Econ8069 Business Economics : Consumer Assessment Answers

1.Using data from the Australian Bureau of Statistics (ABS) http://www.abs.gov.au/ collect information on the consumer price index (CPI) and average weekly earnings for the period 2005 to 2015 inclusive. Employ annual figures.  Define and provide sources for the data obtained including the ABS catalogue number.

Calculate the rate of inflation based on the CPI and the rate of average weekly earnings growth and plot the inflation rate and weekly earnings growth on a single diagram using time on the horizontal axis.  Provide an economic interpretation of these time series plots.

2.Employ the aggregate demand and supply model for the Australian economy, to analyse the consequences for real GDP and the general price level of the following scenarios. Confine your analysis to the short-run. In your response clearly state your assumptions and illustrate your answers with diagrams.

(a)   the price of iron ore, a major export product, increases substantially,

(b)   a favourable set of weather conditions leads to a substantial rise in Australian agricultural output,

(c)   the government spends significant money in developing a broadband internet network across the country,

(d)   the price of oil, a product Australia primarily imports, fall substantially.

1.The data has been taken from the ABS Statistics Page with the following two catalogue numbers – “6302.0 - Average Weekly Earnings, Australia, Nov 2016” and “6401.0 - Consumer Price Index, Australia, Mar 2017”.

On the other hand, CPI Inflation Index has been taken for the inflation in figures followed by Inflation rate and weekly earnings from 2004-2016. The year 2014 has been considered to be calculated the growth rate change in earnings of persons. Furthermore, all the figures were given in quarterly figures except annual weekly earnings which were given half yearly.

Hence, the growth rate in earnings is calculated using the formula as  X 100

The table for the same after calculation can be given as:

Table 1: Record of Yearly Data from 2004-2016

Source: (Abs.gov.au, 2017)

The line graph having inflation rate and growth in average earnings for the years 2005-2016 can be given as below.

Figure 1: Line Chart of Inflation Rate and Growth Rate of Earnings

Source: (Created by Author)

Economists are of view that inflation rate and average earnings that are the wages paid to the person. Many a times to anticipate inflationary pressures the behaviours of earnings have been noticed. All the more, aggregate demand is considered because if the wages increases more than the production level, the price may rise where the firms have to increase the wages costs to meet the raised prices in the market (Cohen-Setton, 2015). As per the line graph given initially the increase in the average earnings lead to increase in inflation rate at the same rate till the year 2011-12.

On the contrary, the pattern start changing since the recession in 2008, even if the wages increases, the inflation was its low. During 2012-13, post-recession, the growth rate in earning increased to 4.78 and inflation rate decreased to 1.75. After 2013, the inflation rate decreased to a level of 2.45 and earnings to 1.464 and since then inflation is at its lowest to 1.5 and earnings at its 1.831 growth rate. However, these changes are futile for the government as this may increase the collection costs on the revenue (Bleaney, 2011).

2.AD and AS Models in Short Run

a.The price of export increases (iron ore)

Figure 2: AS and AD Model for Price increase for Export

Source: (Created by Author)

As per the diagram made, it can be depicted the once the export’s price increases internationally, the domestic price of the good (iron ore) would also increase to meet up the market for the international products. On the other hand, there is a shift in buying patterns as the countries will buy from different countries which will increase their imports in the home market leading to an opposite effect on export rate. The price decrease will shift AD curve to left such as the price takers will save and invest money in different business opportunities.

b.Agricultural output increases due to weather conditions

Figure 3: AS and AD Model for Increase in Agricultural Output

Source: (Created by Author)

A favourable weather condition leads to favourable growth of the agricultural produce. This states that the agricultural produce will be in abundance. As a result, AS will shift to the right which will create more product’s quantity in the market directly. Hence, the product/ agriculture produce’s value will decrease as the product would be easily available which will in turn affect the GDP of the economy.

c.The significant government spending in developing a broadband network

Figure 4: AS and AD Model for Price increase for Significant Government Spending

Source: (Created by Author)

The diagram drawn states that the broadband network is a new technology developing in the economy such that AD will move to AD1 because developing a resource means increasing the employment to imitate more manpower force. The hiring of the labourers will result a decline in the unemployment rate. At this rate, the unemployment people will be employed and will be able to afford the basic necessities of life properly. Moreover, this will further enhance the GDP of the economy.

d.The price of import falls (oil)

Figure 5: AS and AD Model for Price fall for Import

Source: (Created by Author)

Petrol/ oil are consumed more in the countries and are required more in machine. The oil is considered to be one of the fuel that is dealt across countries through the dominant organization OPEC. On the other hand, if the import price falls, then the countries will but more oil while increasing the supply of oil more in the economy. As a result, once it increases, the price of oil will decrease in the home country and the shift is shown from P to P1 for price because AS curve shifts towards right.

References

Bleaney., M. (2011). The Disappearing Openness-Inflation Relationship - A Cross-Country Analysis of Inflation Rates (3rd ed.). International Monetary Fund.

Cohen-Setton, J. (2015). The divorce of wage growth from inflation. Business Insider. Retrieved 25 May 2017, from https://www.businessinsider.com/wage-growth-and-inflation-relationship-2015-7?IR=T

6302.0 - Average Weekly Earnings, Australia, Nov 2016. (2017). Abs.gov.au. Retrieved 25 May 2017, from https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6302.0Nov%202016?OpenDocument

6401.0 - Consumer Price Index, Australia, Mar 2017. (2017). Abs.gov.au. Retrieved 25 May 2017, from https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6401.0Mar%202017?OpenDocument