explain how the unemployment rate rose in Australia from March 2023 to March 2024 while the number of people employed and the labour force participation increased.
• Explain how the unemployment rate fell in Tasmania from March 2023 to March 2024, even though the number of employed people fell.

b. Read the article Youth Unemployment in Tasmania's north. What type of unemployment is George Town facing, and what are the economic and social costs of such unemployment in the short and long run.

c. As an economic consultant, you find it challenging to monitor your workers, and thus, you prepare a report in which you recommend to the firm’s leadership team that the firm should raise employees’ wages. One manager, however, makes the following argument: ‘I think the wages we are paying are fine. As long as enough people are willing to work here at the wages we are currently paying, why should we raise them?’ What argument can you put forward to justify that the firm should increase its wages? Under which economic condition (boom or sluggish) do you reckon you have a strong case, and why?

Question 3

a. Consider the two tables below.

Annual Growth (%) in CPI and CPI Groups

March 2022 to March 2023 - Australia (Weighted average of eight capital cities)

All groups CPI                                                                7.0%                        Health	5.3%
Food and non-alcoholic beverages                                8.0%                        Transport	4.3%
Alcohol and tobacco                                                     4.4%                        Communication	1.2%
Clothing and footwear                                                  3.2%                        Recreation and Culture	8.6%
Housing                                                                        9.8%                        Education	5.4%
Furnishings, household equipment and services           6.7%                      Insurance and financial services   Source: ABS (2023) Consumer Price Index, Australia - March 2023, Tables 3 & 4    Annual Growth (%) in CPI and CPI Groups March 2023 to March 2024 - Australia (Weighted average of eight capital cities)	6.5%
All groups CPI                                                             3.6%                            Health	4.1%
Food and non-alcoholic beverages                             3.8%                           Transport	3.6%
Alcohol and tobacco                                                   6.3%                      Communication	1.8%
Clothing and footwear                                                 0.4%                      Recreation and Culture	0.2%
Housing                                                                       4.9%                      Education	5.2%
Furnishings, household equipment and services         0.2%                      Insurance and financial services	8.2%

 

(i) Which goods (or CPI groups) rose faster (above 6%) than the All Groups CPI from March 2022 to March 2023?

 (ii) How did the price of the same group of items fare between March 2023 and March 24? What could explain the changes in the prices of these items, their sustainment, or even their increase?

(iii) Ignoring any potential substitution, quality and new product bias in the CPI, explain whether the CPI measures the cost of living and, if so, for whom?

(iv) What three groups of items had the lowest price growth between March 2023 and March 24? Provide an analysis of why these items had sluggish price growth. 

(v) The inflation rate, which was 7.0% from March 2022 to March 2023, is now 3.6?tween March 2023 and March 24. Assuming households and businesses expected inflation to persist at 7% in 2024 while the actual inflation fell below 4%. Explain who is likely to be most negatively affected by this unexpected change and who may benefit from it in relation to income, assets, and debts.

b. To answer the questions below, assume the table below contains nominal $ per week and the CPI for Australia in December 2003 and December 2023.

	Average Weekly Earnings	Age Pension	Unemployment Benefits	Consumer Price Index
Dec-2003	$881.30	$206.55	$187.45	77.6
Dec-2023	$1,807.70	$485.75	$334.20	130.8

 

i. In Dec-2023 dollars, how much were the Average Weekly Earnings, the Age Pension and Unemployment Benefits 20 years ago in Dec-2003?

ii. Calculate the real growth rate (using any suitable method) for the Average Weekly Earnings, the Age Pension and Unemployment Benefits from December 2003 to December 2023.

iii. Use your answers in (i) and (ii) to compare and discuss the growth of Average Weekly Earnings, the Age Pension and Unemployment Benefits in Australia over the last 20 years.

iv. Calculate the percentage proportion of Unemployment Benefits to the Age Pension in December 2003 and December 2023. Are there big differences between the two periods? Provide reasons as to what could have led to the outcome.

Question 4

In 2013, the Australian economy experienced a mining boom.

a. An increase in households' and firms' expectations would lead to an increase in aggregate demand, higher levels of output and employment, and potentially inflationary pressures.

b. Given the situation in part (b), if the Reserve Bank of Australia wants to move real GDP to its potential, should it use expansionary or contractionary policy? In your answer, make sure you explain in which direction the RBA would move the cash rate to achieve its policy goal.

c. Using the dynamic aggregate demand and aggregate supply model, explain the effect of aggregate demand increasing faster than potential GDP on price level and actual GDP.

d. During the mining boom period, what effect would a change in households' and firms' expectations have had on the aggregate demand curve?

e. At various times in recent years, the major banks in Australia pursued their own interest rate policy and increased their interest rates by more than the amount by which the RBA increased the cash rate. Would such actions mean that monetary policy has become ineffective?

f. Briefly discuss the effect of the cash rate changes in (c) and (d) on consumption and investment spending.

Question 5

a. The information in the following table shows what the situation will be in 2021 if the government does not use fiscal policy:

Year	Potential GDP	Real GDP	Price Index
2022	$2.7 trillion	$2.7 trillion	118.8
2023	$2.7 trillion	$2.3 trillion	119.7

 

1. Draw a diagram that depicts the Australian economy in 2022. Assume the economy is in long-run equilibrium.

ii. On the same diagram, show a short-run supply shock that depicts the Australian economy in a short-run equilibrium in 2023.

iii. If there were no other movement in AD or AS, explain what would happen to prices and real GDP in the long run. Explain your answer using the AD-AS diagram.

iv. If the supply shock was instead a permanent long-run shock, explain what would happen to prices and real GDP in the long run. Explain your answer. 

v. Assume that the economy is in a short-run equilibrium in 2023, as you drew in part (ii), and that no movement to the long-run equilibrium has begun. Show on the AD-AS diagram, how the government’s fiscal policy could be used to move the economy towards the potential output. In your answer, make sure you explain whether the government should increase or decrease government purchases and taxes.

vi. If the government is successful in moving real GDP to its potential level in 2023, state whether each of the following will be higher, lower or the same as it would have been if they had taken no action:

• Real GDP
• Potential GDP
• The inflation rate The unemployment rate.

b. In what ways does the federal budget serve as an automatic stabiliser for the economy?

c. During the recent sluggish economic growth, why will the Australian government budget likely move into deficit?

d. What is the difference between the Australian budget deficit and government debt?

e. Is the rising government debt bad for the Australian economy?

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