Download Week 9 Lecture 17, The Australian Economic system

What is an economic system?
The Australian Economic System
The University of Melbourne
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The University of Melbourne
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• Simply a context where:
– people
– rules
– laws
– customs
– institutions
– principles
(with thanks to A/Prof Carol Johnston &
Assoc Prof. Martin Davies)
Mark Eggins
[email protected]
operate an economy
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Mark Eggins
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Mark Eggins
Outline
What are the main decisions of an economy?
The University of Melbourne
The University of Melbourne
• Types of Economy
• Australia's current economic profile:
– What
– How
– How much
– For who
• To produce
• Production (labour or capital intensive)
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– The Economic parameters
– The Reserve Bank
– Immigration
– Imports and Exports
– Trade Policy
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What type of economy is Australia?
The University of Melbourne
Type of Economy
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The University of Melbourne
Planned
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Type of Economy
The University of Melbourne
Modified planned
Modified market
Market
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Planned Economies
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The University of Melbourne
• State:
Planned econ
(former USSR)
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Modified planned
(China)
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Modified market
(Aust/USA)
Market econ
(19thC UK)
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dominates
ownership/control of property/labour
decides goods and services/planning and distribution
control emphasises collective goods and services
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Planned Economies: Issues
The University of Melbourne
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Planned Economies: Issues
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The University of Melbourne
Is there much unemployment?
Is there more ‘security’?
Is there over or underproduction?
Can people use their own initiative?
1. Less unemployment
2. More security (China before: “Iron Rice Bowl
铁饭碗 – cradle to grave”)
3. Over or underproduction
4. Dominant ‘state’ can reduce initiative
Mark Eggins
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Mark Eggins
Market Economies
The University of Melbourne
– Does the Market dominate?
– Is there any state control of anything?
– Does business have total freedom in pursuit of
profit?
– Is there many social services?
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Market Economies
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The University of Melbourne
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Market dominates
Individual ownership/No state control of anything
Free reign of business in pursuit of profit
Few social services and social goods
Sometimes called ‘laissez-faire’ or ‘free market’
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Milton Friedman
The University of Melbourne
What are these basic concepts?
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The University of Melbourne
•
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• ‘The most important single central fact about a free
market is that no exchange takes place unless
both parties benefit’.
• ‘If you put the federal government in
charge of the Sahara Desert,
in 5 years there'd be a shortage
of sand’.
Freedom of enterprise:
Price mechanism:
Private enterprise:
Profit motive:
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Basic Concepts
The University of Melbourne
Mark Eggins
Market Economies: Issues
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The University of Melbourne
• Freedom of enterprise: wealth within the law
• Price mechanism: system which brings equality
between supply and demand
• Private enterprise: private ownership of means
to production
• Profit motive: incentive to production
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Individual entrepreneurship
Taxation levels
Employment market volatility
Workers’ security
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Market Economies: Issues
The University of Melbourne
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The University of Melbourne
Mark Eggins
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Modified Market Economy
The University of Melbourne
• Based on market system BUT:
– Involvement of government, business and trade
unions in decision-making
– Government redistributes wealth (tax), controls
inflation and unemployment, regulates some
services
– Private sector (incentive for profit) and public
sector (provision of infrastructure)
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Based on a market system BUT how is it different?
Individual entrepreneurship rewarded
Any taxation may stifle entrepreneurship and
hiring decisions
More volatile employment market
Less security for workers
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Modified Market Economy
Mark Eggins
Australia: Ownership
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The University of Melbourne
• Depends on goods and services
– Meat/bread/wheat/basic services (large government
control affecting price and output)
– Media/newspapers (few companies)
– Steel (one major company)
• Recent moves to deregulate telecommunications
• Labour is unionised but this is changing
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Australia: Powersharing
The University of Melbourne
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The University of Melbourne
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• Power in the economy ‘shared’ between groups such as:
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Federal and state governments
Unions (peak body Australian Council of Trade Unions ACTU)
Business (peak body AIG)
Media (News Corporation and Fairfax)
Lobby Groups
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Some other industry groups
The University of Melbourne
• Cotton Research and Development
Corporation (CRDC)
• Dairy Australia
• Fisheries Research and Development
Corporation (FRDC)
• Grape and Wine Research and
Development Corporation (GWRDC)
• Meat and Livestock Australia (MLA)
• Sugar Research and Development
Corporation (SRDC)
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Some other industry groups
The University of Melbourne
• Cotton Research and Development
Corporation (CRDC)
• Dairy Australia
• Fisheries Research and Development
Corporation (FRDC)
• Grape and Wine Research and
Development Corporation (GWRDC)
• Meat and Livestock Australia (MLA)
• Sugar Research and Development
Corporation (SRDC)
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The University of Melbourne
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The University of Melbourne
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Ref: harpersbazaar.com
The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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Lobby Groups: what do they want?
The University of Melbourne
• We will see a number of home pages
for lobby groups in Australia
• See if you can identify:
– What they might be ‘lobbying’ for
– If overall they might want more (>) or less
(<) government regulation
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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Answers
The University of Melbourne
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Australia: regional power
The University of Melbourne
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APEC
ASEAN (dialogue partner)
ILO
IMF
OECD
WTO
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The University of Melbourne
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Name
Main reason/s for lobbying
Friends of the Earth
Protect the environment
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Australian Chamber of Commerce and Industry
Promote business (inc exports)
< & >
Australian Medical Association
Promote health and doctors’ working conditions
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Australian Council of Social Service
Help the poor and disadvantaged
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Electronic Frontiers Australia
Reduce internet censorship
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Gun Control Australia
Reduce the amount of guns in Australia
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Firearm Owners Association of Australia
Protect the rights of gun owners
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The Wilderness Society
Protect the environment
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National Association of Forest Industries
Promote forest industry and reduce environmental regulation
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National Farmers’ Federation
Promote Australian agriculture and reduce exports >
Public Transport Users Association
Promote public transport
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Australian Shareholders’ Association
Promote the rights of shareholders
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Australian Institute of Company Directors
Promote the role of company directors
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Brotherhood of St Laurence
Help the poor and disadvantaged
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Australia: regional power
The University of Melbourne
• APEC = Asia-Pacific Economic Cooperation
• ASEAN (dialogue partner) = Association of
Southeast Asian Nations
• ILO = International Labour Organization
• IMF = International Monetary Fund
• OECD = Organisation for Economic Cooperation and Development
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WTO = World Trade
Organisation
Mark Eggins
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Freedom in MM Economy
The University of Melbourne
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The University of Melbourne
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Individuals free to produce almost any good/service
Wage earners (theoretically) free to select any employment
Consumers free to spend or save
Some government regulation:
– Hours of work (38 hours pw)
– Minimum wages (The federal minimum wage is currently $15.00 per hour or
$569.90 per 38 hour week (before tax) *
• Government provides subsidies and social service benefits and
produces unprofitable “collective wants”
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Ref:
http://www.netlawman.com.au/info/minimumwages-australia.php
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Advantages/Disadvantages
The University of Melbourne
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The University of Melbourne
• What do you think are the advantages
and disadvantages of a MM Economy?
• Advantages
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• Disadvantages
– Freedom and high
level of innovation
– Profit motive
– Large increases in
output
– High standard of
living
– Poverty and unequal
distribution of wealth
– Losses of production
from industrial
disputes
– Unemployment
– Waste
– Inflation
Mark Eggins
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Major Economic Parameters
The University of Melbourne
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Unless otherwise indicated all
statistics from the ABS
(http://www.abs.gov.au/)
The University of Melbourne
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The University of Melbourne
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• Employment
• Wages
• Real GDP: Gross Domestic Profit (total value of final
goods and services in a finite time).
A measure of economic growth.
• CPI: Consumer Price Index (measure of changes in the
average price over a certain period).
A measure of inflation.
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Consumer Price Index
The University of Melbourne
• Cost/value of a basket of goods in metropolitan
region
• In Australia this has averaged 2.5% since 1993
• % change in the CPI is measure of inflation (Now
3.6%)
• http://www.abs.gov.au/ausstats/[email protected]/mf/6401.0/
• Can be used to:
– index (i.e., adjust for the effects of inflation) wages, salaries,
pensions
– regulate or contract prices
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The University of Melbourne
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The University of Melbourne
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The University of Melbourne
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Exchange Rate
The University of Melbourne
• What one currency is worth in terms of
another.
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Exchange Rate
The University of Melbourne
Growth Rate: GDP
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The University of Melbourne
• What one currency is worth in terms of
another.
• The Australian dollar has in recent times
been strong against other currencies
• This has seen a rise in international tourism
and imports
• Also domestic tourism and international
tourism to Australia has gone down
• GDP = Gross Domestic Product
• Australia’s GDP has averaged 3.25%
since 1990
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The University of Melbourne
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Mark Eggins
The University of Melbourne
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Unemployment
The University of Melbourne
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The University of Melbourne
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• Unemployment rate is currently 5.1%. (ABS)
• The labour force participation rate is defined as
the labour force (persons employed or
unemployed) expressed as a percentage of the
population.
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Mark Eggins
The University of Melbourne
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Mark Eggins
The University of Melbourne
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Question
The University of Melbourne
Monetary Policy
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The University of Melbourne
• What is the difference between
monetary and fiscal policy?
• Stability of the currency
• Economic prosperity and welfare of the people of
Australia
• Controlled by the Reserve Bank
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Mark Eggins
Monetary Policy
The University of Melbourne
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The University of Melbourne
• Concerned with the management of:
– the money supply,
– interest rates
– financial conditions generally
• Part of the bank/government's broad objectives of:
– achieving high employment
– sound economic growth
– low inflation
• In a deregulated financial system the tools of monetary policy
include:
– open market operations by the central bank in securities markets
– intervention in the foreign-exchange market.
Ref: http://www.anz.com/edna/dictionary.asp?
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• Why are people concerned about
interest rates?
• If they go up?
• If they go down?
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Fiscal Policy
The University of Melbourne
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The University of Melbourne
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• Influences the economy through the budget by changes
in:
• Why are people concerned about interest rates?
• If they go up:
– tax
– welfare payments
– government spending
– People with investments are happier (esp. self funded
retirees)
– People with variable interest home loans have to pay more
• If they go down
N.B. Monetarists claim that fiscal 'fine-tuning' of the
economy is ultimately destabilising; they say that fiscal
policy is less effective than monetary policy or not
effective at all.
– People with investments are worried (less interest income)
– People with variable interest home loans happier (have to
pay less)
Ref: http://www.anz.com/edna/dictionary.asp?
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Government reduction of the money supply
Tax Rates (2009-2010)
The University of Melbourne
Taxable income
Tax on this income
$0 – $34,000
29c for each $1
$34,001 – $80,000
$9,860 plus 30c for each $1 over $34,000
$80,001 – $180,000
$23,660 plus 40c for each $1 over $80,000
$180,001 and over
$63,660 plus 45c for each $1 over $180,000
>
The University of Melbourne
• It reduces the amount that people spend
– Lower spending together with prices that are stuck too high
– Reduces the quantity of goods and services that firms sell
– Lower sales cause firms to dismiss workers
• Thus a reduction in the money supply will increase
unemployment in the short run until prices have
adjusted to the change.
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Australian Federal Budget: 2012
Federal Budgets
Ref: blogs.abc.net.au
The University of Melbourne
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• Announced every year by the Treasurer
(currently Wayne Swan)
• The budget will be in
>
– cancellation of the 1ppt cut to the company tax rate, living away from
home allowance for senior executives
– increased superannuation taxes for high income earners
– deficit
– balanced or;
– in surplus
• Remaining consistent to the budget surplus, while minimising the
impact of the budget on the Australian economy
– defence cutbacks
– deferral of the increase in foreign aid spending to poor countries
• This will be influenced by government
revenue and expenditure
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The University of Melbourne
• Redistribution of income from companies and high income earners
to low and middle income earners
• New spending initiatives:
– school kids bonus
– public dental scheme
– Pacific Highway upgrade
Mark Eggins
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Mark Eggins
Terms of Trade: Current Account
The University of Melbourne
• The terms of trade represent the relationship between the
relative price of exports and imports.
• In trade terms, the Australian economy has had persistently large
current account deficits for more than 50 years.
• One single factor that undermines balance of payments is
Australia's narrow export base.
• Lack of international competitiveness and heavy reliance on
capital goods from overseas might increase Australia's current
account deficit in the future.
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The University of Melbourne
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Protection V Free Trade
The University of Melbourne
Protection
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The University of Melbourne
1.
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3.
4.
5.
6.
7.
8.
9.
Free Trade
• help ‘sunrise’ industries
• secure employment
• helps in competing
with other countries
• uses gov’t money
to create jobs
Some Key Trends & Challenges
rewards successful industries
more unstable employment
compete on a ‘level playing
field’
waste of gov’t money
Mark Eggins
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The mining boom
Housing costs
Foreign ownership
Unemployment, underemployment and casualisation
Protection V free trade
Global warming and a carbon tax
E Commerce and the national broadband network
Aging population
Saving V spending
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Mark Eggins
Finally …
The University of Melbourne
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SOCIALISM
You have 2 cows. You give one to your neighbour.
COMMUNISM
You have 2 cows. The State takes both and gives you some milk.
FASCISM
You have 2 cows. The State takes both.
NAZISM
You have 2 cows. The State takes both and shoots you.
The University of Melbourne
AN AUSTRALIAN CORPORATION
You have two cows. Business seems
pretty good. You close the office and
go for a few beers to celebrate.
BUREAUCRATISM
You have 2 cows. The State takes both, shoots one, milks the other, and then throws the milk away.
TRADITIONAL CAPITALISM
You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You
sell them and retire on the income.
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Vocab helpsheet
The University of Melbourne
Commonwealth Government departments
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The University of Melbourne
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Prime Minister and Cabinet
Agriculture, Fisheries and Forestry
Attorney-General's Department
Broadband, Communications and the Digital Economy
Climate Change and Energy Efficiency
Defence
Education, Employment and Workplace Relations
Families, Housing, Community Services and Indigenous Affairs
Finance and Deregulation
Foreign Affairs and Trade
Health and Ageing
Human Services
Immigration and Citizenship
Innovation, Industry, Science and Research
Infrastructure and Transport
Regional Australia, Regional Development and Local Government
Sustainability, Environment, Water, Population and Communities
Veterans' Affairs
The Treasury
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