Summary of Economic Objectives

Learning Outcome 1: The economic objectives of the Australian Government

1. Sustainable economic growth

a. Definition: Increase in the volume of g/s an economy produces / Increase in the capacity
of the economy to satisfy wants of members.
b. Indicator: GDP
c. Target: 3-4% of growth per year
d. Advantages:
i. Rise in material living standard (subject to changes in population)
ii. More goods and services, wider choice for consumers
iii. Creates employment or prevents unemployment from rising
e. Disadvantages:
i. May result in demand pull inflation
ii. May lead to labour shortages
iii. May lead to structural change and structural unemployment

2. Low inflation (price stability)

a. Definition: Price stability implies avoiding both prolonged inflation and deflation.
Inflation is a rise in the in the general price level of goods and services in an economy
over a longer period of time resulting in a decline in the value of money and purchasing
power.
b. Indicator: Inflation rate
c. Target: 2-3% inflation on average per year
d. Advantages:
i. Promote international competitiveness (through lower relative inflation
rate)
ii. Promotes confidence for households and business (reduce uncertainties
about future cost)
iii. Allow low interest rate
e. Disadvantages:
i. Danger of slipping into deflation
ii. May require reduction in aggregate demand to achieve low inflation, result
in higher level of unemployment rate

3. Low unemployment (full employment)

a. Definition: Labor resources fully utilized, avoid cyclical unemployment rate, stay within
non-accelerating (speeding) inflation rate of unemployment (NAIRU). A job for
everybody that wants to work and is available for work.
b. Indicator: unemployment rate
c. Target: 5% UE (NAIRU)
d. Advantages:
i. Avoid costs to government and taxpayer (tax loss, cost of welfare such as
unemployment benefit)
ii. Avoid social costs (higher crime rate, higher spending on health care due to
crime)
iii. Avoids personal or individual costs (loss of confidence, loss of job readiness,
denial or work ethic)
 e. Disadvantages:
i. May trigger wage-push inflation (cost push inflation)
ii. Moral hazard (guaranteed full employment might make people slack and
inefficient)
iii. Natural unemployment is hard to fix (e.g. frictional unemployment in
between job; structural unemployment mismatch; surplus unemployment
due to minimum wage law)

4. A more equitable distribution of income

a. Definition: Income distribution refers to the way in which an economys income is
spread among the members of different social and socio-economic groups. Equitable
doesnt mean equal distribution of income. It refers to distribution of income that is
fair. E.g. With an equitable distribution of income, a physician might earn more
because he/she deserves more.
b. Indicator: Gini-coefficient (numerical measure of income inequality), Lorenz Curve
(shows proportion of a populations income that is earned by a given percentage of the
population.)

Lorenz curve above the more the curve is bent the more unequal distribution of
income. The 45 degree curve shows complete equality 1% of population receives 1%
of populations income; 10% receives 10% and so on.
Gini coefficients formula: A / (A+B)
Gini coefficient values are between 0 and 1 (as can be seen from the formula above).
The lower the value of the coeffcieint the lower the inequality. The higher the value of
Ginis coefficient the higher the inequality.

c. Target: to reduce Gini coefficient, currently 0.3ish, encourage societies to help the
needy, to reduce gap between higher and lower income, i.e. higher tax rate for those
with higher income, higher socially security payments for low income earners, to
improve opportunities for younger Australians who grow up in disadvantaged areas or
not well educated.
d. Advantages:
 i. More equitable income means a more equitable amount of consumer
income is spent on goods and services, subsequently increasing satisfaction
ii. Less reliance on government funded program such as welfare payments, as
less inequitable incomes means a detraction from the cycle of poverty, as
well as a reduced number of people on government assistance
iii. Generally higher levels of well being, and not a massive gap in standards of
living and satisfaction levels between low and high socio economic groups.
e. Disadvantages:
i. People are less encouraged to improve themselves for higher pay
ii. Investors are less encouraged to take risks. Hence, losing out the potential
gain of undertaking new ventures and creating wealth along with jobs and
income
iii. The social cost of an equitable distribution of income is that the correlation
between work and wage outcomes doesnt exist, therefore the motivation
to work harder for higher wage doesnt exist.

5. The efficient use of resources

a. Definition: Economic efficiency implies an economic state in which every resource is
optimally allocated to serve each individual or entity in the best way while minimizing
waste and inefficiency.
b. Indicator: Labour productivity, deadweight loss
c. Target: to achieve Allocative efficiency resources are allocated to their most valued
uses, opportunity cost is minimised, which means operation on the PPC. Technical /
productive efficiency ensuring the best use of resources within individual firms,
getting more output for the same or less inputs. Dynamic / adaptive efficiency refers
to adaptability of the economy to develop innovation and the best use of new
technology by firms at all times.
d. Advantages:
i. Protect level of non-renewable resources
ii. Reduces rate of environmental damage
e. Disadvantages:
i. May lead to structural change. Contraction of less efficient industries
ii. Renewable resources may be relatively expensive

Learning Outcome 2: The economic policy objectives of the Reserve Bank of Australia (RBA)

The objectives of the RBA are stated in the Reserve Bank Act 1959. The objectives are to achieve:

1. Stability of the currency

Keep inflation within a 2% to 3% target band on average over the life of the business cycle.
2. Maintenance of full employment
Avoid cyclical unemployment and maintain unemployment at the non-accelerating inflation
level of unemployment (NAIRU).
3. Increase the economic prosperity and welfare of people of Australia
Foster as much economic growth for as long as possible consistent with price stability.
Learning Outcome 3: The extent to which the economic objectives of the Australian Government
may conflict and complement each other

Complementing objectives:
Economic Growth
VS
Full Employment

Compatible

Full Employment Economic Growth

VS VS
Income Distribution Income Distribution

1. Economic Growth VS Full Employment

a. Rising economic growth means growing demand for factors of production
(resources).
b. Unemployed resources including labor are taken up as production increases, hence
full employment.

2. Economic Growth VS Equitable Income Distribution

a. Economic growth is necessary for income to rise.
b. As incomes rise, tax revenue rises, and government redistribute income via transfer
payment (such as subsidies, without exchanges of g/s) and public services of various
kinds.
c. Income support schemes and the provision of merit goods such as health care are
sometimes referred to as the social wage. This depends on appropriate
redistributive policies being in place.
d. NOTE: Economic growth by itself will not guarantee equity in income distribution but
it is a necessary condition for it to occur

3. Full Employment and Equitable Income Distribution

a. Lower unemployment rate (particularly labour unemployment rate) will reduce the
rate of poverty, hence reduce the gap between the rich and the poor.
b. Full employment also reduces the need of transfer payment.
Conflicting objectives:

Unemployment
VS
Inflation

Economic Growth Economic Growth

VS Incomp VS
Structural atible
Price Stability
Unemployment

Income Distribution
VS
Economic Growth

1. Unemployment (Full Employment) VS Inflation (Price Stability)

a. As unemployment rate reduces, purchasing power will increase, hence result in
increase in AD. Increase in AD will result in demand pull inflation.
b. Also, as unemployment rate reduces, cost of hiring workers will increase as well, this
will result in cost push inflation.
c. E.g. 1st qtr of 2015, AUS inflation rate was 1.3%, while UE was at 6.2%
d. NOTE: AUS, Low inflation has better priority

2. Economic Growth VS Demand Pull Inflation (Price Stability)

a. If there is no change in economic capacity (potential capacity).
b. Increase in economic growth reflects the increase in AD, causing demand pull
inflation.
 3. Equitable Income Distribution and Economic Growth
a. As mentioned, equitable income distribution will reduce the motivation to improve
or to innovate/take risk to expand business.
b. Labour skill will stagnant, which will affect the competitiveness of output, hence
economic growth
c. As investors are less motivated to take risk of expansion, production level will be
affected, hence economic growth affected.

4. Economic Growth VS Structural Unemployment (Full Employment)

a. To achieve higher level of economic growth, efficient allocation of resources is
needed
b. Industries which are less efficient will then contract, and the efficient industries will
grow
c. Hence mismatch of job available and skills available will take place, which result in
structural unemployment rate

Learning Outcome 4: The time lags which occur in the use of economic policies i.e. recognition,
decision (implementation) and effect (impact) lags

1. Fiscal policy: Fiscal policy uses changes in the level of government spending (G) and taxation
(T) to directly and indirectly manage the level of aggregate demand to achieve
macroeconomic objectives.
2. Monetary Policy: Monetary policy involves the action by the Reserve Bank, on behalf of the
government to influence the cost and availability of money and credit in the economy.

Types of time Definition Fiscal Monetary

lags policy policy
Inside Lag Recognition lag The time taken to recognize a Longer Shorter
change in economic conditions
Decision lag Time taken to make a policy Longer Shorter
decision
Action lag Time taken to implement the Longer Shorter
policy decision
Outside lag Effect lag Refers to the time takes for the Shorter / Longer
policy to actually affect the level of immediate
economic activity