The domestic macroeconomic goals of strong and sustainable economic growth, full employment, and low and stable inflation, including how each is measured, how each has been performing in recent years, and the relationships and trade-offs between them

What this dot point is asking

VCAA wants you to identify the three domestic macroeconomic goals, explain how each is measured, describe Australia's recent performance, and analyse the relationships and trade-offs between them. Expect a 6 to 10 mark extended response.

The answer

The three goals

The Australian government and the RBA pursue three macroeconomic goals:

1. Strong and sustainable economic growth

Real GDP growth at or near the trend rate (Treasury estimates 2.0 to 2.25 percent in 2025), consistent with low inflation and sustainable resource use. "Strong" means growth that lifts material living standards; "sustainable" means growth that does not generate inflation, current account problems, or environmental degradation.

2. Full employment

Unemployment at or near the Non-Accelerating Inflation Rate of Unemployment (NAIRU), estimated at 4.0 to 4.5 percent in 2025 by the RBA. Below the NAIRU, wage and price pressures accelerate. Above, there is spare capacity in the labour market.

3. Low and stable inflation

The RBA targets headline CPI of 2 to 3 percent on average over the cycle. Low and stable inflation supports planning, preserves real incomes, and underpins international competitiveness.

Measurement

Economic growth: real GDP year-on-year, from ABS National Accounts (cat. no. 5206.0). Real GDP per capita is a better measure of living standards.

Full employment: the unemployment rate from ABS Labour Force (cat. no. 6202.0), monthly. The RBA also monitors underemployment, the participation rate, and the underutilisation rate (unemployment plus underemployment).

Low and stable inflation:

• Headline CPI year-on-year from ABS Consumer Price Index (cat. no. 6401.0), quarterly. The RBA target.
• Trimmed mean CPI: the RBA's preferred underlying measure.
• Inflation expectations: measured by financial market indicators (bond yield spreads) and household and union surveys.

Recent Australian performance

The 2022-24 period saw a textbook trade-off: tight labour market and strong growth produced an inflation spike; the policy response (tighter monetary policy, fiscal consolidation) brought inflation down at the cost of slower growth and rising unemployment.

Relationships between the goals

Short-run Phillips curve trade-off. Empirically, lower unemployment tends to coincide with higher inflation in the short run.

Mechanism:

• Tight labour market gives workers and unions bargaining power.
• Wage growth accelerates.
• Higher unit labour costs feed into prices.
• Inflation rises.

The Phillips curve is steepest when the economy is near or below the NAIRU.

Diagram. Draw the short-run Phillips curve with inflation on the y-axis and unemployment on the x-axis, sloping downward. The long-run Phillips curve is vertical at the NAIRU. A short-run rightward shift up the curve takes unemployment below NAIRU at the cost of higher inflation.

Long-run vertical Phillips curve. Over the long run, there is no trade-off. Sustained attempts to push unemployment below the NAIRU just raise inflation and inflation expectations, leaving unemployment back at NAIRU but with higher inflation. The 1970s "stagflation" episode is the textbook example.

Growth and inflation

When real GDP growth exceeds the trend rate (potential growth), the economy moves above its non-inflationary capacity:

• Capacity utilisation rises.
• Bottlenecks emerge (labour, capital, supply chains).
• Inflation pressure builds.

This is why the RBA aims for "strong and sustainable" growth rather than maximum growth.

Growth and unemployment (Okun's Law)

Okun's Law (Australian estimates): a 1 percentage point rise in real GDP growth above trend tends to lower unemployment by around 0.5 percentage points.

The COVID-19 recovery confirmed the relationship: rapid growth in 2021-22 pulled unemployment to a 50-year low.

Are all three goals achievable together?

In the short run, often not. The 2022-24 episode showed inflation control required modest job losses.

In the long run, yes, through:

• Productivity growth. Raises potential output, allowing non-inflationary expansion.
• Labour market flexibility. Lowers the NAIRU.
• Anchored inflation expectations. Allows lower unemployment without runaway inflation.
• Sound monetary and fiscal policy. Stable AD growth.

This is why Australian macroeconomic policy combines short-run demand management (monetary and fiscal) with long-run supply-side policy (microeconomic reform).

Other goals

The three goals are sometimes supplemented by:

• External stability. A sustainable current account and net foreign liabilities position. Important for confidence and exchange rate stability.
• Equity in income distribution. Progressive tax and transfer system, minimum wages.
• Environmental sustainability. Climate, biodiversity, resource depletion. Increasingly central to "sustainable" growth.

VCE marks responses that acknowledge these alongside the three core macroeconomic goals.

Recent policy response

The 2022-24 disinflation effort combined:

• Monetary policy. Cash rate from 0.10 to 4.35 percent over 18 months. The fastest tightening in 30 years.
• Fiscal policy. The 2022-23 and 2023-24 federal Budgets returned surpluses, tightening the structural balance.
• Supply-side. Record net overseas migration (around 500,000 in 2023-24) eased labour market tightness. Energy market reforms (price relief, wholesale interventions). The 2024 Future Made in Australia announcement targeting long-run productivity.

By 2026, inflation has returned close to the 2 to 3 percent target band, growth is recovering toward trend, and unemployment is just above the NAIRU. The "narrow path" of disinflation without recession has largely been achieved (TODO: confirm with latest RBA/Treasury data).

Common VCE traps

Treating "full employment" as zero unemployment

Full employment is unemployment at the NAIRU, which is around 4.0 to 4.5 percent in Australia.

Forgetting the trimmed mean

Headline CPI is the target, but the trimmed mean is the better signal of underlying pressure.

Drawing the Phillips curve as upward sloping

It slopes downward in the short run. Unemployment on the x-axis, inflation on the y-axis.