Home > Economic Cycle, Growth, Inflation, Unemployment > Macro Conflicts in New Zealand

Macro Conflicts in New Zealand

November 27, 2012 Leave a comment Go to comments

Part of the Cambridge A2 syllabus studies Macro Economic conflicts of Policy Objectives. Here I am looking at GDP, Unemployment, and Inflation (improving Trade figures is another objective also). The objectives are:

* Stable low inflation with prices rising within the target range of 1% – 3% per year
* Sustainable growth – as measured by the rate of growth of real gross domestic product
* Low unemployment – the government wants to achieve full-employment

New Zealand Growth, Jobs and Prices — 3 Key Macro Objectives Inflation, jobs and growth

1. Inflation and unemployment:

From the graph above you can see that low levels of unemployment have created higher prices – demand-pull inflation. Also note that as unemployment has increased there is a short-term trade-off between unemployment and inflation. Notice the increase in inflation in 2010-2011 as this is when the rate of GST was increased from 12.5% to 15%. Also today we have falling inflation (0.8% below the 1-3% band set by the RBNZ) and unemployment in on the rise – 7.3%

2. Economic growth and inflation

With increasing growth levels prices started to increase in 2007 going above the 3% threshold in 2008. This suggests that there were capacity issues in the economy and the aggregate supply curve was becoming very inelastic. In subsequent years the level of growth has dropped and with it the inflation rate.

3. Economic Growth and Unemployment

Usually you find that with increasing levels of GDP growth unemployment figures tend to gravitate downward. This was apparent between 2006-2008 – GDP was positive and unemployment did fall to approximately 3.6%. However from 2009 onwards you can see that growth has been positive but unemployment has also started to rise.

  1. Simon
    November 28, 2012 at 7:42 pm

    With increasing GDP unemployment is downward? I actually don’t see that. We have had positive GDP growth for 4 out of the last 6 years yet unemployment has gone from under 4% to nearly 8%. Unemployment jumped 50% following the GFC, there was no recovery, and it continues to rise. The unemployment benefit is a terrible waste of tax payers money. The unemployed should be paid enough to do useful stuff. Don’t ask me what! There are tons of worthwhile things that could be done.

    • November 28, 2012 at 10:18 pm

      Thanks for the correction – have adjusted it on the post. Interesting comment regarding the unemployment benefit – agree that there must be something that they can do. Like that in post depression USA.

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