Conomic Issues and Concerns

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Economic Issues and Concerns
The main economic issues are economic growth, unemployment, inflation and external stability. Economic growth, unemployment and inflation are domestic issues, while external stability is an international issue. Economic growth can contribute to increased inflation, greater income inequality and damage to the natural environment. Higher level of economic growth can result in price increases and large wage claims contributing to a rise in the level of inflation. Even though economic growth improves overall quality of life it can polarise the distribution of income as high income earners reap more benefits from high economic activity. At 4.3%, Australia’s annual growth rate is bigger than any of the developed nations in the Organisation for Economic Co-operation and Development and quarterly growth rate of 1.3% is more than twice the most optimistic forecast. Unemployment means that an economy’s resources are not being used to their full capacity. Thus the economy is operating below its production possibility frontier. With high rates of unemployment the production of both consumer goods and capital goods is lowered, as supply cannot meet demand. Reduced production will lead to a reduction in the current rate of economic growth and standard of living. Those who are unemployed for long periods of time will lose their labour market skill, self-esteem or even become unemployable. Australia’s current unemployment rate is 5.1% Rise in inflation rates tend to have negative impact on the distribution of income because lower income earners often find that their income do not rise as quickly as prices. Higher inflation leads to wage-price inflationary spiral where wage increases lead to higher prices as producers need to maintain profits. In terms of unemployment higher levels of inflation will usually result in more contractionary fiscal and monetary policies, resulting in slower economic growth and high unemployment in the short to medium term. Currently Australia’s inflation rate is 1.6% and so the RBA is putting upward to pressure on it to raise the inflation rate to the target 2-3% The best way of assessing a country’s external stability is to look of it external accounts, foreign liabilities & CAD. Australia’s sustained CAD and high foreign liabilities are major concerns for Australia’s external stability as this may undermine the confidence of foreign investors by suggesting Australia’s economic fundamental are unstable. The volatility of the $A can have a significant impact upon Australia’s external stability. A change in the exchange rate affects the balance of payments by affecting Australia’s international competitiveness and servicing costs of our foreign debt as consumers lose confidence in the economy. Australia’s exchange is currently $0.98 falling from $1.05 during April of 2012, which could indicate a decline in external stability.

The government is able to use macroeconomic policies to influence the economic growth, unemployment, inflation and external stability. Fiscal policy involves the use of the Commonwealth government’s budget in order to achieve economic objectives. Monetary policy is administered by the RBA to influence level of interest rate. Microeconomic policies are policies that affect the economy as a whole with the aim of minimising fluctuations in the business cycle. The use of fiscal policy in 2008-09 and 2009-10 provided significant macroeconomic stimulus to the Australian economy. As the economy recovered the focus of fiscal policy shifted from fiscal expansion to fiscal consolidation, with the government committing to return the budget to surplus in 2012-13. The government will tighten fiscal policy as economic growth recovers in order to shift the Budget from a deficit of -$44.4 billion in 2011-12 to a small surplus of $1.5 billion in 2012-13, indicating contractionary fiscal stance. The government plans to tighten fiscal policy by an enormous $46...
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