Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Our economy
Focus statement
In this chapter we learn about changes in our economy.
We look at how these changes relate to existing trends
in the economic cycle, and explain the implications of
these changes for consumers and businesses.
In this chapter
you will learn about:
• economic change
• the links between Australian
consumers, employers, businesses
and governments
• the economic cycle and how
changes in total output, consumer
confidence and spending, inflation,
wage rates, interest rates and
unemployment affect the economy
• interest rates and the effect of rising
and falling interest rates on consumer
and personal financial decision making
• price changes (inflation)
• the effects of changes in the value
of the Australian dollar on consumers
and businesses
• current issues relating to changes in
economic activity.
13.1 Economic change
Getting technical
Budget, the The Budget is the annual announcement enterprise Entrepreneurial skill. The term enterprise is often
of the federal government’s fiscal policy. In the Budget, used to describe entrepreneurship as a factor of production.
the government sets out the tax changes proposed for It is the skills and ability to take risks and create profit.
the following tax year, and also how it plans to spend
entrepreneurship An entrepreneur is an individual
that revenue.
who takes risks and organises the factors of production
business cycle/economic cycle The tendency of to generate a product with the aim of making a profit.
economies to move, over time, through periods of boom and Entrepreneurship is the skill involved in being an entrepreneur.
slump. The business cycle is made up of the fluctuations in
exports Goods, services and capital assets sold overseas.
the rate of economic growth that take place in the economy.
The peak of the business cycle is usually referred to as a financial stability Maintaining financial stability is one of
boom, and the trough as a recession or depression. the main purposes of the Reserve Bank of Australia (RBA).
The focus of this work is the monitoring of developments and
capital Manufactured resources; for example, machines,
events in financial markets in Australia and overseas. Although
factories and offices. Capital is one factor of production.
maintaining financial stability is not the RBA’s most public role,
economic growth Typically refers to an increase in a it is vital if we are all to maintain trust in the financial system.
country’s output of goods and services. It is usually measured
imports Goods, services and capital assets purchased
by changes in gross domestic product (GDP).
from overseas.
Info.com.tech
Reserve Bank of Australia
The Reserve Bank of Australia website <www.rba.gov.au>
provides a great deal of information that is relevant
to our economy.
Activity
Access the RBA website. Research:
a the history of the RBA
b what monetary policy is
c the RBA’s role in setting monetary policy.
Figure 13.1a The key players in our economy.
Payment
Income
Labour
4 How are prices for goods and services set in Australia?
5 In what ways can the government affect the economy?
Businesses
Activities
1 Look at Figure 13.1a (page 265). As a class, discuss the Figure 13.1b A two-sector economy.
economic linkages portrayed.
2 Research information on the most recent federal Budget.
Describe what the Budget is and find out what areas will Governments
have the most federal government money allocated to it
in the coming year. Discuss your findings with the class.
(Note: All major newspapers extensively report on the
Products
Taxes
Income
Labour
Payment
Income
Labour
Taxes
Income
Labour
where:
C = consumers’ consumption of goods and services
Households I = investment in goods and services by business
G = government spending on goods and services
X = exports
Products
Payment
Income
Labour
M = imports.
Productivity is the output gained from the resources used.
If output increases without a change in the resources
used then productivity has improved. For example, when
Businesses a business first starts up or begins operating, the staff
are usually on a steep learning curve. As employees
become more skilled at performing their roles the firm’s
Imports Exports
output increases even though exactly the same level of
resources (land, labour and capital) are being used. This
World economy is an increase in the productivity of labour. Technology
also enables businesses to produce more efficiently and
thus increase productivity.
Figure 13.1d A three-sector economy plus the link between the
Australian economy and the world economy.
Wage rates
Point of recovery If the economy is experiencing high inflation, con-
sumers often demand higher wage rates so they can
afford more goods and services. When wages rise
faster than improvements in productivity it further adds
Trough
to inflation because businesses increase their prices
to cover the increased costs of production the wage
Time rises have caused. In the past, wage rises helped fuel
Figure 13.1e The economic cycle. the level of inflation. Today, wage rates are not usually
linked to price rises. Instead, wage rates are generally
tied to productivity (through workplace agreements and
Spending and consumer confidence enterprise bargaining, as discussed in Chapter 4), so
Consumer confidence is reflected in consumer spending inflation is more contained.
while business confidence is reflected in business
spending. Economic confidence is the overall perception Interest rates
of the economy by all the sectors combined. Consumer Interest rates also influence consumer spending. High
and business confidence is very important as they interest rates encourage consumers to save rather than
influence spending and, hence, total output (GDP). This spend. As interest rates increase so do the required
is illustrated by the GDP formula given on the previous payments on mortgages so that many consumers with
page. Economic growth depends on consumers and mortgages need to reduce spending in other areas. Also,
businesses spending. when interest rates are high, consumers often defer
entering the housing market, which means total output
would be lower than it would otherwise have been.
268 Commerce.dot.com
Business spending also drops as interest rates rise
because high rates make it more expensive to borrow
funds to invest in capital. Interest rates will be examined Comprehending the text
in more detail in Section 13.2. 1 List the four functions of an economy.
2 Define the term total output.
Employment/unemployment
3 a What is the economic cycle?
The unemployed, as officially measured by the Aust-
ralian Bureau of Statistics (ABS), are Australians aged b Explain the relationship between various points in the
cycle and economic confidence.
over 15 who are not currently working but are seeking
employment and are available to start work. 4 Define the term productivity.
Effect on
Fixed and variable interest rates
Variable interest rates are those that the lender can change Change in Repayment Choice Choice of
at any time during the loan period. Fixed interest rates are interest rates of debt between personal
fixed and investment
those that the lender cannot change during the loan.
variable rate strategy
Fixed interest rates are generally higher than the variable
rate for the period of the loan. This is to compensate the Increase in Likely to
lender for missing out on unexpected rises in the variable interest rates extend the
rate. Fixed rates provide certainty for the borrower but repayment
period/duration
present the risk of missing out on a lower variable rate as
of loan as debt
an average over the period of the loan. A honeymoon rate becomes more
means that at the start of the loan period the interest rate expensive
is fixed at an attractively low rate.
Decrease in
interest rates
270 Commerce.dot.com
13.3 Price changes
The percentage change in the CPI from September 2006
to September 2007 was 1.9 per cent. The percentage
Getting technical change in the WPI from September 2006 to September
appreciation An increase in the value of an asset. 2007 was 4.2 per cent. This would indicate that over
The term can also be used to refer to the appreciation of the financial year 2006–07 wages increased more than
a currency. A currency appreciates when its value, expressed prices. That is, wages outstripped inflation and, hence,
in terms of another currency, rises. had greater purchasing power. This would be particularly
consumer price index (CPI) The main measure of inflation be due to an increase in productivity.
in Australia. The CPI shows the amount by which prices have Since 1995, the Reserve Bank of Australia (RBA) has
increased for spending on an average basket of goods. As
aimed to keep Australia’s inflation between 2 and 3
with all index numbers, it has a base year, and all changes
per cent. One reason for this is to reduce economic
are expressed as percentage changes around that base.
uncertainty. When prices change dramatically, consumer
depreciation When the value of one currency, expressed and business confidence falls. Saving levels drop due to
in terms of another currency, falls. consumers being nervous about interest rates keeping
exchange rate The price of one currency in terms of pace with inflation. If consumers are not saving they are
another currency. For example, the exchange rate between spending, which further adds to the inflation process.
the A$ and the US$ may be A$1 = US$0.65. This means that The RBA has been quite successful with this goal,
you need to pay a price of A$1 to get US$ 65 cents. except when the goods and services tax (GST) was
wage price index (WPI) a measure of changes in wages introduced in 2001.
and salaries.
Exchange rates
Inflation An exchange rate is the amount for which one currency
The real value of money is what goods and services can is exchanged for another. For example, at the start of
be purchased with it; that is, the purchasing power of 2008, $1.00 Australian was worth $0.88 US. To express
money. When the prices of goods and services rise, the this the other way round, US$1.00 could be exchanged
purchasing power of money is reduced. This means the for A$1.14. To buy a car costing US$10 000 in the United
cost of living has become higher. States you would need to take A$11 400 out of your
Australian bank account.
In Australia, inflation is measured using the consumer
price index (CPI), which is produced by the ABS. The When the Australian dollar decreases in value relative to
CPI measures the changes in the price of a fixed basket other currencies in the world it makes the purchase of
of goods and services acquired by household consumers. imports (goods and services produced overseas) more
Every three months the ABS finds the cost of each item expensive. This is called a depreciation of the Australian
in its theoretical basket of goods and compares the total dollar. For example, if an Australian business paid US$100
cost to the total cost at the time of the base period. The to a US supplier for each pair of US designer jeans they
CPI had a base index rate of 100 from 1989–90. At the imported, the jeans would cost the equivalent of A$114
end of September 2007 the CPI was 158.6. This means each. If the importer wanted to order another batch of
that over the last 17 years prices have risen, in general, by jeans and, in the meantime, the Australian dollar had lost
58.6 per cent. At the end of September 2006 the CPI was value (depreciated) against the US dollar, the US supplier
155.7. This means the percentage change over the year would still want US$100 for each pair of jeans but they
was 158.6 divided by 155.7, minus 1, times 100, which is would then cost more than A$114 each. If the Australian
1.9 per cent. This can be expressed as (158.6/155.7) – 1) dollar appreciated (that is, improved relative to the US
× 100 = 1.9 per cent. dollar), the jeans would cost less.
The wage price index (WPI) measures changes in the When the Australian dollar depreciates, consumers and
cost of wages and salaries using a similar method to businesses spend less on imports. They would then be
the CPI, but for a mixed basket of jobs instead of goods likely to increase their spending on local products and,
and services. thus, consumption and investment would rise.
Weakening dollar Local companies find it easier to compete Higher prices on imported products put upward
internationally pressure on the rate of inflation
Local companies can increase their prices because the It is harder for local companies to expand into foreign
cost of imported products increase markets
Australian investments become more attractive to International travel becomes more expensive for
overseas investors Australians
7 8
‘Our economy’ to a new student. Prepare a mindmap to 9
help you in your task. Explain your completed mindmap 10 11
to another student in your class. 12
13
Activity 2: crossword 14
15 16
6 A ________ economy is a system where resources a Select a topic; that is, identify an economic issue
are owned by households that is of importance at the present time. Careful
examination of the print and electronic media will give
7 An economy where resources are owned by both
you ideas. It would be useful to collect a media file.
private individuals and the government
b Identify the stakeholders in this issue; that is,
10 The pay you receive per time period of work (two words)
determine who has something to gain or lose from the
11 One of the factors of production. It includes issue and who has opinions on the topic.
machines, factories and offices
c Consider what the experts have to say on the issue,
14 Two consecutive quarters of negative economic growth and whether their view is biased in any way. Another
16 Goods, services and capital assets purchased country may have faced the same economic issue.
from overseas Consider how the issue has affected the economies
of other countries.
18 Goods, services and capital assets sold overseas
d Prepare your speech using a report format. Discuss
the economic issue and its relevance to the Australian
274 Commerce.dot.com government, businesses and household sectors.