Chapter 1: Economic performance

Contents
1.1 Overview

1.2 Economic growth and Australia’s economy

1.3 Employment trends and Australia’s economy

1.4 Inflation rates and Australia’s economy

1.5 Sustainability indices and Australia’s economy

1.6 Other indicators of economic performance and Australia’s economy

1.7 SkillBuilder: Calculating inflation

1.8 Review

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1 Economic performance
1.1 Overview
1.1.1 Measuring economic performance

Resources

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As you have probably learned through earlier studies of economics, it is important that an economy satisfies
as many of the needs and wants of its citizens as possible. It does this by providing a structure — such as a
market — that enables buyers and sellers to meet and exchange goods and services.

You have probably also learned that not all citizens of society have the same level of access to these goods
and services. The ability to earn an income, family background, health, education and luck are some factors
that influence a person’s ability to satisfy their needs and wants.

The numbers of people who are unable to access a minimum level of goods and services are often used as a
measure of how well an economy is performing. Information gathered about an economy’s performance can
be used to plan strategies that assist people to access those minimum levels of goods and services.
 FIGURE 1 All economies in the world measure their economic performance.

The information obtained by measuring the performance of an economy directs government policy. This
topic will discuss some of the key areas for performance assessment, many of which should be familiar to
you as they are often discussed by the media.

Learning objectives
Students will investigate:

the indicators of economic performance and how Australia’s economy is performing.

 STARTER QUESTIONS
1. What is an economy?
2. What do citizens want from their economy?
3. What is the role of a market in an economy?
4. Why should an economy measure its performance?

1.2 Economic
economy
growth and Australia’s

1.2.1 Economic growth = increased volume of goods and services

Every day you use goods and services. Think of the things you use on a daily basis: bread for breakfast, a
bus or train service to get to school, pens and paper to complete homework, and electricity for charging
your laptop and mobile phone. And you will need all of these goods and services again tomorrow.

The need for an economy to produce goods and services to replace the ones that have been used or
consumed is one of the main reasons why economies must grow each year. Other reasons why economies
must grow include population growth — which requires additional goods and services — and the desire to
continually improve the quality of products. Imagine if producers never improved telecommunication: mobile
phones and the internet would not have been invented. Economic growth is defined as real growth in the
volume (value) of goods and services produced by an economy over a period of time.

FIGURE 1 Economic growth leads to employment and infrastructure growth.

Measuring economic growth is important as it is linked to many other aspects of the economy and to its
ability to satisfy the needs and wants of consumers.

1.2.2 Measuring economic growth

Economic growth occurs when an economy increases the volume of goods and services produced over a
period of time. The most commonly used general measure of this is the annual rate of growth in real Gross
Domestic Product (GDP). GDP represents the total market value of final goods and services produced by a
country over a period of time. This figure is adjusted to remove the effects of any inflation existing within the
economy over the same time period.

FIGURE 2 Consumer goods must be continually produced to replace the ones that have been
consumed.

The most common means of measuring GDP is by using the Aggregate Demand (or Aggregate Expenditure)
method shown below.
Aggregate Demand method of measuring GDP
It is generally considered acceptable for the rate of increase in GDP to be between 3 per cent and 4 per cent
per year. This rate allows for an increase in population, the replacement of goods and services that have
been consumed, improvements and new products.

Anything less than 3 per cent is considered slow growth and suggests the economy is not keeping up with
the demand for goods and services.

A figure above 4 per cent is often considered to be too high; in other words, the economy is growing too
quickly and the rate of growth will not be sustainable. A sustained rate of growth means the economy is
able to maintain that level over a significant period.

1.2.3 Australia’s recent performance

Figure 3 charts Australia’s rate of economic growth, as measured by changes in real GDP, from 2013 to
2016.

FIGURE 3 Australia’s GDP growth rate, 2013–16

Changes to Australia’s GDP growth rate are published quarterly so the annual rate of GDP growth must be
drawn from the quarterly figures provided. For example, the annual growth rate of 2.8 per cent for 2015,
shown in Figure 4, is calculated by summing the rate for each quarter of 2015 shown in Figure 3.
 FIGURE 4 Australia’s annual GDP growth rate, 2012–15

Figure 4 shows that each year from 2012 to 2015 Australia’s growth rate fluctuated but remained below the
rate of 4 per cent (the figure identified as too high). The goal of achieving a rate of growth of between 3 per
cent and 4 per cent, however, was not reached.

Australia’s performance in the first quarter of 2016 saw a seasonally adjusted increase in GDP of 1.1 per
cent. This was the largest quarterly increase since the first quarter increase of 2012. Growth was driven by
net exports, private consumption expenditure and private investment. Demand within the mining and
agriculture, forestry and fishing industries was the main driver for the economy during the March quarter,
with mining up 6.2 per cent and agriculture, forestry and fishing up 2.5 per cent.

1.2.4 International comparison

It is useful to compare Australia’s economic performance with that of other countries. The United States is
often considered to be the world’s biggest economy and Australia’s performance is regularly compared to its
performance.

China is an important trading partner for Australia and changes in its growth can lead to a change in our
growth. China buys large quantities of our mineral exports, so a decline in China’s growth will have a
negative impact on our mining sector and hence our growth.

Australia has historic ties to the United Kingdom. It is still one of our major trading partners and its economy
is one of the main ones in Europe.

Finally, New Zealand is our closest neighbour and trading partner. The ties between the two countries are
strong and New Zealand’s economy often mirrors changes in our economy.

The graphs in Figure 5 show the growth rates of those four economies.
FIGURE 5 Growth rates of other economies, 2013–16: (a) the United States, (b) China, (c) the United
Kingdom and (d) New Zealand
1.2.5 Limitations of measuring economic growth
While tracking changes in our GDP is the main means of measuring our economic growth, there are
limitations to this form of measurement. Some of these limitations are:

GDP doesn’t include non-market production

GDP doesn’t provide information about the distribution of production
GDP doesn’t consider the impact of production on the environment
GDP involves some ‘guesstimates’ of production.
Let’s look at each of these limitations.

GDP doesn’t include non-market production

If someone carries out jobs around their own home that could be done by a paid worker they are
contributing to economic growth, but this contribution is not included because it can’t be measured. For
example, when someone paints their own home, the Australian Bureau of Statistics can’t put a value on the
work done, so this is not included in the official GDP figures.

GDP doesn’t provide information about the distribution of production

GDP only measures changes in the quantity of goods and services produced but there is no information
regarding who receives this increased number of goods and services. If the increased production is not
shared equally among the citizens of the economy, it can be argued that the economy hasn’t really ‘grown’.

GDP doesn’t consider the impact of production on the environment

Increased production can mean increased pollution, quicker deterioration of the environment, depletion of
non-renewable resources and increased climate change. These effects are referred to as negative
externalities as they are considered negative outcomes of production. These externalities will all negatively
impact our national wealth in the future.

GDP involves some ‘guesstimates’ of production

The value of some non-marketed (not sold) production making up GDP has to be ‘guesstimated’, leading to
inaccuracies. For example, estimations are made for the part of a farmer’s production that is consumed on
the farm, as is the annual value of accommodation provided by houses occupied by their owners. This leads
to inaccuracies in Australia’s GDP figures.

1.2 ACTIVITIES
REMEMBER
1. Define economic growth.
2. Provide one reason why an economy needs to grow each year.
 EXPLAIN
3. Explain why it is important for an economy to measure its performance in terms of economic
growth.
4. Explain two limitations of using GDP as a measure of a country’s economic growth.

DISCOVER
5. Use the Australia GDP growth rate weblink in your Resources section to help you answer the
following questions.
a. What was the percentage change in Australia’s GDP in the most recent quarter?
b. Provide a summary of the reasons for the growth rate identified above.

6. Select two other countries that are important to Australia. For each one:
a. explain why it is important to Australia
b. calculate its economic growth rate using the figures provided.

Resources

Explore more with this weblink: Australia GDP growth rate

1.3 Employment
economy
trends and Australia’s

1.3.1 The importance of reducing unemployment

As a student, you are constantly asked to think about your future and what you want to do when you finish
school. While this may not necessarily be your immediate goal, eventually you will hope to gain employment.
Employment enables us to earn an income so we can purchase the goods and services we need and want.
In the workplace we can form relationships, and often our friendship groups later in life include our work
colleagues. Employment also enables us to feel good about ourselves as we are contributing to society,
being productive and interacting with others.
 FIGURE 1 Unemployed people have to rely on the government and welfare for their income.

However, not everyone is always able to find employment, and sometimes circumstances arise that lead to a
person losing their job. Unemployment is a situation where people who are willing and able to work are
unable to find employment. The government recognises that there will always be some level of
unemployment, but tries to reduce it. It sets a target or goal of maintaining the rate of unemployment at
about 5 per cent of the workforce, or at a level where cyclical unemployment is avoided. We will talk about
cyclical unemployment later in this chapter; it refers to unemployment caused by cyclical or regular
decreases in the level of economic activity.

Let’s first look at how unemployment is measured and what the causes of unemployment are.

1.3.2 Measuring unemployment

In Australia, the unemployment rate is measured using the Labour Force Survey.

FIGURE 2 As part of the Labour Force Survey individuals are interviewed to determine their work status.
The Labour Force Survey is conducted monthly and involves about 32 per cent of the civilian population
aged 15 years and over. This survey sample is selected from around the country. As shown below, people in
the labour force are classified and measured according to their labour force status.

The structure of Australia’s Labour Force survey

The Australian Bureau of Statistics (ABS) defines the labour force as people who are older than 15 years and
who are able and willing to work. This definition includes people who are classified as employed — that is,
they work full time (usually more than 35 hours per week) or part time (more than one hour per week); work
for payment or profit; are self-employed; work in a family business; or have a job but are prevented from
working due to illness, strikes, holidays or other similar situations in the survey week.

The definition also includes people who are unemployed — that is, those who do not have a paid job but
who are actively looking for work by completing job applications and/or registering with Centrelink as a job
seeker, either on a full-time or part-time basis, in the week prior to the survey. It also includes those who
were able and willing to start employment in the week prior to the survey week or are waiting to resume a job
after being laid off or stood down without pay. This group of people is expressed as a percentage of the total
labour force, and this percentage is called the unemployment rate.

Australia’s unemployment rate fluctuated over the 12 months to July 2016, but an overall downward trend is
evident.

FIGURE 3 Australia’s unemployment rates, July 2015–June 2016

We can see in Figure 4 that in the years leading up to 2016, the annual rate of unemployment exceeded 5
per cent.
 FIGURE 4 Australia’s unemployment rates, 2010–16

1.3.3 International comparison

As with economic growth, it is worthwhile comparing Australia’s employment performance with that of some
of Australia’s trading partners.

The graphs below show the recent unemployment rates of the United States, China, the United Kingdom
and New Zealand.
 International comparison of unemployment rates

1.3.4 Causes of unemployment

When examining our unemployment rate it is important to understand the causes of unemployment and the
various types of unemployment that exist. It is possible to identify four key types of unemployment:

cyclical unemployment
structural unemployment
seasonal unemployment
frictional unemployment.

Cyclical unemployment
Cyclical unemployment occurs when the level of spending in the economy falls. When consumers or
businesses feel pessimistic about the economy they tend to save rather than spend. This leads to reduced
spending, reduced production and hence a reduced need for labour. If the pessimism persists the economy
can move into a period of negative growth. Two consecutive quarters of negative growth is referred to as a
recession and this can cause further negativity about the state of the economy.
Cyclical unemployment can also occur because of a reduction in consumer incomes, higher interest rates
leading to less money available for spending, poor economic conditions overseas among our trading
partners, and a decrease in government spending to reduce budget deficits and debt.

Structural unemployment
Structural unemployment occurs as a result of changes in the way goods and services are produced.
Generally, this takes place when production methods change, leading to a mismatch of skills; that is, the
skills currently in use are outdated and are not transferrable to the new production methods. This causes job
losses, often due to changes in technology. Another cause of structural unemployment is outsourcing. This
is when one section or department of a business is closed and its work is done overseas.

FIGURE 5 Structural unemployment can be caused by the outsourcing of jobs such as call centre
operators.

Seasonal unemployment
Seasonal unemployment results from the termination of jobs at the same time each year due to the regular
change in seasons. Common examples of these types of jobs include fruit-picking, tourism, working for
holiday operators, sheep shearing and working in the ski fields.
 FIGURE 6 Fruit picking is one example of a seasonal job.

Frictional unemployment
Frictional unemployment occurs when people are unemployed between finishing one job and starting
another. This is common in the building trades and in some areas of rural industry.

1.3.5 Effects of unemployment

Unemployment has a number of negative effects on the economy, society and individuals. Let’s look at three
of these effects:

deteriorating living standards

decreased national production
changed government budget position.
Deteriorating living standards
When an individual becomes unemployed, their living standard is likely to deteriorate considerably because
the average wage of $ 1499 per week (as at November 2015) is replaced by an average unemployment
benefit of $ 264 per week (as at March 2016). This results in less spending on goods and services, and
reduced savings as individuals readjust their spending patterns.

A reduced income can place stress on families and relationships as it often means cutting back on spending
on such things as children’s activities or family social outings. Unemployed people often develop a feeling of
personal failure associated with the loss of status and friends. Knockbacks from unsuccessful job
applications reinforce this feeling and individuals may lose their skills and possibly their work ethic if they are
out of work for long periods.

Decreased national production

When some of a nation’s resources are not used or are lying idle, the economy does not produce at its
optimum or productive capacity. Fewer goods and services are available and national output, or GDP, is
lower than its potential level, causing lower material living standards.

Changed government budget position

Unemployment negatively affects government revenue and government payments. On the one hand,
unemployment lowers the number of income earners, thereby reducing government tax revenues. At the
same time, unemployment also raises government spending on welfare benefits, leaving fewer resources for
other areas of need such as health, education and infrastructure.

DISCUSSION
Unemployment benefits are paid to job seekers to provide a minimum adequate standard of living to
people who are temporarily out of the workforce. As of June 2016, the Newstart Allowance for a single
person aged 22 or over with no children is a maximum of $ 527.60 per fortnight. Do you think this is
about right, or should it be a higher or lower figure?
1.3 ACTIVITIES
REMEMBER
1. Define unemployment.
2. Describe what is meant by the labour force and outline who is considered part of the labour
force.

EXPLAIN
3. Explain two main types of unemployment.
4. Explain how the trend in Australia’s unemployment rate may have affected the Australian
economy over the past four years.
5. Explain how unemployment may affect an individual.

DISCOVER
6. Use the Australia unemployment rate weblink in your Resources section to help you answer the
following questions.
a. What is the current rate of unemployment in Australia?
b. Explain the trend in unemployment over the period shown.

7. Use the Australia youth unemployment rate weblink in your Resources section to help you
answer the following questions.
a. What do you understand by the term ‘youth unemployment’?
b. According to the graph, what is the current rate of youth unemployment in Australia?
c. Outline the effect of unemployment on young people.

Resources

Explore more with this weblink: Australia unemployment rate

Explore more with this weblink: Australia youth unemployment rate
1.4 Inflation
economy
rates and Australia’s

1.4.1 Getting value for our money

As consumers, we are constantly looking for value for money; that is, for good-quality goods and services at
reasonable prices. When the price of a good or service increases, we are naturally concerned because this
represents a decrease in the value we are getting for our money for that particular good or service.

FIGURE 1 Inflation causes the value of money to fall.

When the price of a good or service increases, we think of this as inflation. However, inflation is more than
just the price of a good or service increasing. Inflation occurs when there is an increase in the general level
of prices across the economy.
1.4.2 Measuring inflation
Inflation in Australia is traditionally measured by calculating the Consumer Price Index (CPI). This index is
calculated every quarter by the Australian Bureau of Statistics (ABS). The CPI measures the average change
in retail price of a basket of local and imported goods and services that represent a high proportion of
expenditure by metropolitan households.

FIGURE 2 The ABS regularly conducts a survey of prices to calculate inflation.

This basket of goods and services is referred to as the regimen and it includes only those items considered
important to Australian households. The regimen comprises more than 80 000 items, which can be grouped
into the following 11 categories:

food
clothing and footwear
housing
household contents and services
transportation
recreation
 financial and insurance services
communication
alcohol and tobacco
health
education.

Once the items are selected, they are weighted. Next, the relative importance of each item to the overall
household budget is determined and a weighting is applied. Weighting is based on the frequency of
purchase and the relative cost of the item.

With the regimen and categories determined, prices for the goods and services included are surveyed at a
range of representative retail outlets such as supermarkets, fast-food shops, chemists, department stores
and service providers. Prices are only surveyed at these outlets in the eight capital cities of Australia. These
prices are then compared to the prices of the same items in what is termed a ‘base year’ to determine the
change in price.

1.4.3 Causes of inflation

There are generally considered to be two main types of inflation:

demand-side factors. These factors cause an increase in demand that exceeds the current level of
goods and services.
supply-side factors. These factors lead to an increase in the cost of producing goods and services.

Demand-side factors
Demand-side factors are those factors that influence the level of spending or demand in the economy. If
there is too much demand chasing too few Australian-made goods and services, the economy is operating
ahead of productive capacity. This can lead to shortages of goods and services because businesses cannot
produce more goods and services or access the resources needed to produce additional goods and
services. As a result, the general price level will rise. This is called demand inflation and it generally occurs
when the economy is going through a period of strong growth and employment. A good way to think of this
is as buyers at an auction who compete for only one property: the highest bidder will win the auction.

This excessive demand can result from a variety of factors, including:

an increase in consumer optimism about the future. Consumers are encouraged to spend more money
because they don’t see a need to save for ‘a rainy day’.
an increase in business confidence. This can lead businesses to spend and invest in new assets, hire
more employees or replace old equipment.
an increase in income. If consumers have a higher income — either through wage increases
determined by the government or through a reduction in income tax imposed by the government —
they are likely to increase their spending on goods and services.
 an increase in our exports. If the economies of our major trading partners are performing well and they
are experiencing good economic growth, they may increase their demand for our goods and services.

Demand inflation occurs periodically in our economy, as every economy goes through cycles. It is the
Australian government’s role to manage these cycles and the effect of demand inflation on the economy.

Supply-side factors
The supply of goods and services is the task of suppliers or producers. In producing goods and services for
sale, producers and suppliers may experience an increase in their costs. When costs increase, some
producers and suppliers may choose to absorb the cost increase themselves and operate with a smaller
mark-up. However, not all businesses do this, choosing instead to pass on this increased cost to consumers
in the form of higher prices. This is known as cost inflation.

The most common supply-side causes of cost inflation include:

an increase in wages paid to employees. Wages are often the main cost for a producer and rising
wages represent a large cost increase, which is passed on to consumers.
an increase in interest rates. This raises the producer’s cost of finance and borrowing. These costs are
usually passed on to consumers.
an increase in government taxes, oil prices and prices for utilities (such as electricity, gas and water
services). These costs are outside the control of the producer and are also usually passed on to
consumers.
an increase in the cost of raw materials. One-off supply-side shocks due to a one-off event can cause
this. An example may be a severe storm that negatively affects the yield of a crop, such as Cyclone
Larry, which hit Queensland in 2006 and wiped out much of the banana crop for that year. The price of
bananas and banana-based products rose as the supply had decreased.
Australia’s trading partners experiencing a period of inflation. Many component parts are imported so if
our trading partners are experiencing inflation, that inflation may be passed on to Australian producers
and suppliers, who then pass the cost on to consumers.
 FIGURE 3 Cyclone Larry, which hit Queensland in 2006, wiped out much of the supply of bananas,
causing banana prices to rise dramatically.

The Australian government has worked hard to minimise the incidence of cost inflation by making significant
changes to the way some industries are organised and structured.

Tariffs means that imported goods and services have become cheaper and Australian producers have had
to cut costs to remain competitive. This has led to lower prices in some industries, such as the motor-vehicle
industry.

The government has also opened up some industries to increased competition. Industries such as gas and
electricity were previously dominated by one provider. By allowing more competition there has been a
lowering of prices as these new providers seek to gain customers.

1.4.4 Effects of inflation

Inflation is considered to be an unfavourable occurrence for an economy. Inflation makes it difficult for the
government to achieve any of its other economic objectives and it can negatively impact on the living
standards of consumers. This happens because, among other things, inflation:
 causes local producers to lose out to overseas competitors. Inflation raises the price of goods and
services produced locally. This hurts Australian producers who wish to compete internationally as the
prices they sell their products for cannot compete with the lower overseas prices. This inability to
compete can cause business closures, resulting in higher rates of structural unemployment.
undermines economic growth. Inflation erodes consumer and business confidence as consumers stop
spending and producers stop investing in productive assets when prices are rising. This can reduce
the level of spending, negatively impacting the rate of economic growth.
changes the allocation of resources. When inflation occurs, people with excess income often invest in
what is referred to as unproductive resources; that is, resources such as shares and property, which
generally increase in value at a faster rate than inflation. So, instead of being used to purchase
productive resources that generate goods and services, this money goes into resources that only
produce an income for those wealthy enough to invest.
affects income distribution. Inflation can reduce the purchasing power of the dollar and negatively
impact on income distribution. People on a fixed wage are not able to increase their income to cope
with price increases, so their purchasing power declines.

FIGURE 4 Inflation in Zimbabwe saw its government produce a 100 trillion dollar banknote.

1.4.5 Australia’s inflation rate

The Australian government has set a target for inflation of 2 to 3 per cent over the course of a business
cycle. One business cycle is a period of five to seven years, during which time it is expected that the
economy will go through certain stages such as a peak or boom, an economic downturn, a trough and an
expansionary phase.

Figure 5 charts Australia’s inflation performance between 2013 and 2016.

 FIGURE 5 Australia’s inflation performance, 2013–16

Figure 5 shows that Australia’s inflation rate in the quarter from March to July 2014 reached 3 per cent, the
upper limit of the target rate for inflation. This figure was the latest in a series of small rises over the previous
year. The inflation rate then fell sharply. The government was able to achieve its target rate of inflation in the
first year-and-a-half shown in figure 5, but the inflation rate has been below target since the end of 2014.

1.4 ACTIVITIES
REMEMBER
1. What is meant by inflation?
2. What are the two types of inflation?

EXPLAIN
3. Explain why inflation is bad for the economy. Identify some groups in society that would be
negatively affected by high inflation and explain why you believe this to be so.

THINK
4. How is inflation measured?
 5. Can you identify any problems with the way inflation is calculated?

DISCOVER
6. Prepare a list of all the items you have spent money on over the past week. Classify the items
into the categories used by the ABS to calculate the CPI.
a. Which category is most important to you?
b. What percentage of your spending belongs to each category?
c. Explain the item of expenditure that is most important to you. Is your spending reflected in
your response?
d. Assuming your income remained constant, explain how a rise in prices of 5 per cent may
impact your spending.

1.5 Sustainability
economy
indices and Australia’s

1.5.1 Qualitative measures

Many measures of economic performance are quantitative; that is, they measure the dollar value or the
percentage value change in an item. For example, unemployment measures the number of people
unemployed as a percentage of the labour force. Inflation measures the percentage change in the price of
goods and services.

FIGURE 1 Deforestation is an issue for economies that wish to develop in a sustainable manner.
While these measures provide useful information, this is not the only information available or relevant to an
economy. There is a range of qualitative measures that can be calculated and examined to measure the
performance of our economy. Qualitative measures determine or measure the quality of our life and the
economy. Let’s examine three of these qualitative measures (or indices) now:

the Genuine Progress Indicator (GPI)

Measuring Australia’s Progress (MAP)
the Human Development Index (HDI).

1.5.2 Genuine Progress Indicator (GPI)

The GPI was developed in the late 1980s to measure the overall progress of an economy in achieving
improved living standards. In simple terms, it calculates GDP but then makes both negative and positive
adjustments to the values to reflect the good or bad effects on society’s welfare of some types of activity
and spending. Deductions from the figures are made to reflect costs such as:

environmental damage due to pollution

depletion of non-renewable energy resources such as coal and petrol
reduced leisure time due to increased hours of work or travel times
inequality in the distribution of income
increased crime rates.

Some items that add to the GDP include:

ongoing services provided by public infrastructure

contributions made by the socially productive use of time, such as volunteer work and housework.

1.5.3 Measuring Australia’s Progress (MAP)

MAP is a collection of measures published periodically by the ABS. It arose partly out of public interest in
determining whether or not life in our country was getting better, and if so, whether this improvement could
be sustained indefinitely.

There are four main categories of measures used by the ABS to compile this indicator. Table 1 summarises
some of the key elements that make up each category of measure.
TABLE 1 Measuring Australia’s progress (MAP) — a summary of the concept’s structure

Key dimensions, specific headline and supplementary measures, and brief description of recent
trends

1. Individuals 2. The economy and 3. The environment 4. Living together

economic
resources

Health, National income, The natural Family, community and social

including life including real GDP landscape, including cohesion, including proportion
expectancy, per capita, real threatened species, of children with lone mother
infant disposable income weed problems, families, children without an
mortality, per capita, real native forest area, employed parent, primary
causes of household water storage carers of the elderly, voluntary
death, burden consumption capacity, water work, suicide and drug-
of disease spending per head diversions and river induced death rates,
Education and and saving as a condition index participation in religious
training, percentage of The air and activities
including GDP atmosphere, Crime, including homicide
participation Economic including days of rate, imprisonment rates,
and retention hardship, including excess ozone levels, victims of personal and
rates, the distribution of highest hour household crime
qualifications, average real averages of sulfur Democracy, government and
literacy equivalised dioxide citizenship, including
Work, disposable concentrations, proportion of overseas born
including the household income greenhouse gas eligible residents who are
unemployment by quintile emissions by sector, citizens, voter turnout,
rate, labour National wealth, carbon dioxide proportion of women in
underutilisation including real concentrations federal parliament and major
rate and assets and Oceans and listed companies
participation liabilities per estuaries, including Communication, including
rate capita, visitors to the Great computer ownership and
Culture and economically Barrier Reef, number internet access for
leisure, demonstrated of reported oil spills households
including natural resources Transport, including passenger
attendance at per head, real net vehicles per 1000 people,
cultural and foreign debt and road facilities
sporting mean household
events net worth
Key dimensions, specific headline and supplementary measures, and brief description of recent
trends

1. Individuals 2. The economy and 3. The environment 4. Living together

economic
resources

Housing (no
specific indicator)
Productivity,
including both
labour and
multifactor
measures of
efficiency,
research and
development as a
percentage of
GDP, and hours
worked
Competitiveness
and openness,
including ratio of
imports to GDP,
real unit labour
costs in
production, foreign
ownership and
exchange rate
Inflation, including
the CPI and other
measures of prices

All sets of There appears to Data suggests Trends in this area are mixed,
statistics above have been overall regression for the with some showing progress and
suggest progress progress in most of environment in some others regression.
over the past five these areas but areas and progress in
years. economic hardship others over the past
and wealth were not five years.
evenly distributed
 Key dimensions, specific headline and supplementary measures, and brief description of recent
trends

1. Individuals 2. The economy and 3. The environment 4. Living together

economic
resources

across society.

1.5.4 Human Development Index (HDI)

The United Nations’ Human Development Index is a measure that compares the wellbeing of people in
different countries. It reflects and takes into account both positive indicators (such as long life expectancy at
birth, educational attainment and average level of income per head per year) and negative ones (such as
infant mortality and prevalence of child labour), combining these into a single statistical index number. When
a country’s index rises, it is a sign that there has been progress and living standards have increased. The
main weaknesses of the HDI include the subjective nature of the indicators used to compile the index and
the unreliability of the statistical data for some countries.

1.5 ACTIVITIES
REMEMBER
1. What is meant by sustainability?
2. Why is it important to consider sustainability when measuring economic performance?

THINK
3. Examine the three alternative measures provided. Use the internet to research each indicator in
more detail and provide an outline as to which indicator is most suitable for measuring economic
performance.

DISCOVER
4. What things are important to you? Conduct a survey of the class to ascertain the three most
important things for each member of the class. Using this information provide an explanation of
what we should measure to determine our progress in terms of economic performance.
1.6 Other indicators of economic
performance and Australia’s
economy
As we have already discovered, both quantitative indicators (such as unemployment) and qualitative
indicators (such as the HDI) are useful in providing information about the performance of the economy. By
using a combination of quantitative and qualitative indicators, we are able to get a clearer understanding of
the state of the economy.

In addition to those already mentioned, there are a range of other indicators that give us information about
how the performance of the economy is impacting on the quality of people's lives. Three examples that will
be examined in this section are:

the Business Confidence Index

the Liveability Ranking
the World Happiness Report.

1.6.1 The Business Confidence Index

Imagine you had a casual job and the hours that you worked changed significantly each week. One week
you may work 18 hours and the next week you may only work 4. This uncertainty about your working hours
may affect your confidence as a consumer. You may decide to save your money rather than spend it, just in
case you don’t work many hours in the next week.

Businesses are no different. They make decisions based on how confident they are in the performance of the
economy. When businesses are confident that the economy is performing well, they are more likely to
borrow money to invest and expand, increase their levels of production and hire more staff. Of course, when
business confidence is down, the reverse occurs.
 FIGURE 1 When business confidence in the economy is high, more employees are hired.

Consumer confidence and business confidence are measured by a number of different organisations.
National Australia Bank (NAB) produces a monthly report based on a survey of more than 600 businesses.

Trading Economics produce a website that provides a range of economic indicators for over 190 countries.
 FIGURE 2 Australian business confidence for August 2016 to July 2017

Source: Trading Economics

As figure 2 shows, business confidence can change quickly. Business confidence is often linked to
consumer confidence (see figure 3). In general it would seem that the two indicators are linked — if
consumers are confident then businesses are also confident about the future. The latest figures seem to
refute that assertion so other factors need to be considered.

FIGURE 3 Australian consumer confidence for September 2016 to August 2017

Source: Trading Economics

Business confidence may be positive because overseas demand is growing (exports are in demand), interest
rates may be falling or steady, the government may have introduced laws favourable to businesses or a
change of government may have occurred.
Confidence can also vary between industries, and at different points in time businesses in certain industries
may feel more confident than others. For example, predictions of a bumper season of snow will boost the
confidence of ski resort owners, and the staging of the 2018 Commonwealth Games on the Gold Coast
should boost the confidence of local businesses.

Use the link below to find more up-to-date data on business confidence. https://tradingeconomics.com/
australia/business-confidence

1.6.2 Liveability Ranking

While economic indicators are very important, it is also necessary to consider if the benefits of a strong
economy are improving our quality of life. A number of indicators such as the Liveability Ranking have been
developed to try to measure this. The Liveability Ranking considers a wide range of factors (outlined in figure
4) to determine which cities are the most desirable to live in.

FIGURE 4 The major categories used to determine the Liveability Ranking (and the weighting of each)
The 2016 Liveability Ranking Report surveyed 140 cities using the criteria set out in figure 3. Overall, the
report identified a range of factors that had contributed to changing ‘liveability’ in cities throughout the world.
In particular, civil unrest, acts of terror and violence have reduced stability throughout the world and caused
many cities to become less ‘liveable’. Cities such as Tripoli (Libya), Kiev (Ukraine) and Damascus (Syria) all
became less liveable, largely owing to conflict.

FIGURE 5 In 2016, Melbourne topped the list of the world's most liveable cities.

1.6.3 The World Happiness Report

What use is a strong and productive economy if people are not happy? If an economy is strong because
people spend the majority of their lives working with little time to enjoy themselves or see their family and
friends, is it really of any benefit? The main aim of having a strong national economy is to ensure that people
can benefit from it and enjoy a higher standard of living.
 FIGURE 6 The main aim of having a strong economy is to ensure that people can benefit from it and
enjoy a higher standard of living.

The World Happiness Report is a survey that was first conducted in 2012. It collects data on more than 150
countries and ranks them based on the level of happiness of their citizens. Increasingly, governments are
interested in ‘happiness’ data because it not only tells them about the performance of the economy, but also
the benefits that people derive from the performance of the economy.

FIGURE 7 The World Happiness Report ranks more than 150 countries based on their level of
happiness.

Source: World Happiness Report, 2016.

Some of the major areas used to calculate the ranking in the World Happiness Report are:
 Gross Domestic Product (GDP) per capita
social support
healthy life expectancy
freedom of life choices
generosity
perceptions of corruption.

FIGURE 8 The top 10 and bottom 10 countries according to the World Happiness Report, 2016

DISCUSSION
Happiness is usually reported as the primary goal in individuals’ lives; however, many people believe
there is much more to a rewarding life than just seeking happiness. What else do you think people
should pursue in life?
1.6 ACTIVITIES
REMEMBER
1. Identify one international and one domestic factor that may influence business confidence.
2. What are the five major categories used to determine the liveability ranking?
3. According to the 2016 World Happiness Report, what are the:
a. three happiest countries?
b. three least happy countries?

EXPLAIN
4. Explain why business confidence may vary between industry sectors.
5. Explain why the World Happiness Report is a useful indicator for governments.

THINK
6. Imagine the Australian Government has asked you to design a new index or indicator that
provides information about the economy and standard of living in Australia. What would you call
your index/indicator and how would it be calculated?

DISCOVER
7. Choose ONE country that is not in the top 10 or bottom 10 of the World Happiness Report, 2016.
For your chosen country, undertake research in relation to:
Gross Domestic Product (GDP) per capita
Social support
Healthy life expectancy
Freedom of life choices
Generosity
Perceptions of corruption

Use your research to predict where your chosen country would be ranked on the World Happiness
Report for 2016. Check to see how close your estimated ranking was with the actual ranking for your
country on the report.
1.7 SkillBuilder: Calculating inflation
1.7.1 Tell me
Calculating the inflation rate for Australia involves collecting data about changes in the prices of goods and
services. This information is not readily available and requires time to collect and the ability to conduct
surveys at regular intervals.

However, on a smaller scale it is possible to monitor and record the changes in price of a single product. For
our purposes we will look at calculating changes in the price of petrol.

Calculating changes in the price of petrol over a period of time can give an insight into how inflation is
calculated and the effect the change in price may have on other areas of the economy.

1.7.2 Show me
Identify a two-week period and a location you pass regularly where the price of petrol can be observed on a
daily basis.

Each day for the two-week period record the price at your chosen service station of:

unleaded petrol
premium petrol
diesel
LP gas.

(If there is more than one location available, select one and use that same location each day.)

Record the date and time you visit the location and then record the price advertised for each of the four
products listed above.

Note: When recording the price per litre ensure the price is the ‘actual’ price and not the price available to
customers using discount offers or supermarket dockets.

Once you have collected this information, calculate the percentage change in price for each product each
day. Use this calculation formula:

% increase on day 2 = price day 2 – price day 1

price day 1 × 100
1

At the end of the survey period, calculate the overall inflation rate for the four products using this formula:
% increase over the period = price on last day – price on day 1
price day 1 × 100
1

1.7.3 Let me do it

1.7 ACTIVITIES
Write a report outlining the inflation rates for the four types of fuel and then explain how the change in
price of these may impact upon individuals, families and other businesses. Comment on the reliability
of the data collected. What could be done to make the data more reliable?

1.8 Review
1.8.1 Summary
Assessing the performance of an economy is important because it enables the economy to evaluate how it is
performing its role as ‘manager’. It also enables the economy to assess the wellbeing of its citizens.

There are a number of key areas where it is important and possible to measure economic performance:

economic growth
unemployment
inflation.

Each of these indicators has a means of measurement and it is important to understand how they are
measured and the effects these problems have on our living standards — both material and non-material.

Sustainability indices and other indicators of economic performance also provide a lot of information about
the economy. Some examples of these include: the Human Development Index (HDI), the Genuine Progress
Indicator (GPI) and the World Happiness Report.
1.8.2 Your turn

1.8 ACTIVITIES
Prepare a report comparing Australia’s economic performance in the key areas of economic growth,
unemployment and inflation against one other country not already examined (India, as a growing
economy of importance to Australia, is an example).

In your report, the following questions should be addressed.

1. Provide a summary of what your report is aiming to show. Include a definition of the indicators
you will discuss and an explanation of how they are calculated.
2. Provide a statement outlining why the country selected for comparison was chosen; that is, their
importance to Australia.
3. Provide a brief summary of the performance of both economies over the period shown in terms
of the measures identified.
4. Provide a comparison between the two economies. Which economy has performed better?
Provide reasons for your assertion.
5. Outline the effects that the trends in the indicators may have had on the people living in the
economy.
6. Investigate the Human Development Index for each country and answer questions a, b and c.
a. Which country has performed better?
b. Does the ranking on the HDI match the results identified above using the more traditional
measures?
c. Which areas are of concern to each country?

Resources

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