Explain the macroeconomic objectives of low inflation, full employment and economic growth, how each is measured, and the conflicts between them

What this dot point is asking

SCSA wants you to define each objective, explain how the ABS measures it, and analyse the conflicts between objectives. Expect data interpretation of CPI, unemployment and GDP figures plus an extended response on trade-offs.

Low and stable inflation

Inflation is a sustained rise in the general price level, eroding the purchasing power of money. It is measured by the Consumer Price Index (CPI), compiled quarterly by the ABS from a basket of household goods and services.

$\text{Inflation rate} = \frac{\text{CPI}_{\text{current}} - \text{CPI}_{\text{previous}}}{\text{CPI}_{\text{previous}}} \times 100$

The RBA also watches underlying (trimmed mean) inflation, which strips out the most volatile price movements. The target is 2 to 3 percent on average over time. Inflation that is too high erodes savings, distorts decisions and hurts those on fixed incomes; deflation is also damaging.

Full employment

Full employment does not mean zero unemployment. It means employing all who want to work at prevailing wages, with only frictional and structural unemployment remaining. The ABS measures the unemployment rate monthly through the Labour Force Survey.

$\text{Unemployment rate} = \frac{\text{number unemployed}}{\text{labour force}} \times 100$

The labour force is the employed plus the unemployed (those actively seeking work). Key concepts:

• The non-accelerating inflation rate of unemployment (NAIRU) is the lowest unemployment rate consistent with stable inflation. The RBA has estimated it at around 4 to 4.5 percent.
• Types of unemployment: frictional (between jobs), structural (skills or location mismatch), cyclical (from weak demand), seasonal, and hidden or underemployment.

Australian unemployment fell to around 3.5 percent in 2022 and 2023, the lowest in around 50 years, before edging up as the economy slowed.

Economic growth

Economic growth is the increase in the volume of goods and services produced, measured by the percentage change in real Gross Domestic Product (GDP), compiled quarterly by the ABS.

$\text{Real GDP growth} = \frac{\text{real GDP}_{\text{current}} - \text{real GDP}_{\text{previous}}}{\text{real GDP}_{\text{previous}}} \times 100$

Real GDP adjusts for inflation. The government aims for strong and sustainable growth, often cited at around 3 percent, fast enough to lift living standards and employment but not so fast it triggers inflation or environmental damage. Sustainable growth also considers environmental limits and intergenerational equity.

Conflicts between objectives

Other conflicts:

• Growth versus inflation. Rapid demand-driven growth can overheat the economy and lift inflation.
• Growth versus the environment. Faster output can increase emissions and resource depletion, conflicting with ecological sustainability.
• Growth versus the current account. Strong domestic growth raises import demand, which can widen the current account deficit.
• Growth versus equity. Growth does not automatically reduce inequality.