Australia has an odd way of measuring inflation compared to the rest of the world. The data is collected infrequently and only in the urban areas.
This makes the measure difficult to use when answering the question "Is the standard of living rising or falling for Australians?"
Of course the real cost of goods and services is only one way of measuring the standard of living, but it is an important one. And in the election campaign much has been made of 'skyrocketing prices" by the idiot Abbott and his cronies.
This article in the Guardian Australia shows that Australians are actually better off in real terms when considering their nominal incomes and the price level. This is very much in contrast to the rest of the developed world and you have to ask why Labor have not made much more of this. But that's another story.
What the article does show is how important it is to include the correct prices of goods in any calculation of inflation and how you have to compare it to incomes when considering real incomes. It also exposes the Liberals claims on the cost of living as a crude distortion of the facts. But we are used to that from Australian politicians aren't we?
Friday, 30 August 2013
Monday, 1 April 2013
Massive Holden subsidies harm consumers
It was revealed that Holden had received over $2billion in subsidies in the last 12 years, far more than previously thought.
The Australian government has long argued that subsidising industries is good for jobs in Australia. But most economists would disagree with this as both shortsighted and damaging to the economy.
The argument for subsidy relies on the idea that if it was absent then all the jobs in the industry would be lost, leading to higher unemployment and a lower standard of living in Australia.
The argument against this was first put forward by Adam Smith a then David Ricardo and has been backed up by a further 200 years of economics research. Simon Cowan of The Centre for Independent Studies has argued that if the subsidies were removed then consumers would benefit from lower car prices and the standard of living would rise as resources were redeployed to efficient industries instead.
The argument works like this:
* The car industry in Australia is uncompetitive and inefficient.
* Removing the subsidy means the industry loses money and shuts down.
* Those currently employed in car manufacturing and its supporting industries move to other sectors.
* The resources currently used up by the car industry are released for use by efficient Australian industries.
* All cars sold in Australia are imported from abroad (up from 75%) - these cost less to produce and will become cheaper as firstly the import taxes needed to protect Australian producers are scrapped and foreign producers gain economies of scale.
* Therefore consumers gain by getting their cars more cheaply (approx 1.1 million new cars are sold each year)
* Government can use the money used for subsidies to help reduce taxes or pay for other programmes such as Gonski.
Smith pointed out that competition leads to productive efficiency. Smith and Ricardo showed that with free international trade the most efficient suppliers produce the goods people want with each country specialising in the sectors they are comparatively best at. AS A RESULT EVERYONE IS BETTER OFF.
Australia has never been keen on this argument and despite reforms going back to Hawke/Keating Australia remains the most protectionist country in the G20.
The Australian government has long argued that subsidising industries is good for jobs in Australia. But most economists would disagree with this as both shortsighted and damaging to the economy.
The argument for subsidy relies on the idea that if it was absent then all the jobs in the industry would be lost, leading to higher unemployment and a lower standard of living in Australia.
The argument against this was first put forward by Adam Smith a then David Ricardo and has been backed up by a further 200 years of economics research. Simon Cowan of The Centre for Independent Studies has argued that if the subsidies were removed then consumers would benefit from lower car prices and the standard of living would rise as resources were redeployed to efficient industries instead.
The argument works like this:
* The car industry in Australia is uncompetitive and inefficient.
* Removing the subsidy means the industry loses money and shuts down.
* Those currently employed in car manufacturing and its supporting industries move to other sectors.
* The resources currently used up by the car industry are released for use by efficient Australian industries.
* All cars sold in Australia are imported from abroad (up from 75%) - these cost less to produce and will become cheaper as firstly the import taxes needed to protect Australian producers are scrapped and foreign producers gain economies of scale.
* Therefore consumers gain by getting their cars more cheaply (approx 1.1 million new cars are sold each year)
* Government can use the money used for subsidies to help reduce taxes or pay for other programmes such as Gonski.
Smith pointed out that competition leads to productive efficiency. Smith and Ricardo showed that with free international trade the most efficient suppliers produce the goods people want with each country specialising in the sectors they are comparatively best at. AS A RESULT EVERYONE IS BETTER OFF.
Australia has never been keen on this argument and despite reforms going back to Hawke/Keating Australia remains the most protectionist country in the G20.
Thursday, 14 March 2013
Jobs growth is only good news
The pessimism that abounded prior to the latest employment numbers is making a lot of people look stupid.
True the resources boom is ending and the uncompetitive industries of Victoria and NSW will continue to decline. But the numbers say the economy is fine.
The Age have an unusually detailed analysis of the data which means I don't need to spend much time on it. However look for:
Total employment
Percentage unemployment - and understand the definition - particularly how the workforce is defined
Look at the participation rate - why does this matter?
The state by state breakdown - why do states perform differently?
Monthly figures are volatile, don't expect a a similar rise in employment next time. But look at the TRENDS - it is difficult to avoid the conclusion that unemployment at 5.1% to 5.4% since last July is broadly stable.
As total employment has risen there must be steady growth too. (Remember with productivity increases around 1% growth is needed just to maintain employment.)
True the resources boom is ending and the uncompetitive industries of Victoria and NSW will continue to decline. But the numbers say the economy is fine.
The Age have an unusually detailed analysis of the data which means I don't need to spend much time on it. However look for:
Total employment
Percentage unemployment - and understand the definition - particularly how the workforce is defined
Look at the participation rate - why does this matter?
The state by state breakdown - why do states perform differently?
Monthly figures are volatile, don't expect a a similar rise in employment next time. But look at the TRENDS - it is difficult to avoid the conclusion that unemployment at 5.1% to 5.4% since last July is broadly stable.
As total employment has risen there must be steady growth too. (Remember with productivity increases around 1% growth is needed just to maintain employment.)
Saturday, 2 March 2013
Operating monetary policy
I know this is not a subject anyone is studying at this point in the year, but Ross Gittins outlines how monetary policy works in today's Age.
Exactly how the Reserve Bank of Australia (RBA) controls interest rates is something you have to understand in Unit 4. Australia does this in a similar way to other countries, but has its own precise way of doing it.
Ross Gittins can write some really useful stuff and following his column is a good idea. (However sometimes he seems to get it off the back of a cereal packet so be careful!)
I have one argument with Gittins assertion that the RBA is in control of interest rates. His analysis works for Australia, so far. If he was talking about the UK or the Euro Area, for example, then it would have to be conceded that the market rate can diverge from the 'official rate'.
This happens because funds move between financial markets as banks operate across borders. Australia is a small and isolated market, but it becomes less isolated everyday and before long international banks will be operating alongside the high street banks you know well. But not before you do your exams.
Exactly how the Reserve Bank of Australia (RBA) controls interest rates is something you have to understand in Unit 4. Australia does this in a similar way to other countries, but has its own precise way of doing it.
Ross Gittins can write some really useful stuff and following his column is a good idea. (However sometimes he seems to get it off the back of a cereal packet so be careful!)
I have one argument with Gittins assertion that the RBA is in control of interest rates. His analysis works for Australia, so far. If he was talking about the UK or the Euro Area, for example, then it would have to be conceded that the market rate can diverge from the 'official rate'.
This happens because funds move between financial markets as banks operate across borders. Australia is a small and isolated market, but it becomes less isolated everyday and before long international banks will be operating alongside the high street banks you know well. But not before you do your exams.
Thursday, 21 February 2013
The Asian Century
Last year the government introduced their 'Asian Century' paper. It pointed out that Australia's future lay in Asia and that the reality was that the low cost, highly innovative Asia was where world growth would be centred.
Australia has to live with this simple fact and adjust. Strangely the discussion of the paper was centred on how more language teaching was needed and how Australia had to develop new service based industries to sell to this rapidly growing industrial continent.
Virtually nobody mentioned the implied decline of low tech and manufacturing jobs in Australia. Australians are paid very well and by comparison are much less productive in terms out costs per unit than Asian economies. For many years Australia was able to maintain high manufacturing employment and let technology pass them by for decades because they were so far away.
That is no longer an option. Globalisation, which the 'Asian Century' seeks to embrace, has made the usual Australian view of ' Australian made and owned' as up to date as a dinosaur.
Australia has to learn from the successful economies of Europe. Those who held on to the old industries and work practises, such as Spain and France, have fared very badly compared to those, such as Britain, who allowed the industries to decline and shifted resources to the more modern opportunities.
The pieces linked below illustrate this. The Telstra call centres are moving to Asia where University graduates will answer your call at any time of the day or night. Telstra will cut costs, raise profits and reinvest them in the high tech sector which will provide the sustainable jobs Australia needs.
The second piece is about a US/France spat where an American industrialist declared that they would be insane to invest in France due to the poor working practises.
Trade Unions beware, protecting an inefficient job does nothing to help the future economy of any country.
Australia has to live with this simple fact and adjust. Strangely the discussion of the paper was centred on how more language teaching was needed and how Australia had to develop new service based industries to sell to this rapidly growing industrial continent.
Virtually nobody mentioned the implied decline of low tech and manufacturing jobs in Australia. Australians are paid very well and by comparison are much less productive in terms out costs per unit than Asian economies. For many years Australia was able to maintain high manufacturing employment and let technology pass them by for decades because they were so far away.
That is no longer an option. Globalisation, which the 'Asian Century' seeks to embrace, has made the usual Australian view of ' Australian made and owned' as up to date as a dinosaur.
Australia has to learn from the successful economies of Europe. Those who held on to the old industries and work practises, such as Spain and France, have fared very badly compared to those, such as Britain, who allowed the industries to decline and shifted resources to the more modern opportunities.
The pieces linked below illustrate this. The Telstra call centres are moving to Asia where University graduates will answer your call at any time of the day or night. Telstra will cut costs, raise profits and reinvest them in the high tech sector which will provide the sustainable jobs Australia needs.
The second piece is about a US/France spat where an American industrialist declared that they would be insane to invest in France due to the poor working practises.
Trade Unions beware, protecting an inefficient job does nothing to help the future economy of any country.
Wednesday, 6 February 2013
Scarcity, choice and opportunity cost
So its the start of the course and you will all be encountering the concept of scarcity. It's a vital concept in Economics, but really not given anywhere near enough attention in VCE. This means when the exam asks about these early portions of the study design students have not revised it that well.
Therefore its really a good idea to get this right first time. I won't waste space repeating the textbooks, but I'd like to point you at some resources and draw a lesson from this concept.
A brief overview:
Scarcity is the issue that describes the problem that there are not enough resources to satisfy the wants of society. Therefore society has to make a choice about What to produce, how to produce it and who gets the goods and services produced.
The cost of the choices made is the opportunity cost, the next best alternative given up.
To reduce, but not eliminate, the problem of scarcity it is best for society to use its resources fully and efficiently and that means the economy operating on the boundary of the Production Possibility Curve (or PPF - Frontier). Please note that one text book states that you can distinguish between points on the PPF in terms of productive efficiency - this is wrong and in 2010 misled many candidates! All points on the PPF are efficient.
So what is the lesson?
In a word it is all about price.
Any system can be adopted to deal with scarcity. The method chosen in Australia is the market system.
This means that each good and service has a price. If you can afford the price then you can have it.
So how does price allocate resources between alternative uses? The answer is that your income is like votes. One dollar equals one vote.
Households compete with each other for the goods and services produced because they are scarce. The more votes a good gets the higher the price it can command and as the price rises some people decide not to buy. The scarce resources of Australia are allocated to the uses which people will pay most for.
It may not be fair but it works.
So the prices we pay in the shops are due to scarcity. If there was no scarcity all goods and services would be free and Grand Final tickets would be available to all who want them. We can dream.
Here are a couple of Youtube links. One is a 15 minute lesson, very useful for revision too.
Therefore its really a good idea to get this right first time. I won't waste space repeating the textbooks, but I'd like to point you at some resources and draw a lesson from this concept.
A brief overview:
Scarcity is the issue that describes the problem that there are not enough resources to satisfy the wants of society. Therefore society has to make a choice about What to produce, how to produce it and who gets the goods and services produced.
The cost of the choices made is the opportunity cost, the next best alternative given up.
To reduce, but not eliminate, the problem of scarcity it is best for society to use its resources fully and efficiently and that means the economy operating on the boundary of the Production Possibility Curve (or PPF - Frontier). Please note that one text book states that you can distinguish between points on the PPF in terms of productive efficiency - this is wrong and in 2010 misled many candidates! All points on the PPF are efficient.
So what is the lesson?
In a word it is all about price.
Any system can be adopted to deal with scarcity. The method chosen in Australia is the market system.
This means that each good and service has a price. If you can afford the price then you can have it.
So how does price allocate resources between alternative uses? The answer is that your income is like votes. One dollar equals one vote.
Households compete with each other for the goods and services produced because they are scarce. The more votes a good gets the higher the price it can command and as the price rises some people decide not to buy. The scarce resources of Australia are allocated to the uses which people will pay most for.
It may not be fair but it works.
So the prices we pay in the shops are due to scarcity. If there was no scarcity all goods and services would be free and Grand Final tickets would be available to all who want them. We can dream.
Here are a couple of Youtube links. One is a 15 minute lesson, very useful for revision too.
Tuesday, 5 February 2013
A monthly routine - statistics and decisions
The state of the Australian economy is something VCE Economics students have to understand. For those starting Unit 3 and 4 this year then you have to know the data for the last three years and follow developments this year.
This is because not only can the questions in the exam include that data, but the exam will require students to use statistics in their answers. So it is your responsibility to keep track of them.
Why not just learn the statistics prior to the exam? That may work, but if you are following developments closely then you will gain a deeper understanding of what they mean and the significance of changes. This will help improve your answers and help you move up the rankings. Remember it is the top 10% who get 40+.
Another group of people who follow the statistics closely are the Reserve Bank of Australia (RBA). They have responsibility for keeping inflation between 2 and 3% and they adjust interest rates in order to do this.
Changes in interest rates (monetary policy) take 18 months to two years to affect the inflation rate. Therefore the RBA must look carefully at trends in the data, such as unemployment, the exchange rate, wage costs and domestic and foreign demand in order to predict future inflation and so policy changes. This makes them an excellent source of information on the data and they provide a commentary on the state of the Australian economy.
Each time the RBA make a decision on interest rates (once a month) they issue a statement. Make a habit of reading this and understanding what they are saying. The article from The Age below guides you though the latest one by putting it into plain English.
The RBA also provide a useful 'Chart Pack' undated around once every three months which provides excellent information.
This is because not only can the questions in the exam include that data, but the exam will require students to use statistics in their answers. So it is your responsibility to keep track of them.
Why not just learn the statistics prior to the exam? That may work, but if you are following developments closely then you will gain a deeper understanding of what they mean and the significance of changes. This will help improve your answers and help you move up the rankings. Remember it is the top 10% who get 40+.
Another group of people who follow the statistics closely are the Reserve Bank of Australia (RBA). They have responsibility for keeping inflation between 2 and 3% and they adjust interest rates in order to do this.
Changes in interest rates (monetary policy) take 18 months to two years to affect the inflation rate. Therefore the RBA must look carefully at trends in the data, such as unemployment, the exchange rate, wage costs and domestic and foreign demand in order to predict future inflation and so policy changes. This makes them an excellent source of information on the data and they provide a commentary on the state of the Australian economy.
Each time the RBA make a decision on interest rates (once a month) they issue a statement. Make a habit of reading this and understanding what they are saying. The article from The Age below guides you though the latest one by putting it into plain English.
The RBA also provide a useful 'Chart Pack' undated around once every three months which provides excellent information.
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