Tuesday, December 13, 2011


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The three main economic issues facing Australian government include economic growth, unemployment and inflation. To understand Australian recent performance, the measurement, trends, causes and effects will be analyzed in each issue. Meanwhile, the influence of the global economy and the interaction amongst these three issues will be also discussed.

Economic Growth (EG)

EG can be defined as the increase in the volume of goods and services (G & S) that an economy can produce over a period of time. It is measured by annual rate of change in real GDP, i.e. the percentage (%) in the value of G & S produce in an economy over one year, adjusted for rate of inflation.


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By mid 000 the Australian economy had recorded years of continual growth, averaging around 4% per year, but it tends to slow down, by 00, EG has slowed to .%. However, it is still well ahead of most industrialized countries.

These causes of Australia¡¦s EG trend can be explained by the Aggregate Demand (AD). AD is the total demand for G & S generated by the sum of all spending in the economy. AD = Consumption (C) +Investment (I) + Government Spending (G) + Export (X) ¡V Import (M). Therefore, the change in AD is the result of the change in these components.

¡± Consumer and business expectation about the inflation. Inflation creates uncertainty. If they expect the price to increase, they buy now, and verse-vice.

¡± The level of interest rate (IR). IR is the cost of borrowing. Low IR encourages C and I.

¡± The distribution of income (Y). The more even the distribution of Y the higher the level of spending.

¡± Y levels and C references. It can be explained by using the multiplier process. It occurs when extra spending (e.g. I or G) is injected into the economy. It stimulates further spending, which in turn stimulates yet more spending, and so on. The higher the level of spending, the greater the multiplier effect.

¡± cost of capital equipment. It is affected by the level of IR, tax concessions, cost of depreciation and the cost and productivity of labour. The most important factor behind the Australian sustained growth during the 10s is the improvement of productivity, especially in computer sectors.

The effect of EG

¡± Living standard¡XEG means more G & S are produced, which increase the ability for household to enjoy a higher material life.

¡± Employment¡Xaccording to derive demand. The increase demand for G & S increases the need of labour to produce them.

¡± Increase inflation¡Xhigh EG can result an increase in price and a large claim in wages.

¡± External stability¡Xincrease in Y means increase the wants for M, which results in increase in CAD.


Unemployment refers to the proportion of people in the Labour Force (LF) actively seeking work but unable to find one. LF is people actively seeking work in the working age (=15 years old). The data from the survey of ABS, Job network and Centerlink can be used in the measurement of unemployment. Unemployment rate=Unemployed/LF.


Australia becomes the low unemployment country for the first time. The figure reveals the unemployment rate decreasing and below the average for industrialized nations. 6.% at the end of 00, compare to an average of 7.1%.

Recently, UR rises from 6%-6.% since the 00 treasurer budget speech.

¡± The level of EG

The sustained low UR is contributed by the sustained EG of the economy. As mentioned above, EG helps to increase employment, so that reduce unemployment.

¡± Microeconomic reform and structural change

It alters the pattern of the demand and production within a society, which results numerous job losses and de-skilling. E.g. in Australia during late 180 and early 10, there were a lot of job losses in manufactory sector.

¡± Level of I

The falling in the level of I will result increasing in unemployment.

e.g. the downsizing of Telstra and Qantas, increase the size of unemployment.

¡± High cost of labour

High cost of labour means high cost of production, to minimize cost, business will replace labour with the more efficient machine, which result in increase of unemployment.

Economic and social effects of unemployment

¡± Opportunity cost

Unemployment means the resources are not being used sufficiently. Therefore it reduces the society¡¦s ability to maximize their satisfaction of G & S, and have lower living standard.

¡± Cost to government

Some unemployed people may live on welfare. The increase in unemployment will reduce the government revenue.

¡± Social cost

Unemployment results loss in self-esteem, or increase domestic violence, and crisis. It brings insecurity to the society.

¡± Unemployment for particular groups

In Australia, the non-english speakers and indigenous Australians are discriminated against.


Inflation is the sustained increase in price of general G & S. the common measurement is Consumer Price Index (CPI). It measures the quarterly change in a basket of goods according to their importance in C. inflation rate=% change in CPI=points change in CPI/CPI in previous years.


Strong productivity growth has been a key factor in Australia¡¦s low inflation performance throughout the 10s. The inflation increases by .% in 001-00 compared with 000-001.in 000-01, the CPI directly affected by the introduction of GST. It is expected to be moderate in 00-0 (.75%).

Causes of inflation

¡± Demand pull inflation

Too much demand chasing too few goods, price is bid up.

¡± Cost inflation

An increase in source of production, i.e. raw materials and wages force the price to rise in order to cover the cost. Imported inflation

Increase in imported goods increases the cost of imported components, which results the increase in domestic price.

¡± Inflationary expectations

Inflation creates uncertainty. The producer will increase the price if they expect the price to rise, as a result, the worker also requires an increase in wages in order to cover the future inflation. (e.g. the war leads to the expectation of increase in oil and gold price.)

In Australia, the impact on drought and the rise in international oil prices, like GST, are one-offs, which have lifted inflation but not persistence inflation trends.

Effects of inflation

¡± Economic growth and uncertainty¡Xinflation results from a fast economic growth but constraint on growth at the same time. Inflation can be solved by contractionary monetary policy, which hence slows down the economy. Therefore, it creates an unclear version for future C & I.

¡± Wages price inflationary spiral¡Xwage increase which results in price increases and then lead to a larger claim on wages¡Kit works in a spiral and hard to break.

¡± Unemployment¡Xthe level of unemployment and inflation are closely related, especially in the short term. High unemployment often associated with a low inflation.

¡± Exchange rate impact¡XLow inflation rate results an appreciation in the value of AUS.

In conclusion, in Australian economy, the decrease in EG (from around 4% to .%) has resulted an increased in UR (from 6% to 6.%) and a decrease in IR (increased by .%). It is due to the instability of the world economy (i.e. war, SARS, etc.) and the slow down in the domestic markets (i.e. the effect of drought and appreciation of the AUS, etc.). However, compare to other industrialized countries, Australian economy remains strong. This is because of the effective government policies, which keep the interest rate low and maintain the inflationary around target. Therefore, some sectors still remain relatively strong, with household C, business I and non-residential construction (i.e. the non-financial purpose building industries) helping to sustain growth. The outlook of Australia¡¦s economic performance is depending on the post-war Iraq and the recovery of the world economy.

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