HSC 2015 Economics Marathon (4 Viewers)

[pomsky]

Re: 2015 HSC Economics Marathon

Productivity improvements in the economy through microeconomic reforms will shift the supply curve to the right as more output is produced per unit of input. With firms producing more efficiently, consumption will rise, fostering an increase in the overall market size. As a result, GDP will increase as well as firms attract greater investment.

/4? Should I include examples such as factor/product market improvements

These last couple of sentences seem very confused. You've suggested productivity improvements will shift the Aggregate Supply Curve, but then you go on to suggest that economic growth occurs here based on increases in consumption and investment, ie a shift in the Aggregate Demand Curve.

But won't they link sooner or later? ie: as productivity increases, aggregate supply will shift to the right as more output is produced per unit of input. With firms producing more efficiently, cost of production will fall, leading to a fall in the price level. As prices fall, the demand for products will rise, leading to an increase in consumption and an increase in the overall market size. As a result, GDP will increase.

(just changed a few words of aanthnnyyy's post. Hope he doesn't mind haha)

Unless you say that more efficient productivity --> lower price level --> lower cost of production --> more production --> increase in GDP (as GDP measures the total value of G +S produced in an economy).

 

[RecklessRick]

Re: 2015 HSC Economics Marathon

But won't they link sooner or later? ie: as productivity increases, aggregate supply will shift to the right as more output is produced per unit of input. With firms producing more efficiently, cost of production will fall, leading to a fall in the price level. As prices fall, the demand for products will rise, leading to an increase in consumption and an increase in the overall market size. As a result, GDP will increase. (1)

(just changed a few words of aanthnnyyy's post. Hope he doesn't mind haha)

Unless you say that more efficient productivity --> lower price level --> lower cost of production --> more production --> increase in GDP (as GDP measures the total value of G +S produced in an economy). (2)

A change in Aggregate Supply will have an influence on Aggregate Demand, yes, and there are about a half a dozen ways you could outline this. Since the question is specifically about productivity, aka Aggregate Supply however, I think it would be best to go for the approach I've labelled (2) here first. That being said, the question is a four marker, so you probably can't pick up full marks without mentioning Aggregate Demand factors. The problem with aanthnnyyy's post though seemed to be clearly outlining the link.

Thoughts @swagmeister? Did this question come with marking guidelines?

Edit:

Should probably actually answer a question, "Explain why economies don't always reach their maximum productive capacity"
I don't actually remember this being in the syllabus, does it come under micro? My school hasn't done micro too well yet.

Anyway, just off the top of my head, maybe
- Distortions as a result of government policies (eg regulation of electricity prices)
- Sticky wages (+ unionisation as a whole I guess)
- Sticky prices
- Geographical problems, ie actually physically getting to resources etc.
- Structural bottlenecks (for example when there weren't enough ports to get the iron ore out of WA fast enough)

The first one and the last couple are probably more relevant/what the markers would want rather than stickiness. Would it be worth 3 to outline those three? Or is there some actual overarching textbook reason for why economies don't reach productive capacity that I'm forgetting? Sounds PPF related now that I think about it

 

[swagmeister]

Re: 2015 HSC Economics Marathon

A change in Aggregate Supply will have an influence on Aggregate Demand, yes, and there are about a half a dozen ways you could outline this. Since the question is specifically about productivity, aka Aggregate Supply however, I think it would be best to go for the approach I've labelled (2) here first. That being said, the question is a four marker, so you probably can't pick up full marks without mentioning Aggregate Demand factors. The problem with aanthnnyyy's post though seemed to be clearly outlining the link.

Thoughts @swagmeister? Did this question come with marking guidelines?

Edit:

Should probably actually answer a question, "Explain why economies don't always reach their maximum productive capacity"
I don't actually remember this being in the syllabus, does it come under micro? My school hasn't done micro too well yet.

Anyway, just off the top of my head, maybe
- Distortions as a result of government policies (eg regulation of electricity prices)
- Sticky wages (+ unionisation as a whole I guess)
- Sticky prices
- Geographical problems, ie actually physically getting to resources etc.
- Structural bottlenecks (for example when there weren't enough ports to get the iron ore out of WA fast enough)

The first one and the last couple are probably more relevant/what the markers would want rather than stickiness. Would it be worth 3 to outline those three? Or is there some actual overarching textbook reason for why economies don't reach productive capacity that I'm forgetting? Sounds PPF related now that I think about it

Found it as a past HSC, the only guidelines were that the explanation was clear and accurate for full marks and it was pretty sold so no sample answer was provided. The way you took it (2) is good, but I wouldn't directly link more efficient productivity to a lower price level - I would speak about how with the same level of the factors of production, more can be produced in the economy as AS shift to the right, and this will result in a new higher level of equilibrium national income, creating economic growth. This will also result in falling prices, however as increased supply represents increased income for workers, aggregate demand is likely to increase as well. Well potentially reverting falling prices, this will further increase GDP, assisting in economic growth.

My question was part of economic growth in the syllabus (maybe a bit subtle but linking up how the syllabus looks at it in terms of demand and supply), with your answer I would disagree (like structural bottlenecks limit their maximum productive capacity, not stop GDP from reaching it). What I was looking for is something along the lines of aggregate demand being lower then aggregate supply, and producers are only willing to supply based on the level of demand otherwise they will have heaps of unsold inventory.

I do find that for these types of questions though if we were allowed to draw graphs it would be heaps easier.

 

[amberbambi]

Re: 2015 HSC Economics Marathon

What is the difference between underemployment and hidden unemployment? (2 marks)

 

[swagmeister]

Re: 2015 HSC Economics Marathon

What is the difference between underemployment and hidden unemployment? (2 marks)

Underemployment refers to when members of the labour force are either not employed for the number of hours they desire or using skills simpler then they have developed, while hidden unemployment refers to workers who are not actively seeking work but have the potential to do so, for example older workers may retire early because of poor job prospects.

"Explain why economic growth may create structural unemployment" (5 marks)

 

[amberbambi]

Re: 2015 HSC Economics Marathon

"Explain why economic growth may create structural unemployment" (5 marks)

Economic growth - defined as the quantitative increase in economic output - can inadvertently foster structural unemployment, arising through microeconomic reform implemented by the government. Microeconomic reform (e.g. deregulation), with the underlying objective of increasing aggregate supply, engenders allocative, technical and dynamic efficiency, manifesting in the form of structural change - that is, the shift in production reflecting the demands of the modern economy. As such, particularly inefficient industries may suffer from the conduct of microeconomic reform, experiencing greater competition within the market as exhibited through the car manufacturing industry in Australia (e.g. Holden, Ford, Toyota). These uncompetitive industries will suffer as a consequence and may resort to their closure, laying off workers and instigating higher levels of structural unemployment within the economy in the short-term as 'sunset industries'. Over the long-run, such microeconomic reform will foresee efficient industries within the market prosper as 'sunrise industries'.

"For an economy other than Australia, analyse the strategies used by the government in response to the international business cycle"

 

[Ekman]

Re: 2015 HSC Economics Marathon

Economic growth - defined as the quantitative increase in economic output - can inadvertently foster structural unemployment, arising through microeconomic reform implemented by the government. Microeconomic reform (e.g. deregulation), with the underlying objective of increasing aggregate supply, engenders allocative, technical and dynamic efficiency, manifesting in the form of structural change - that is, the shift in production reflecting the demands of the modern economy. As such, particularly inefficient industries may suffer from the conduct of microeconomic reform, experiencing greater competition within the market as exhibited through the car manufacturing industry in Australia (e.g. Holden, Ford, Toyota). These uncompetitive industries will suffer as a consequence and may resort to their closure, laying off workers and instigating higher levels of structural unemployment within the economy in the short-term as 'sunset industries'. Over the long-run, such microeconomic reform will foresee efficient industries within the market prosper as 'sunrise industries'.

"For an economy other than Australia, analyse the strategies used by the government in response to the international business cycle"

I don't believe that this is a complete answer. What I would of included was:
-Increase in economic growth is characterised by increase in exports
-Increase in exports causes an appreciation
-Appreciation causes the 'Dutch Disease', where the is structural unemployment.

 

[astab]

Re: 2015 HSC Economics Marathon

I don't believe that this is a complete answer. What I would of included was:
-Increase in economic growth is characterised by increase in exports
-Increase in exports causes an appreciation
-Appreciation causes the 'Dutch Disease', where the is structural unemployment.

Hey Ekman, what textbook explains the Dutch disease again. I have it in my notes but I can't remember where I sourced it. I probably need more detail - is the Dutch Disease where Australia's increasing level of commodity exports causes an appreciation of the AUD, which inadvertently worsens Australia's international competitiveness in non-mining sectors eg. manufacturing, where we don't have a comparative advantage?

 

[astab]

Re: 2015 HSC Economics Marathon

I was looking at a past HSC short answer question on Bilateral Trade Agreements and was unsure if I needed to incorporate an example to validate my argument. The question was simple - an advantage of Bilateral Trade Agreements, but from memory it was 3 marks, so I was wondering if I needed a statistic to back it up eg. Australia forming a bilateral free trade agreement with China in November 2014 (ChAFTA), which is expected to increase Australia's economic output by $24b over the next decade.

 

[Ekman]

Re: 2015 HSC Economics Marathon

Hey Ekman, what textbook explains the Dutch disease again. I have it in my notes but I can't remember where I sourced it. I probably need more detail - is the Dutch Disease where Australia's increasing level of commodity exports causes an appreciation of the AUD, which inadvertently worsens Australia's international competitiveness in non-mining sectors eg. manufacturing, where we don't have a comparative advantage?

Pretty much, but refrain from using the term 'non-mining sectors', just say it reduces the level of international competitiveness of domestic import-competing industries, which results in these industries being killed off, causing Australia to have a narrow export base, (And if you want to go further, it contributes to Australia's trade deficit - resulting in a worsened BOGS).

Edit: It is in the Dixon Textbook, I believe it is in the BOP chapter and is under the Cyclical factors of BOGS.

 

[Ekman]

Re: 2015 HSC Economics Marathon

I was looking at a past HSC short answer question on Bilateral Trade Agreements and was unsure if I needed to incorporate an example to validate my argument. The question was simple - an advantage of Bilateral Trade Agreements, but from memory it was 3 marks, so I was wondering if I needed a statistic to back it up eg. Australia forming a bilateral free trade agreement with China in November 2014 (ChAFTA), which is expected to increase Australia's economic output by $24b over the next decade.

There is no harm in using an actual bilateral trade agreement, I remember in my Half-Yearlies I had to mention one and the question just asked what the effects of free trade agreements on the Australian economy - it was worth 2 marks as well.

 

[Ekman]

Re: 2015 HSC Economics Marathon

Here's a classic question:

Explain one positive and one negative effect of inflation on the economy - 4 Marks

 

[swagmeister]

Re: 2015 HSC Economics Marathon

Here's a classic question:

Explain one positive and one negative effect of inflation on the economy - 4 Marks

I reckon the positive would get heaps of people?

Inflation can have a positive impact on some individuals, as rising asset prices may increase their capital gain. This is particular due to the fact that overall inflation is based on the CPI, and that different items in it can very. So, if some asset prices are going up, while necessities such as food still remain low, this can benefit investors as they can sell their assets and have greater overall purchasing power. (does this make sense? or is another better positive to speak about).

For individuals, inflation results in lower real incomes. As inflation increases the cost of living, consumers and businesses will suffer from a loss of purchasing power, unless nominal wages increase to match inflation.

Another good differentiator, "Explain the relationship between the natural level of employment and the NAIRU" (6 marks)

 

[Ekman]

Re: 2015 HSC Economics Marathon

I reckon the positive would get heaps of people?

Inflation can have a positive impact on some individuals, as rising asset prices may increase their capital gain. This is particular due to the fact that overall inflation is based on the CPI, and that different items in it can very. So, if some asset prices are going up, while necessities such as food still remain low, this can benefit investors as they can sell their assets and have greater overall purchasing power. (does this make sense? or is another better positive to speak about).

For individuals, inflation results in lower real incomes. As inflation increases the cost of living, consumers and businesses will suffer from a loss of purchasing power, unless nominal wages increase to match inflation.

Another good differentiator, "Explain the relationship between the natural level of employment and the NAIRU" (6 marks)

To be honest it didn't make sense to me because the whole negative of inflation is the reduction in purchasing power. All you are saying is that investors can gain benefits from selling assets at higher prices, hence more profits, however if the value of money is devalued because of inflation, no matter how much money you have, you will always have less purchasing power than you did before inflation. (Which markers may find contradictory in your statement about negatives as you also stated the loss of purchasing power)

In terms of what the question required you to state as a positive, it is quite simply the prevention of deflation (which is a huge thing as it causes more of a problem than inflation). Hence the whole fact you have positive inflation, it prevents negative inflation (or deflation) from occurring, allowing the economy to prosper, as deflation is associated as a self-fulfilling prophecy where prices of goods and services continually decrease, causing constraints on economic growth and the overall economic stability of the country.

 

[RecklessRick]

Re: 2015 HSC Economics Marathon

In terms of what the question required you to state as a positive, it is quite simply the prevention of deflation (which is a huge thing as it causes more of a problem than inflation). Hence the whole fact you have positive inflation, it prevents negative inflation (or deflation) from occurring, allowing the economy to prosper, as deflation is associated as a self-fulfilling prophecy where prices of goods and services continually decrease, causing constraints on economic growth and the overall economic stability of the country.

The other big one (which dixon doesn't seem to mention for some reason?) is price signalling to entrepreneurs.

 

[Ekman]

Re: 2015 HSC Economics Marathon

The other big one (which dixon doesn't seem to mention for some reason?) is price signalling to entrepreneurs.

Please do explain it

 

[RecklessRick]

Re: 2015 HSC Economics Marathon

Please do explain it

Now that I think about it, it is to an extent just linked with preventing deflation. It is somewhat distinct, however. Essentially it's just as simple as the signal that rising prices give to entrepreneurs to enter the market as producers. With moderate inflation, there's small increases in prices which incentivize the entry of new producers into the market as there are profits to be made. With higher inflation, this is true to an even greater extent. However, labour and input costs will also rise at high levels of inflation, so barriers to entry rise, but the price signalling aspect still remains. It's a pretty obscure one I know, and I can only recall my teacher talking about it, but I assume he got it one from one of the textbooks.

Gittins also has a couple of good non-deflation related ones if you're ever struggling for more than one:

- the severity of economic recessions may be reduced by a slow steady rate of inflation by enabling the labour market to adjust more quickly in a downturn. This is because nominal wages are slow to adjust downwards (offsetting sticky wages with real decreases when nominal decreases aren't possible).
- Investment can be increased leading to faster economic growth. This is because inflation lowers the return on monetary assets relative to real assets such as physical capital

 

[amberbambi]

Re: 2015 HSC Economics Marathon

I reckon the positive would get heaps of people?

Inflation can have a positive impact on some individuals, as rising asset prices may increase their capital gain. This is particular due to the fact that overall inflation is based on the CPI, and that different items in it can very. So, if some asset prices are going up, while necessities such as food still remain low, this can benefit investors as they can sell their assets and have greater overall purchasing power. (does this make sense? or is another better positive to speak about).

For individuals, inflation results in lower real incomes. As inflation increases the cost of living, consumers and businesses will suffer from a loss of purchasing power, unless nominal wages increase to match inflation.

Another good differentiator, "Explain the relationship between the natural level of employment and the NAIRU" (6 marks)

The natural rate of unemployment refers to the rate at which there is no cyclical unemployment (however frictional, structural, hard-core, seasonal, hidden, long-term, etc will irrespectively prevail) - where the labour market is in equilibrium ('full employment'). Similarly, the non-accelerating inflation rate of unemployment alludes at which there is no change inflation. Whilst previously, the short-run Phillips curve was sufficient to depict the inverse relationship between unemployment and inflation, this relationship broke down over the long-run, particularly within the 1970s OPEC oil crisis given rising unemployment and inflation (stagflation). (insert short-run and overlapping long-run Phillips curve diagram). This relationship is exhibited in the long-run Phillips curve, to which overtime illustrates that there is no actual trade-off between unemployment and inflation, producing an inelastic vertical curve. If an economy were to lower their unemployment rate (below the NAIRU) through expansionary macroeconomic policy, this would increase aggregate demand for goods/services and facilitate the derived demand for labour. However, this would amplify inflationary pressures within the economy and give rise to inflation - e.g. cost-push inflation where workers demand higher wages. Over the long-term, firms may resort to cutting their level of production and laying off workers to maintain their price competitiveness, thus corresponding to an increase in unemployment - extrapolating to a vertical line. In order to lower the NAIRU, governments may resort to supply-side policies (microeconomic reform) in alleviating unemployment other than of a cyclical nature, depicting the limitations of macroeconomic management.

 

[amberbambi]

Re: 2015 HSC Economics Marathon

Explain the limitations of both fiscal and monetary policy in addressing an economic slowdown (6 marks)

 

[swagmeister]

Re: 2015 HSC Economics Marathon

Now that I think about it, it is to an extent just linked with preventing deflation. It is somewhat distinct, however. Essentially it's just as simple as the signal that rising prices give to entrepreneurs to enter the market as producers. With moderate inflation, there's small increases in prices which incentivize the entry of new producers into the market as there are profits to be made. With higher inflation, this is true to an even greater extent. However, labour and input costs will also rise at high levels of inflation, so barriers to entry rise, but the price signalling aspect still remains. It's a pretty obscure one I know, and I can only recall my teacher talking about it, but I assume he got it one from one of the textbooks.

Gittins also has a couple of good non-deflation related ones if you're ever struggling for more than one:

- the severity of economic recessions may be reduced by a slow steady rate of inflation by enabling the labour market to adjust more quickly in a downturn. This is because nominal wages are slow to adjust downwards (offsetting sticky wages with real decreases when nominal decreases aren't possible).
- Investment can be increased leading to faster economic growth. This is because inflation lowers the return on monetary assets relative to real assets such as physical capital

There's another one I found in notes I bought (Rising asset prices may benefit speculators - who are able to increase their capital gain) but it doesn't really make sense to me, could someone explain it?