Whose right, the RBA or the Treasury Department?

[qaz]

In economics, theres this theory they call the line of full employment. It is beleived after this point, extra gains are inflationary as opposed to a growth in productivity. The Reserve Bank Of Australia beleives Australia is currently in what is called an "inflationary gap", in other words they have passed that line of full employment of resources and further macroeconomic gains are inflationary. The Treasury Department on the other hand beleives the economy is behind that line of full employment and that the economy has further productivity growth available to it without an increase in resources. It's a little difficult to explain, but the recent budget has included tax cuts which act as a spur to the economy whereas the RBA has been raising interest rates in an attempt to cool down the economy, so they are both pulling in separate directions.

The question is, do you beleive the RBA is right and we are currently experiencing a inflationary gap or the Treasury Department is right and we are in a recessionary gap?.

 

[Jacer]

Don't know much about economics but I understand a bit about physics - when two forces are pulling in opposite directions - where do things go?...nowhere!

 

[Aceyducey]

We're in an inflationary recessionary gap.

Cheers,

Aceyducey

 

[ggumpshots]

Forty years ago full employment was considered to be reached when unemployment was around 2 to 3 %.
The current unemployment rate is still quite high in my view though historically low.

 

[zeph]

I totally agree with Aceyducey

cheers
Z

 

[quintets]

We're in an inflationary recessionary gap.

Cheers,

Aceyducey

The gap is inflating, but also receding so from a perspective view, it's all staying about the same.

 

[MarkB]

In economics, theres this theory they call the line of full employment. It is beleived after this point, extra gains are inflationary as opposed to a growth in productivity. The Reserve Bank Of Australia beleives Australia is currently in what is called an "inflationary gap", in other words they have passed that line of full employment of resources and further macroeconomic gains are inflationary. The Treasury Department on the other hand beleives the economy is behind that line of full employment and that the economy has further productivity growth available to it without an increase in resources. It's a little difficult to explain, but the recent budget has included tax cuts which act as a spur to the economy whereas the RBA has been raising interest rates in an attempt to cool down the economy, so they are both pulling in separate directions.

Extracts from an earlier post of mine....

Full employment.

This does not mean 0% unemployment and to be truthful, zero unemployment is a bit of an economic fantasy and would only occur in la la land.

Structural unemployment - unemployment that has arisen out of a change in the nature of the economy - eg. job losses arising to a deteriorating car manufacturing sector.

Cyclical unemployment - unemployment that has a seasonal component, eg. fruit picking, etc.

Frictional unemployment - people who are between jobs (they have left one job and have another to go to but are not yet employed in that job).

Long-term unemployment - I am not aware of the official definition, but the long term unemployed are those who have been out of work and actively looking for work for a given period of time - it could be 6 months, a year, etc. The longer they are out of work the greater they suffer from what is known as skill atrophy (where their skills slowly fade away).

Hidden unemployment - Persons without a job who have stopped actively seeking work and are no longer classed as unemployed (they don't appear in the unemployment figures).

Occasionally you will hear Economists speak of the Non-Accelerating Inflation Rate of Unemployment (NAIRU). This is a lovely little economics concept that seeks to justify a particular point of equilibrium in labour markets. The NAIRU (if it really exists) would be a level of unemployment where the supply and demand conditions in labour markets are such that real wage increases or decreases did not occur.

The NAIRU arose out of the study of the Phillips curve which demonstrated an observed negative correlation between the rate of unemployment and CPI. This correlation persuaded some analysts that it was impossible for governments to simultaneously target both unemployment and price stability, and that, therefore, it was government's role to seek a trade off between unemployment and inflation which matched a some social consensus.

 

[XBenX]

Haha - sometimes it worries me when I read a thread, think about a reply whilst reading it and then read MB's reply - has economic theory got us both that brainwashed ??? =)

I was going to reply to ggumpshots post about what percentage actually represented full employment and that an unemployment rate above zero isnt always as bad a thing as made out...

FWIW I think that economic growth is subject to the inflation / unemployment trade off -

Where are we now? Well I havent seen any great evidence to suggest that inflation is under the pressure id expect (but then again I havent noticed any growth figures lately - other than that 0.1%...)