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20/06/2022, 10:58
The Australian economy is not as strong as we’ve been led to believe
Business The economy Consumer spending
OPINION
Coming down to Earth: The economy’s
not as strong as we’ve been led to
believe
Ross Gittins
Economics Editor
June 3, 2022 — 11.29am
The main message from this week’s “national accounts” is that the economy isn’t nearly as
Strong – Strong with a capital S – as Scott Morrison and Josh Frydenberg unceasingly claimed
it was during the election campaign. In truth, it’s coming down to Earth.
According to the Australian Bureau of Statistics, real gross domestic product – the nation’s
total production of goods and services – grew by 0.8 per cent during the three months to the
end of March, to be up 3.3 per cent over the year.
Almost to a person, the business economists said – and the media echoed – this was “higher
than expected”. But that just meant it was a fraction higher than they’d forecast a day or two
before the announcement, once most of the building blocks for the figure had been revealed.
https://www.smh.com.au/business/the-economy/coming-down-to-earth-the-economy-s-not-strong-as-we-ve-been-led-to-believe-20220602-p5aqpi…
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20/06/2022, 10:58
The Australian economy is not as strong as we’ve been led to believe
Former treasurer Josh Frydenberg passes the baton on to Labor’s Jim Chalmers. MATT DAVIDSON
But as new Treasurer Dr Jim Chalmers has revealed, when Treasury was preparing its forecasts
for the March 29 budget, it forecast growth of not 0.8 per cent for the quarter, but 1.8 per cent.
Now that would have been strong.
True, if you compound 0.8 per cent, you get an annualised rate of 3.3 per cent. And that’s a lot
higher than our average annual growth rate over the past decade of about 2.3 per cent.
But it’s high because the economy’s still completing its bounce-back from the two pandemic
lockdowns when most people gained more income than they were allowed to go out and spend.
In other words, it’s a catch-up following highly unusual circumstances, which will stop once
everyone’s caught up. It’s not an indication of what we can expect “going forward” as
businesspeople love saying.
If you delve into what produced that 0.8 per cent result, you see we’re probably only a quarter
or two away from returning to a much less Strong quarterly growth rate. Indeed, until we’ve
fixed our problem of chronic weak wage growth, it’s likely to be quite Weak growth.
Growth during the quarter was led by a 1.5 per cent rise in consumer spending, which
contributed 0.8 percentage points to the overall growth in real GDP. Pretty good, eh? Well, not
really. Turns out real household disposable income actually fell by 0.9 per cent.
So the growth in consumer spending came from a 2 percentage-point fall in the rate of
household saving during the quarter, to 11.4 per cent. Household saving leapt during the two
lockdowns, from its pre-pandemic level of about 7 per cent.
This suggests it won’t be long before this honey pot’s been licked out. Note too, that consumer
spending was very strong in the states still rebounding from last year’s lockdown – Victoria,
NSW and the ACT – and particularly weak in the other states.
https://www.smh.com.au/business/the-economy/coming-down-to-earth-the-economy-s-not-strong-as-we-ve-been-led-to-believe-20220602-p5aqpi…
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20/06/2022, 10:58
The Australian economy is not as strong as we’ve been led to believe
An economy whose strength comes from cutting its workers’
wages won’t stay strong for long.
Why did real household disposable income fall during the quarter? Because real wages fell. The
more they continue falling – as seems likely – the more continued growth in consumer
spending will depend on households continuing to cut their saving. Sound sustainable to you?
The other big contributor to growth, of 1 percentage point, came from an increase in the
inventories held by retailers and other businesses, caused by an easing of pandemic-related
shortages of certain imported goods, including cars.
This is a sign of the economy returning to normal, but it’s a once-only adjustment, not a
growth contribution that will continue quarter after quarter.
The third growth factor was a huge 2.7 per cent increase in government consumption spending,
contributing 0.6 percentage points to overall growth.
Where did it come from? From increased health spending required by the Omicron variant and
spending to help people affected by the floods in NSW and Queensland. Again, not something
that will be happening every quarter – we hope.
With those three positive contributions adding up to a lot more than the final 0.8 per cent,
there must have been some big negative contributions. Just one, actually. Net exports – exports
minus imports – subtracted 1.7 percentage points.
The volume (quantity) of exports fell by 0.9 per cent, thus subtracting 0.2 percentage points
from growth – mainly because the floods disrupted mineral exports.
The volume of imports jumped by 8.1 per cent, subtracting 1.5 percentage points from overall
growth. Another sign of the economy returning to normal, with pandemic disruption easing
and imports of cars (and their chips) resuming. Another once-off.
So, what else happened in the quarter? New home building activity fell by 1 per cent. The
pipeline of new homes built up by lockdown-related government stimulus still contains homes
yet to emerge, but the output has faltered because the industry’s at full capacity, with
shortages of labour and materials.
https://www.smh.com.au/business/the-economy/coming-down-to-earth-the-economy-s-not-strong-as-we-ve-been-led-to-believe-20220602-p5aqpi…
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20/06/2022, 10:58
The Australian economy is not as strong as we’ve been led to believe
New building activity has slumped. GETTY
Even so, with interest rates rising and house prices falling, you wouldn’t expect too many new
building projects to be entering the pipeline. Housing won’t be a big part of the growth story
“going forward”.
Business investment spending – mainly on plant and equipment – grew by 1.4 per cent during
the quarter and by 3.6 per cent over the year. It will need to grow a lot faster than that if it’s to
be a big part of the growth story.
The quarter saw the share of national income going to wages continuing to fall, while the share
going to profits rose to a record high of 31.1 per cent.
On the face of it, that says the workers are being robbed. But the factors moving the respective
shares are more complicated than that. For instance, all the growth in company profits during
the quarter was from the mining industry. Coal, gas and iron ore commodity prices have
jumped.
But a much less debatable indication that businesses are doing well at the expense of their
employees comes from the 2 per cent fall in “real unit labour costs” – real labour costs per unit
of production – during the quarter, and by 6 per cent since the start of the pandemic.
An economy whose strength comes from cutting its workers’ wages won’t stay Strong for long.
Ross Gittins is the economics editor
The Business Briefing newsletter delivers major stories, exclusive coverage and expert
opinion. Sign up to get it every weekday morning.
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20/06/2022, 10:58
The Australian economy is not as strong as we’ve been led to believe
Ross Gittins is the Economics Editor of The Sydney Morning Herald. Connect via Twitter, Facebook or
email.
https://www.smh.com.au/business/the-economy/coming-down-to-earth-the-economy-s-not-strong-as-we-ve-been-led-to-believe-20220602-p5aqpi…
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SUBJECT NAME: Economics
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1
18/06/2022, 14:20
Interest rates: RBA under pressure to hike as March quarter figures show inflation growth
Updated Politics Federal Australian economy
RBA under pressure to hike rates as March
quarter figures show inflation growth
By Shane Wright and Rachel Clun
Updated June 1, 2022 — 5.10pm, first published at 12.07pm
The Reserve Bank is facing more pressure to make a larger move on interest rates after new
data revealed broadening inflation pressures as the national economy expanded through the
first three months of the year despite the lingering effects of Omicron and floods.
The economy expanded by a better-than-expected 0.8 per cent in the March quarter, the
Australian Bureau of Statistics reported on Wednesday, with household spending continuing to
improve from its pandemic lows while governments lifted expenditure to deal with the
pandemic and to provide for military support in flood-affected parts of NSW and Queensland.
Treasurer Jim Chalmers said the Labor government has inherited an “incredibly challenging set of
circumstances”. ALEX ELLINGHAUSEN
https://www.smh.com.au/politics/federal/economy-grows-strongly-in-march-quarter-but-inflation-pressures-grow-20220601-p5aq4v.html
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18/06/2022, 14:20
Interest rates: RBA under pressure to hike as March quarter figures show inflation growth
It took annual growth to 3.3 per cent while nominal growth – which tracks economic activity
not adjusted for inflation – grew by 10.2 per cent over the past year.
Despite the relatively strong set of figures, Treasurer Jim Chalmers said the Labor government
has inherited an “incredibly challenging set of circumstances”.
“Skyrocketing inflation is a big challenge. Falling real wages is a big challenge. The impact of
interest rate rises that the Reserve Bank Governor has flagged a big challenge,” he said.
One of those challenges is inflation. The national accounts’ broadest measure of inflation, the
GDP implicit price deflator, rose by 2.9 per cent through the quarter, its highest level since
1988.
The Reserve Bank board meets next week with markets putting the chance of a 0.4 percentage
point rise at 80 per cent.
ANZ senior economist Felicity Emmett said when combined with wages growth figures
published by the ABS on Tuesday, the data suggested RBA Governor Phil Lowe has a strong
case to lift the cash rate by more than 0.25 per cent.
“Policy needs to lean more strongly against the broadening of inflation pressures,” she said.
“As such, we think the strength of the price and wage measures in the GDP data should be
enough to convince Governor Lowe that there is a very strong argument to deviate from a
regular [0.25 percentage point] move and get the cash rate a little higher, a little bit faster.”
The March quarter covered the period when much of southern Queensland and northern NSW
was hit with deadly floods. Treasury had expected this to cut growth by around 0.25 per cent.
https://www.smh.com.au/politics/federal/economy-grows-strongly-in-march-quarter-but-inflation-pressures-grow-20220601-p5aq4v.html
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18/06/2022, 14:20
Interest rates: RBA under pressure to hike as March quarter figures show inflation growth
Floods in areas like Lismore hit growth in the March quarter but the overall economy remains strong.
DISASTER RELIEF AUSTRALIA
The ABS found not only had the economy grown through the floods but also defied the
Omicron variant outbreak that hit many businesses through the period.
Household spending contributed 0.8 percentage points to growth through the quarter while
government spending added 0.6 percentage points.
Spending on discretionary goods and services rose by 4.3 per cent and is now back above prepandemic levels for the first time.
Spending on transport jumped by 60 per cent, due to the re-opening of state and international
boundaries, while expenditure on recreation and culture (4.8 per cent) and restaurants (5.3 per
cent) were also strong. Supply constraints eased on imports of new cars, contributing to a 13
per cent increase in spending.
Expenditure on essentials actually declined by 0.2 per cent. Spending on food dropped by 2 per
cent as people were able to eat out at cafes and restaurants. Spending on health also fell.
Barrenjoey chief economist Jo Masters said the buffer of household savings, which at 11.4 per
cent is more than double its mid-2019 rate of 5.3 per cent, and growing wages should keep
consumer spending strong.
“The ongoing economic expansion will largely be shaped by how much consumers choose to
spend or save,” she said.
Deloitte Access lead partner Pradeep Philip said the figures suggested the economy was on a
knife’s edge.
https://www.smh.com.au/politics/federal/economy-grows-strongly-in-march-quarter-but-inflation-pressures-grow-20220601-p5aq4v.html
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18/06/2022, 14:20
Interest rates: RBA under pressure to hike as March quarter figures show inflation growth
“There’s a lot of strength still in the public sector and households, but the private sector of the
economy in areas such as investment still has a long way to go,” he said.
While the economy expanded by 0.8 per cent, GDP per capita grew by a much more modest 0.3
per cent. It is the widest gap between the two measures since early 2018.
At the state level, the domestic Victorian economy expanded by a national-best 2.4 per cent in
the quarter thanks to large rises in household and government spending.
State final demand in both Western Australia and the Northern Territory jumped by 2.2 per
cent while in NSW it rose by 1.2 per cent and in Queensland by 0.8 per cent.
Spending on defence rose 5.6 per cent in the March quarter as Defence was called in to provide
flood assistance.
Defence spending in NSW and Queensland rose a combined 7.8 per cent while in the rest of the
country it was 3 per cent.
Insurance claims rose dramatically due to the floods. Non-life insurance claims rose 18.6 per
cent in the March quarter, with $2.8 billion paid out due to the natural disasters. The ABS
expects the rebuilding effort to contribute to future GDP figures.
The Morning Edition newsletter is our guide to the day’s most important and
interesting stories, analysis and insights. Sign up here.
Shane Wright – Shane is a senior economics correspondent for The Age and The Sydney Morning
Herald. Connect via Twitter or email.
Rachel Clun is an economics correspondent for The Sydney Morning Herald and The Age, based at
Parliament House in Canberra. Connect via Twitter or email.
https://www.smh.com.au/politics/federal/economy-grows-strongly-in-march-quarter-but-inflation-pressures-grow-20220601-p5aq4v.html
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Economics (MCR001)
Tutorial Homework for Lecture 5 (Production & Costs)
1. After working as a chef for many years, Peter finally wanted to open his own restaurant. Then his
opportunity came along. He inherited some money from his distant relative and eventually started
his restaurant a year ago.
At the end of year one, Peter found he had spent $ 650,000 on rental, wages and other expenses.
The restaurant brought in $ 750,000 revenue. However, Peter had to give up his old job where he
earned $120,000 a year.
a. Calculate the accounting costs and accounting profit for Peter?
Ans:
Accounting Cost =
Accounting Profit =
b. Calculate the economic costs and economic profit for Peter?
Ans:
Economic Cost =
Economic Profit =
c. From the economic point of view, is the business profitable?
Ans:
Explain
2. In this subject, we are assuming that a firm’s goal is to maximise ___________. Ans:
Are economic profits usually higher than accounting profits? True / False
Ans:
Explain.
3. Total Product (output, Q):
Total Cost (TC):
0
1
2
3
4
5
$50
$80
$105
$125
$155 $195
6
$250
a. The average variable cost (AVC) of producing three units of output is $______ Ans:
(Hints: i) What is the total fixed cost (TFC) ii) what is the total variable cost (TVC)? Then, iii) calculate
the average variable cost (AVC).)
Ans:
b. The marginal cost (MC) of producing the sixth unit of output is $ _________ Ans:
4. What is the difference between diminishing returns and diseconomies of scale?
Ans: Diminishing Returns are used in ______________________.
Diseconomies of Scale (DOS) are used in the ______________________.
1
5. Zero economic profit (Normal Profit) means:
total revenue – (_____ cost + ______ cost ) = 0
Ans:
6a: Fill in the blanks.
Ans:
(output)
Quantity
(Q)
Fixed
cost
(FC)
Variable
cost (VC)
0
1
2
3
4
5
6
50
0
15
22
33
56
90
130
Total
cost
(TC)
Marginal Average Average
cost
variable Fixed
(MC)
cost
cost
(AVC)
(AFC)
Average
Total
cost
(ATC)



6b. Sketch the AFC, AVC, ATC and the MC. Label the axis and curves. Show the relationship
between MC and AVC, ATC.
Ans:
2
7.
Fill in the blanks:
Ans:
Price
9
8
7
6
5
4
3
2
1
Qty
0
50
100
150
200
250
300
350
400
Total
Rev (TR)
Marginal
Rev
(MR)
xxxxx
TFC
300
TVC
0
100
200
300
400
500
600
700
800
TC
MC
xxxxx
A(T)C
xxxxx
Profit
8. Sketch the Long Run Average Cost curve (LRAC), label the axis. In your graph, show Economies of
Scale (EOS), Constant return to scale (CRS) and diseconomies of scale (DOS).
Ans:
3
5 minutes pre-class reading for Lecture 5
Lecture 5 – Production and Costs Analysis
The conventional assumption in microeconomic modelling is that firms seek to maximize
total economic profits. To calculate total economic profits, total economic costs (explicit
costs + implicit costs) are subtracted from total revenue (TR).
For example, imagine a doughnut shop sells doughnuts at an average price of $2.00 per
doughnut. Each day it sells a total of 500 doughnuts. Thus the total revenue each day is
$1000. Assume the total economic costs of producing the doughnuts are $950 each day. This
includes the cost of leasing the premises plus the costs of labour, machinery, electricity,
advertising (explicit / accounting) costs, interest payable on borrowed money and the owner’s
forgone wages from not working elsewhere (implicit costs / opportunity) and so on.
The economic profits are thus: $1000 total revenue and $950 to total costs, which means a
$50 profit (economic profit) per day. (Note: in the Long Run, competitive industry only
makes zero economic profits, stay tuned for to lecture 6).
This underlines the two key elements that determine profits: (i) total revenue from sales
minus (ii) costs of production. In the lecture, we will divide costs into fixed costs and
variable costs. Fixed costs don’t change in the short run.
For example, rents are fixed costs. If our doughnut-shop premises are leased for say 3 years,
it doesn’t matter whether the business sells 20 doughnuts a day or 2000, the rent will be the
same for 3 years. Labour costs, on the other hand, are variable costs. If the demand for
doughnuts doubles, more workers will be hired, and the total wage bill (labour costs) will
rise.
We will develop various cost curves, such as the short-run average total cost curve (Short
run Average Cost curve, SRCC or SRAC) and the long-run average total cost curve (Long
Run Average Cost curve, LRCC or LRAC). We will see that the typical u-shaped appearance
of the SAC curve is determined, in large measure, by productivity.
To be more specific, as productivity increases, so costs of production decrease. Costs and
productivity are inversely related.
This completes our look into production costs and analysis.
Economics (MCR001) 2022_2
Teaching/Learning timetable (draft)
Teaching
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
Day
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Week
commencing
12/05/2022
19/05/2022
26/05/2022
2/06/2022
9/06/2022
16/06/2022
23/06/2022
30/06/2022
7/07/2022
14/07/2022
21/07/2022
28/07/2022
4/08/2022
Topic content
Assessment
Introduction (ppf)
Demand/Supply – Part 1
D/S applications – Part 2
Elasticity
Production & costs
Test 1 (20%) L1 – L4
Market Structure
Macro fundementals
AD/AS Model 1
AD/AS Model 2
Fiscal Policy
Assign (20%) L5 – L9
Monetary Policy
Macro Current Affairs discussions
Exam Week
Final Exam (60 %) L1 to L11

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