This week, as the HSC continues to approach, we have some time to look at the important links between the latest news and Economics syllabus concepts and dot points. In doing so you can often raise your essay writing and arguments by showing the marker you understand the essential connections of the economy.
1. The Globalised Financial System
As you well know, Topics 1 and 2 in the syllabus show us the sheer level of interconnection and integration, or globalisation that the Australian economy has with the global economy. To this day, the USA is still the largest source of investment for the Australian economy, such that FDI inflows from the USA are equivalent to 10% of our GDP. Therefore, rapid developments and changes within the American economy and its COVID recovery will have a significant impact upon our economy, in a similar way to how it has in previous decades.
As News.Com.au reports, the American economy is likely to maintain or grow beyond its current 4% inflation rate. This would likely force an increase in the Cash Rate from the American Central Bank, also known as “the Fed”. Due to worries around the globalised financial system, Capital Flight and interconnected interest rates, some argue that “if the Fed is forced to raise interest rates years ahead of their current schedule, the RBA may not be too far behind.”
If this occurs, the RBA will have little choice but to follow by raising the Australian Cash Rate, leading to increased cost of borrowing, a reduction in borrowing, reducing investment and aggregate demand.
This is a result of the globalised nature of Australia’s post-banking reform financial system; if the RBA fails to raise its Cash Rate after other countries’ central banks do, then there will be nothing stopping investors from shifting their investment money away from the Australian financial system and banks to those countries with higher interest rates, because they will earn more profit on interest in doing so. This would deprive Australia of the much-needed investment money that supports a large portion of economic growth.
As a whole, this would slow down our economic recovery, particularly affecting young first home buyers in the property market, as well as causing a further delayed recovery in the international business cycle.
2. The Economic Multiplier and Social Housing
In a new, niche example of government spending’s ability to stimulate aggregate demand, The Guardian has recently noted how injections of money into the building of new social housing may lead to much greater than proportional increases in GDP. Firstly, the Guardian notes that the $7bn scheme to allow domestic violence victims to leave homes by building new ones will allow for “immediate economic benefits of $15.3bn and the creation of 47,000 new jobs”.
Generally this occurs due to the Multiplier Effect, where the investment money expended on the building of homes will create jobs and spending, whose income is then spent again elsewhere in the economy.
Moreover, if the government is able to support more people being in safe conditions, this might improve the workforce participation rate and reduce hidden unemployment for many struggling Australians. This would also lower unemployment and raise quality of life.
So, if you’re looking for a new niche policy to write about this might just be the one!
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Monday!