Explain how Australia’s unemployment and inflation impact economic growth.
Employment and inflation are the key determinants of economic growth in the Australian
economy, and it is the priority of governments to control these aspects to achieve sustainable
growth. Both unemployment and inflation affect aggregate demand (AD) and aggregate supply
(AS) in the economy, hence immensely affect its potential.
The derived nature of employment demonstrates how consumption affects the whole economy
as a chain reaction by being the largest contributor to AD in the economy. AD is the total level of
expenditure in the economy over a given period of time. John Keynes was one of the first to
propose that the most important influence on economic growth is the total level of expenditure
instead of its potential for AS. It is clear that the more people are employed, the higher incomes
will be and the lower the unemployment. Households’ consumption comprises around 50-60% of
total AD in the economy, as seen in Figure 1, hence if employment increases, it will have
significant effects on the levels of total AD, hence economic growth. For instance, in March 2020,
the unemployment rate increased to 7.4%, and consumption fell by approximately 14% causing a
7% decrease in GDP from the same time the previous year, demonstrating the effect of
unemployment on national income, hence economic growth. However, AD only greatly
influences economic growth in the long-term.
Historically, Australia’s non-accelerating inflation rate of unemployment is estimated at slightly
above 4%, below which inflation would increase, and above which, the economy would be
performing below its potential, the production possibility frontier. The demand for labour is in
turn itself derived from AD in the economy, as it is a cyclical flow, where the ability of businesses
to hire employees is determined by the demand for their products. This even further accelerates
national income, because consumer spending is amplified through the multiplier effect, Similarly,
a fall in AD is also multiplied, hence it is crucial to
maintain ample economy-wide demand in the
economy through consistent and low rates of
unemployment.
Another crucial determinant of long-term economic
growth in any economy is aggregate supply, which is
defined as the total level of income over a period of
time. It is also referred to as the nation’s potential
for economic growth, because higher AS allows the
economy to grow faster, while also decreasing
inflationary pressures. This effect is shown in
Figure 2, where the AS curve shifts from AS1 to
AS2, leading to a new equilibrium between the
two with a lower general price level, and increased
national output, which directly correlates to
Employment and inflation are the key determinants of economic growth in the Australian
economy, and it is the priority of governments to control these aspects to achieve sustainable
growth. Both unemployment and inflation affect aggregate demand (AD) and aggregate supply
(AS) in the economy, hence immensely affect its potential.
The derived nature of employment demonstrates how consumption affects the whole economy
as a chain reaction by being the largest contributor to AD in the economy. AD is the total level of
expenditure in the economy over a given period of time. John Keynes was one of the first to
propose that the most important influence on economic growth is the total level of expenditure
instead of its potential for AS. It is clear that the more people are employed, the higher incomes
will be and the lower the unemployment. Households’ consumption comprises around 50-60% of
total AD in the economy, as seen in Figure 1, hence if employment increases, it will have
significant effects on the levels of total AD, hence economic growth. For instance, in March 2020,
the unemployment rate increased to 7.4%, and consumption fell by approximately 14% causing a
7% decrease in GDP from the same time the previous year, demonstrating the effect of
unemployment on national income, hence economic growth. However, AD only greatly
influences economic growth in the long-term.
Historically, Australia’s non-accelerating inflation rate of unemployment is estimated at slightly
above 4%, below which inflation would increase, and above which, the economy would be
performing below its potential, the production possibility frontier. The demand for labour is in
turn itself derived from AD in the economy, as it is a cyclical flow, where the ability of businesses
to hire employees is determined by the demand for their products. This even further accelerates
national income, because consumer spending is amplified through the multiplier effect, Similarly,
a fall in AD is also multiplied, hence it is crucial to
maintain ample economy-wide demand in the
economy through consistent and low rates of
unemployment.
Another crucial determinant of long-term economic
growth in any economy is aggregate supply, which is
defined as the total level of income over a period of
time. It is also referred to as the nation’s potential
for economic growth, because higher AS allows the
economy to grow faster, while also decreasing
inflationary pressures. This effect is shown in
Figure 2, where the AS curve shifts from AS1 to
AS2, leading to a new equilibrium between the
two with a lower general price level, and increased
national output, which directly correlates to
