Crest Economics – Sample Essay Plans – By Spencer Hu

Crest Economics – Sample Essay Plans

Crest HSC Economics Tuition:
Crest Tuition offers HSC group tutoring in small classes of less than 10 students in our
private classroom on George Street, Parramatta. All classes are run by Spencer Hu (1st in
NSW Economics 2016). Crest classes cover all syllabus content in detail, and we will teach
you exactly what you need to write in exams to make your answers stand out.

Having used these essay plans to study successfully for our own HSC exams, we maintain
an extensive collection of constantly-updated resources for our students at Crest
Economics. Throughout the HSC year, we provide our students with essay plans for every
frequently-tested essay topic, among many other exclusive resources including state
ranking notes, full-mark sample answers and 20/20 essays.

Contents:
- Microeconomic Reform Essay Plan

How we recommend you use our essay plans:

- You can learn the optimal ESSAY STRUCTURE by reading over our essay plans. This is
so important to forming a cohesive response and is the FIRST step to getting TOP MARKS.
- You can pick up our TIPS AND TRICKS, such as where to put diagrams and statistics to
add depth to your response. When examiners see these little things in your essay, they
make a mental ‘tick’! Over time you will develop the skills to write an essay full of little ‘ticks’.
- While we encourage you to memorise the content in these essay plans, we also
recommend you WRITE YOUR OWN essay plans, especially for topics you find difficult.

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Essay Plan: How does microeconomic reform improve long term economic
performance in the Australian economy?

This is a complete essay plan for any essay question asking you to link microeconomic
policies to one or more economic objectives.

Introduction

• MER refers to policies that reform particular product or factor markets with the aim of
raising an economy’s long term growth and increasing its flexibility.

• MER aims to improve long term economic growth while subduing inflationary
pressures and boosting international competitiveness by influencing the supply
side of the economy (increasing aggregate supply)

• The objectives of MER are to improve the efficiency of resource allocation, raise
labour and capital productivity and encourage greater competition in product
and factor markets.

• MER also causes structural change in the economy whereby the pattern of
production in an economy changes over time with the emergence of new industries
(sunrise) and decline of old industries (sunset).

• MER has included reduction in trade protection, labour market reforms, measures to
increase competition and taxation reform.

Reduction in protection

• Gradual sustained reduction in protective barriers for the Australian industry e.g. tariff
cuts (first reduced in the 1970s to improve productivity and allocative efficiency)

• Previously Australia had high levels of protection in industries such as manufacturing

and agriculture. This is reflected by the tariff levels of 20% in 1990. However, the
level of tariffs have been gradually phased down to 1.7% (2016).

• Alongside tariff reductions, Australia has eliminated most quotas and

subsidies (other protectionist policies)

• In Short term, this reduces inflation (imported, cost push as imported inputs are
cheaper and domestic as firms find it harder to compete) and the cost of imported
goods.

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Crest Economics – Sample Essay Plans – By Spencer Hu

• Tariffs removed -> higher imports -> less domestic production - > cheaper prices (i.e.
lower inflation + benefits consumers)

• But also causes inefficient firms to downsize (represented by removal of dead

weight loss) and even causes closure of some firms leading to short term
unemployment and slower economic growth. Also causes structural unemployment
as workers in declining industries lose their jobs. However, allocative efficiency
increases because resources are freed up for productive firms.

• In Long run, domestic industries will be forced to become internationally

competitive (innovate, respond to new changes in consumer demands,
focus/specialise in a certain area of production / take up new technologies/
adopt new production methods and techniques Dynamic efficiency) ->
increases in productivity and output levels (increase AD and economic
activity)

• Economies of scale in productive firms can be created (increase in IC, greater

export markets allow domestic firms to escape domestic demand constraints),
allowing a higher level of technical efficiency to be achieved (minimise long-
run average costs) e.g. in mining and services industries

• The impacts are higher levels of economic growth in the long term and also a
reduction in inflation.

• E.g. inflation during 1960s and 1970s in Australia prior to removing

protection averaged 6-10% but since 1993, it has been 2.6% on
average.

Labour market reforms

• Labour market reform has greatly increased labour productivity and the efficiency in
which labour is allocated in the economy leading to price stability but a worsening
in the distribution of income.

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• Reform: shift from strongly regulated centralised labour market system to a

deregulated, decentralised labour market.

• Effect: Increased flexibility and efficiency of the labour market

• How: By discouraging the use of industry wide Awards (where wages were
determined under a centralised system) and encouraging the use of firm level
enterprise agreements and individual contracts.

• e.g. Industrial Relations Reform Act (IRRA) 1993 was the first move away from
centralised wage fixing towards enterprise bargaining. Fair Work Act 2009 simplified
the state award system from a set of national awards

• Stat: Employees on Awards fell by 5% and those on enterprise agreements

increased by 5% in the last 10 years.

• Decentralised wages have made wage increases tied to productivity (higher

productivity allows workers to bargain for higher wages. At the same time efficient
and productive industries can attract skilled workers through higher wages thereby
improving the allocative efficiency of labour in the economy)

• Provides an incentive for people to improve their skills.

• Decentralisation in 1990s: Led to productivity improvements (1.1% in 1980s

and 2.1% in 1990s). Significant gains in productivity were felt by later
governments (estimated that increases in productivity from 2000-2013 were
responsible for 60% of economic growth)

• A decentralised labour market have also improved the responsiveness and dynamic
efficiency of the labour market to changes in the global economy. (Wages are now
more flexible. Instead of retrenching workers, employers can cut back on hours and
wages, increased casualisation, lower wage growth which is now dependent upon
economic conditions). Effect: enables the economy to absorb negative economic
shocks (prevents spikes in unemployment)

• Philip Lowe quote: “resilience of Australia due to the flexibility of three prices
including that of labour”

• Inflation: Because wages are linked to productivity, this has reduced the extent of
wage growth, limiting the cost increases of labour for firms. It is estimated that 70%
of a firm’s cost are in wages. Therefore cost push inflation has been contained.

• Income inequality:

• Enterprise agreements vary wages and conditions of employees across

industries to encourage the efficient allocation of resources i.e. industries that
need the labour more pay higher salaries.

• Has led to increases in Gini coefficient from 0.3 in 1996-97 to 0.33 in 2012-13

Competition Policy

• Implementation of Australia’s National Competition Policy in 1995 aimed to use

competitive pressures to drive innovation in the economy, increase economic
activity and force firms to compete with each other to lower prices and reduce
inflation

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• Government has promoted competition in several markets through

deregulation and the corporatisation or privatisation of GBE’s e.g.
Privatisation of Telstra from 1997 to 2006 and NSW’s electricity in 2014-2015
and Australian Post lowering costs and inflation

• Reducing Monopolies e.g. Banks (financial deregulation), Qantas

(cancellation of two airline policy), Electricity, Sydney Water (privatised)

• Competition and Consumer Act 2010 empowers ACCC to prevent anti-

competitive behaviour such as price fixing and abuse of market power,
forcing firms to compete and place downward pressure on prices.

• Firms will seek to cut costs in order to lower prices while protecting
their profitability, increased competition also increases pressure on firms to
pass benefits of increased tech. Efficiency on to customers in the form of
lower prices or improved service.

• Lower prices reflect improved allocation of resources and thus a higher AS

Taxation reform

• During the mining boom, the Howard and Rudd government had large surpluses
which they used to give out tax cuts e.g. superannuation concessions and capital
gains discounts. This has made it harder for consecutive governments to balance the
budget through automatic stabilisers even though the economy is performing well.

• Give big businesses tax reductions. Stopping the tax breaks on child support
removing family benefit part A part B for tax deductions will worsen income
inequality. Excise tax on tobacco will increase the cost, leading to less resources
being allocated to it. Small businesses tax cuts to 27.5% plus 20 000 asset write off
provision will allow businesses to invest more.

• Mining tax, carbon tax – increase the allocative efficiency of resources

• Increasing taxation threshold from 6000- 18200

• Introduction of the GST in 2001

• 2016: Superannuation tax concessions

MEP and economic growth

• MER aims to improve the speed limit of the economy i.e. the rate of achievable GDP
growth without causing inflation to increase above the target rate of 2-3% on average
over the economic cycle

Aggregate Supply Diagram

• Higher economic growth

• Lower cost push inflation

MEP and unemployment

• More competition and less regulation, means the market is more flexible and
dynamic and so able to respond to unfavourable ‘economic shocks’ i.e. sudden
changes in the economic environment, without generating as much unemployment
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• e.g. in the GFC, firms were able to cut back hours for their employees, reducing the
number they would need to retrench. Unemployment peaked at only 6% in 2009
while other OECD economies experienced much higher (e.g. USA=10%)

• However, reform producing structural change in the economy (e.g. reducing

protection) can lead to displaced workers which represent resources lying idle and
underutilised.

MEP and Income distribution

• Reform can cause changes in distribution of income in favour of the rich.

• E.g. Labour market deregulation and wage decentralisation involved linking

improvements with productivity with higher wages. Thus increased wage
differentials between highly skilled and low skill workers.

MEP and Inflation

• Greater import competition (from reduced border protection) and domestic

competition (from competition policy, reforming of public monopolies, corporatisation
and privatisation of GBE’s) will make it harder for firms to grant excessive wage rises
and raise prices making the economy less inflation prone

MEP and EXTERNAL BALANCE

• MEP can help raise the international competitiveness of firms in the tradeable sector
which should theoretically lead to increases in exports. E.g. During the 1980’s
increases in the CAD from 1.1% to 4.3% prompted the government to undertake
MER to improve the competitiveness of the manufacturing sector.

• However even if productivity and the technical efficiency of the tradables sector
improved, this won’t reduce the structural component of the CAD, unless MEP also
causes national savings to rise relative to national investment. Rather exchange rate
will appreciate so improvements in international competition despite higher
productivity and technical efficiency will be nullified.

• So, a greater proportion of national savings must come out of the additional income
stream produced by the successful MEP if the CAD is to reduce.

Conclusion

• Microeconomic reforms including reductions in protection, labour market reforms and

the National Competition Policy have increased Australia’s economic growth whilst
reducing inflation and increasing the productivity and efficiency of the economy.

• Ultimately, MER is used to supplement macro-management in achieving economic

objectives

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