Business Economics Assignment: Analysis of Australian Economy - 2019

This business economics assignment provides a comprehensive analysis of the Australian economy, addressing key macroeconomic concepts. The assignment begins by examining the relationship between household consumption expenditure and disposable income from 2000 to 2017, calculating the marginal propensity to consume (MPC) and explaining its behavior over time. It then delves into the determinants of economic growth and evaluates the 2018-2019 Federal Budget policies designed to stimulate growth. The assignment also explores the trends in unemployment and underemployment in Australia, comparing their rates and discussing the factors contributing to these trends. Finally, it analyzes the effects of various economic events, such as a rise in electricity prices, import tariffs, changes in income tax rates, and housing price fluctuations, on aggregate supply and demand, explaining how these factors influence real GDP and price levels. The assignment incorporates data, diagrams, and references to support its arguments, providing a well-rounded understanding of the Australian economic landscape.

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Course ID

1BUSINESS ECONOMICS
Table of Contents
Answer to Question 1.................................................................................................................2
Answer to Question 2.................................................................................................................4
Answer to Question 3.................................................................................................................6
Answer to Question 4.................................................................................................................7
References list..........................................................................................................................11

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Answer to Question 1
Relation between consumption expenditure and disposable income
Income is one of the primary determinants of consumption expenditure of household.
All other factors remaining constant, income tends to have a positive influence on
consumption expenditure (Heijdra, 2017). The following figure depicts the relation between
consumption expenditure and household income by examining overtime trend of
consumption and income for households in Australia.
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f(x) = 0.798982909193316 x + 51723.1879682354
Consumption
Income
Consumption
Figure 1: Relation between disposable income and consumption expenditure
(Source: abs.gov.au, 2018, Cat no. 5204.0, Table 36)
Figure 1 shows a scatter plot of household income and consumption expenditure. In
order to determine the consumption function, consumption expenditure is taken as a
dependent variable and is measured on the vertical axis. Disposable income of household is
the independent variable and is measured on the horizontal axis. The scatter plot indicates a
positive linear trend in the movement of consumption and income. This in turn implies that
income has a positive association with consumption. That is, consumption expenditure

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increases with a trend increase in disposable income. Using the trend relation, the estimated
consumption function is given as follows.
Consumption=51723+(0.80 × Income)
Marginal Propensity to Consume (MPC)
Marginal propensity to consume is a measure indicting unit change in consumption
expenditure as resulted from a unit change in income (Whitmore, 2017). Given the time
series data on consumption expenditure and income, MPC can be estimated by examining
percentage change in consumption followed by a percentage change in income
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
0.5
1
1.5
2
2.5
Marginal Propensity to Consume
Year
MPC
Figure 2: Trend in marginal propensity to consume
Household consumption expenditure constitutes an important part of Gross Domestic
Product of Australia. As households tend to spend a higher share of additional income on
consumption expenditure, marginal propensity to consume for Australian household is quite
high. In the estimated consumption function, the slope coefficient or coefficient of income is
obtained as 0.80. This is average MPC for Australian household. This can be interpreted as
for every unit change in income household consumption increases by 0.80 unit. The overtime

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trend of MPC though reveals significant variation in movement but it values are mostly close
to 1. In some of the years, MPC even exceeds 1 indicating dissaving or borrowing. This
occurs due to slow growth in wages along with a high consumption demand (Beech et al.,
2014). With a slow wage growth high consumption is supported by higher wealth of
household leading to a lower propensity to save.
Answer to Question 2
Economic growth and its measure
Economic growth refers to a situation of continuous increase in aggregate output in an
economy. As Gross Domestic Product is a representative measure for volume of output, rate
of change in GDP measures economic growth of a nation (Maurice & Thomas, 2015).
Determinants of economic growth
Several factors determine economic growth of a nation. Some of the major factors
ensuring economic growth are discussed below
Natural resources: Higher the stock of natural resources, higher is he productive capacity.
Huge stock of natural resources and easy access to the resources thus is a primary
determinant of economic growth.
Physical capital: Capital is one important input in production process. Physical capital refers
to machines, factory, different equipment and capital goods that are needed in production.
Higher the stock of capital, higher is the amount of capital per unit of labor resulting in a
higher productivity and economic growth.
Human capital: Human capital implies level of knowledge, skills, state of health and other
attributes contributing to productivity of workers (Barro, 2013). Nations having supply of
well-qualified and talented workers tend to grow at a higher pace.

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Technology: Level of technology determines output per unit of input. More advanced
technology means better utilization of resources. It therefore ensures a higher output and
economic growth.
Evaluation of federal budget policies
Lower tax to support growth: The federal government offers tax relief to small and medium
enterprises. Lower tax means a higher return from business investment. The policy thus
results in a higher investment, generate new jobs, reduces unemployment and causes higher
payment. All these lead to a higher economic growth.
Building a smart economy by investing in science and technology: Economic growth is a
traditional determinants of economic growth. Government now focuses on undertaking
investment in enhance technology infrastructure. This by increasing productivity would lead
to a higher growth.
Delivering major transport infrastructure: Investment in transport infrastructure adds to the
stock of physical capital. Investment in transportation projects enhanced economic growth by
improving connectivity.
A world health industry leader: Federal government attempts to take the several steps to
promote growth of medical industry (Budget.gov.au., 2018). The improved medical care
would contribute to a good state of health for workers resulting in a higher productivity and
economic growth.
Securing access to export markets: Access to export market means a larger market for
businesses resulting in a higher demand for their product. This in turn results in expansion of
businesses and a higher economic growth.

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Backing our farmers: In Australia, agriculture is one vital sector of the economy. Extending
support to farmers result in a higher output and enhance economic growth.
Answer to Question 3
Unemployment and Underemployment
Unemployment indicates an economic situation some members in the labor force
despite their effort to find a job fail to do so. The aspect of underemployment on the other
hand is different from that of unemployment. Underemployment is a state where workers
through engaged in a job but present job underutilize their skills (Barnichon & Zylberberg,
2014). Unlike unemployment, people are not completely jobless during underemployment
but they are mostly engaged in part time or casual or informal jobs.
Increases in the incidence of underemployment now is a growing concern in many
economies. Underemployment through leads to a smaller unemployment but it actually
creates dissatisfaction among the workers in the long run.
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Unemployment and Underemployment
Unemployment rate Underemployment rate
Year
Unemployment Rate
Figure 3: Trend in underemployment and unemployment in Australia
(Source: abs.gov.au, 2018, Cat no. 6202.0, Table 22)

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The figure above shows simultaneous movement of unemployment and
underemployment in Australia. At the beginning of 2000s, the percentage share of
underemployment and unemployment in total labor force was almost same. Since 2003, trend
in unemployment in Australia though declined at a rapid pace but underemployment
constituted an increasing trend. With increase in underemployment rate the gap between
underemployment and unemployment increases. Creation of new jobs in service sectors is
one of the primary forces for lowering unemployment. These jobs however are mostly part-
time in nature resulting in an increase in underemployment rate. There was a significant
increase in the rate of underemployment in 2008 due to attack of global financial crisis. The
expansion of industries and service sector contributed to a decline in unemployment pressure
in Australia. More than 90 percent jobs today are part time in nature (Li, Duncan & Miranti,
2015). Female labor force constitutes a relatively larger share of underemployment as
compared to male counterpart.
Answer to Question 4
a)
Electricity is one of the primary utility services needed for production. Cost of
electricity constitutes an important share in total production cost. The substantial increase in
price of electricity thus adds to a higher cost of production. In response to higher production
cost, firms contract their scale of operation resulting in a decline in output. When all firms in
the economy do the same, then there will be a fall in aggregate supply. The aggregate supply
curve which is positively sloped in the intermediate range would then shift leftward.
Equilibrium in the economy would then move upward along the aggregate demand curve.
Corresponding to the new equilibrium, real GDP declines while price level increases.

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Figure 4: Effect of substantial rise in electricity price
b)
Imposition of import tariff on Australian export increases price of Australian goods in
the domestic market of United State. As price of Australian product increases, there will be a
decline in demand of Australian export resulting in a fall in export earnings of Australia. As
export earnings decline, net export decreases as well causing aggregate demand to contract
(Mankiw, 2014). The decline in aggregate demand would then be reflected from an inward
shift in aggregate demand curve as shown in figure 5. The contraction in aggregate demand
leads to a contraction in economic activity resulting in a decline in real GDP and price level.
Figure 5: Effect of imposition of tariff on Australian export

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c)
Income tax rate has a direct effect on disposable income and influences household
consumption expenditure which is one important component of aggregate demand. As
government reduces personal income tax rate there will be an increase in disposable income.
This allows household to spend more. The higher spending increase aggregate demand. There
will be a resulted shift in aggregate demand causing in an expansion of real GDP and price
level.
Figure 6: Effect of a decrease in personal income tax
d)
If there is a substantial fall in housing price, then this will hurt consumers’ confidence
in the economy. Decline in housing price means a decline in wealth of household (Ong et al.,
2013). The fall in wealth will result in a fall in consumer spending which in turn means a
smaller aggregate demand. Consequently, there will be a decline in real GDP and price level.

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Figure 7: Effect of a substantial fall in house prices

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References list
Abs.gov.au. (2018). 5204.0 - Australian System of National Accounts, 2016-17. Retrieved
from http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5204.02016-17?
OpenDocument
Abs.gov.au. (2018). 6202.0 - Labour Force, Australia, November 2018. Retrieved from
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0November
%202018?OpenDocument
Barnichon, R., & Zylberberg, Y. (2014). Under-employment and the trickle-down of
unemployment. American Economic Journal: Macroeconomics.
Barro, R. J. (2013). Education and economic growth. Annals of economics and finance, 14(2),
301-328.
Beech, A., Dollman, R., Finlay, R., & La Cava, G. (2014). The distribution of household
spending in Australia. RBA Bulletin, 13-22.
Budget.gov.au. (2018). Budget 2018-19 - Jobs and growth. Retrieved from
https://www.budget.gov.au/2018-19/content/jobs.html
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Li, J., Duncan, A., & Miranti, R. (2015). Underemployment among Mature‐Age Workers in
Australia. Economic Record, 91(295), 438-462.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Maurice, S. C., & Thomas, C. (2015). Managerial Economics. McGraw-Hill Higher
Education.