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Australia's Macroeconomic Objectives
- 1. Australia’s macroeconomic objectives WACE Economics – Unit 4 Slideshow 12.1 (c) Andrew Tibbitt 2017 1
- 2. (c) Andrew Tibbitt 2017 2 Economic roles of government Role Examples/Comment Allocate resources to public and merit goods Defence, law and order, education, health Redistribute incomes More equitable distribution through tax and transfers Regulate business Control negative externalities, control monopoly power Macroeconomic management Achieve macroeconomic objectives
- 3. Keynesian view Economic activity can get stuck at an undesirable level. Markets, such as the labour market, do not self-correct. Performance can be improved through active demand management. Neo-classical view Given time, markets will self-adjust. Acceptable equilibrium can be achieved without demand- management. Demand management (e.g. excessive borrowing) causes long-term damage to economy (c) Andrew Tibbitt 2017 3 Does the economy need managing?
- 4. (c) Andrew Tibbitt 2017 4 Macroeconomic objectives Objective Comment/Example Steady, sustainable economic growth Achieve a ‘trend growth’ of about 3% per year. Increase material standard of living Price stability, low inflation Inflation with 2% to 3% per year range on average over cycle Full employment for everybody that wants to work Zero cyclical unemployment Reduce natural rate of unemployment where possible Equitable income distribution, distributive justice Fair distribution of income, without losing incentives to work An efficient use of resources Allocate resources in a way that reflects the benefits received by members of society
- 5. Some common external performance measures are monitored by the macroeconomic managers, including: The Current Account Balance on the balance of payments The Exchange Rate (Trade Weighted Index) Net foreign liabilities (as a % of GDP) But the government does not have performance objectives for the external side of the economy. Performance levels are neither good nor bad – they reflect Australia’s participation in the global economy. (c) Andrew Tibbitt 2017 5 External performance indicators are not macroeconomic objectives
- 6. 1. To describe macroeconomic economic performance 2. To make policy makers accountable for their policy decisions 3. To describe or assess the impact of an event on economic performance (c) Andrew Tibbitt 2017 6 The purpose of macroeconomic objectives
- 7. Objectives are described in general terms (e.g. price stability, full employment) Targets are specific. There is only one specific target for the Australian economy, i.e. 2% to 3% inflation over the life of the economy cycle. (c) Andrew Tibbitt 2017 7 Objectives and targets
- 8. Fiscal Policy Government spending Taxation Borrowing Monetary Policy Cash Rate changes Future guidance Bank liquidity Interventionist (e.g. infrastructure, health, education) Market-orientated (e.g. wage flexibility, competition, trade) Demand-side policies (c) Andrew Tibbitt 2017 8 External performance indicators are not macroeconomic objectives Supply-side policies
- 9. 1. Conflicting objectives 2. Information gaps 3. Time lags 4. Political objectives 5. External Shocks These are explained further in the following slides (c) Andrew Tibbitt 2017 9 Problems faced in achieving macroeconomic objectives
- 10. Within domestic economy Complementary in short run • Growth and employment • Growth and higher material living standards • Employment and equity • Foreign investment and growth Complementary in long run • Price stability and growth (and hence employment) • Equity and growth Clash in short run • Inflation and employment • Growth and inflation Clash in long run • Price stability and growth (and hence employment) • Growth and sustainability (c) Andrew Tibbitt 2017 10 Complimentary and conflicting objectives
- 11. Between external and internal economic performance Complementary in long run • Foreign investment and growth Clash in long run • Growth and foreign liabilities Complementary in short run • Current account deficit and living standards Clash in short run • Current account deficit and living standards • High exchange rate and growth (c) Andrew Tibbitt 2017 11 Complimentary and conflicting performance
- 12. Price Level AD1 LRAS SRAS U RGDP Unemplt Rise in aggregate demand AD2 3% 5% 3% 5% More SR growth Higher inflation Lower unemployment inflation lower unemployment higher growth What happens next? (c) Andrew Tibbitt 2017 12 Conflicting macroeconomic objectives
- 13. Conflicting and compatible objectives Price Level AD1 LRAS SRAS U RGDP Unemplt AD2 3% 5% 3% 5% inflation lower unemployment higher growth What happens next? Keynesian view Nothing happens Neo-classical view • Wages rise • SRAS rises • Inflation rises • Growth slows • Unemployment rises to natural rate (c) Andrew Tibbitt 2017 13
- 14. Conflicting and compatible objectives Price Level AD1 LRAS SRAS1 U RGDP Unemplt AD2 3% 5% 3% 5% inflation higher unemployment slower growth What happens next? Keynesian view Nothing happens Neo-classical view • Wages rise • SRAS rises • Inflation rises • Growth slows • Unemployment rises to natural rate SRAS2 8% (c) Andrew Tibbitt 2017 14
- 15. The macro-managers can consult: 1. Leading indicators (data about what is going to happen) 2. Coincident indicators (data about what is currently happening) 3. Lagging indicators (data about what has happened) There are also 1. General indicators (data about economy as a whole) 2. Partial indicators (data about small aspects of the economy) In general general indicators are also lagging indicators and leading indicators are also partial indicators. (c) Andrew Tibbitt 2017 15 2. Information gaps
- 16. Managers face delays in getting and in interpreting data Inside lags Getting the information Recognizing the problem (Recognition lag) Changing the policy setting (Action or implementation lags) Outside lag Effect lag or impact lag (c) Andrew Tibbitt 2017 16 3. Time lags
- 17. In Australia governments serve 3 year terms causing them: • Always to be in election mode • To take a short term view of the economy Politicians are said to suffer from an expansionary bias – they are likely to be more popular spending money than making savings Is it better to have poor but democratic decision making than better but technocratic decision making? (c) Andrew Tibbitt 2017 17 4. Length of the political cycle
- 18. Unforeseen events affect aggregate demand and aggregate supply and knock the economy off course. By definition, the government can’t control factors beyond its control. For example: Global Financial Crisis Waves of pessimism and optimism Growth rates in China The price of commodities Climate change (c) Andrew Tibbitt 2017 18 5. External shocks
- 19. (c) Andrew Tibbitt 2017 19 End of slide show
Editor's Notes
- Internal or domestic performance is measured against the following economic objectives.
- There are three areas of external performance that receive a good deal of media attention. The current account account balance (inflows and outflows of finance related to trade and incomes) The exchange rate (value of the Australian Dollar measured in terms of one or more other currencies) Net foreign liabilities (net value of Australia’s foreign debt and extent of foreign ownership of assets located in Australia) Australia participates in the global economy through trade, capital and finance investment. But there are no objectives here to measure performance against. The levels are neither good nor bad – they are the result of participation in the global economy.
- There is a lot of economy information. Data needs to be treated with caution as individual bits of data may be distorted by special events. Taking two or three bits of different data, or two or three readings of the same indicator over a period of time, gives a more reliable picture. Some data is general (or aggregate) data – indicating performance in the economy as a whole. Examples include: Inflation data (percentage change in Consumer Price Index) Unemployment data Growth data (percentage change in GDP) Balance of Payments data Other data refers to only a particular aspect of the economy. Partial data is often more up to date, and generalised conclusions can be made from the more specific information. Examples include: Business investment New car registrations Housing loans Leading indicators attempt to predict what will happen in the economy. Coincident indicators report what is currently happening in the economy. Lagging indicators show what has happened in the economy. As a general rule, the more general the data the more time it takes to collect and the more out of date it is when it is released. Partial data is available quickly but it may be less reliable.