Linking Economic Issues - Economics Topic 3

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Hey guys! This is a detailed economics guide on how to link all the economic issues in topic 3 with each other. Often, you need to know these links in economics essays (a good essay will always show links between the issues to give a detailed explanation), and there are heaps of situations where the student is unaware of the link.

Read through the following links between the economic issues and apply them in essays to ensure they’re in your head! But once you’ve read through them and understand them a few times, the links should flow automatically.

Economic Growth:

Economic Growth and Unemployment:
• Economic growth leads to increased production and increased demand for labour, thus reduced unemployment
• Economic growth usually entails technological and structural change, which leads to structural unemployment
• Economic growth may lead to demand pull inflation, which then leads to increasing wage demands, and thus, unemployment
• Unemployment may lead to lower economic growth, because resources are not used to their full capacity
• Unemployment in the long term leads to loss of skills and therefore, decreasing AS, leading to lower economic growth
• Unemployment requires more government spending, which may raise taxation rates, lowering consumption, and hence lowering economic growth
• Unemployment leads to people wanting to fain skills to gain employment, leading to an improvement in the quality of the labour force, and thus, economic growth
• Unemployment creates self-employment, leading to better quality enterprise (one of the factors of production) and improving economic growth in the long run[/pre][/left][/center][/right][/left]

Economic Growth and Inflation:
• Economic growth leads to demand pull inflation as prices are driven up
• Economic growth caused by improvements in productivity or cheaper resources lead to decrease in cost push inflation
• Economic growth may lead to appreciation of exchange rate, leading to lower imported inflation
• Inflation may lower investment due to uncertainty, leading to lower economic growth
• Inflation may cause a loss of international competitiveness lowering the goods balance, leading to lower economic growth
• Inflation may lead to contractionary monetary and fiscal policy to address it, lowering economic growth
• Inflation distorts the allocation of resources, lowering allocative efficiency and economic growth

Economic Growth and External Stability:
• Economic growth leads to more import spending, leading to a worsening goods balance, and lower external stability
• Economic growth may lead to appreciation of the exchange rate, leading to improved external stability
• Economic growth leads to increased confidence in the economy, so more foreign investment, lowering external stability
• Economic growth from productivity would reduce prices domestically, leading to fewer imports, improving external stability
• Economic growth increases a country’s capacity to pay back debt, improving external stability
• Economic growth may lead to demand pull inflation, causing a loss in international competitiveness, lowering external stability
• External stability leads to higher confidence in the economy, and more investment, improving economic growth, and vice versa
• External stability means less debt payments are made overseas, so money is spent domestically, improving economic growth
• External instability may lead to the ‘balance of payments constraint’, reducing economic growth

Economic Growth and Distribution of Income and Wealth:
• Economic growth leads to proportional income increases which in fact means the income gap is widening, worsening inequality
• Economic growth means businesses earn more profit, which increases income for high income earners, worsening inequality
• Economic growth leads to increased government revenue from high income earners, which can be spent on social welfare and collective goods, improving inequality
• Income inequality creates an incentive for workers to work and entrepreneurs to take risks, leading to greater factor productivity, and thus, economic growth
• Income inequality leads to more savings, because higher income earners have a lower MPC, which means less consumption, and less economic growth
• Income inequality may lead to social problems and relative poverty, which can reduce labour participation and reduce economic growth.

Economic Growth and Environmental Sustainability:
• Economic growth involves greater production, which requires more resources, and thus, less environmental sustainability
• Economic growth increases income levels to a point where individuals become aware of environmental issues and make an effort to improve environmental sustainability
• Economic growth leads to technological change that allows more efficient resource use, preserving the environment
• Environmental sustainability usually means productivity is forgone in order to preserve resources, reducing economic growth
• Environmental sustainability means preserving of resources for the future, which may improve economic growth for future generations
• Environmental sustainability involves the creation of new sectors that may create new jobs and improve economic growth
• Environmental problems require resources to manage, for example, cleaners to clean up the streets, which could be used elsewhere, thus reducing economic growth
• Environmental problems cause the misallocation of recourses due to negative externalities, leading to reduce efficiency and reduced economic growth.

Unemployment:

Unemployment and Inflation:
• Unemployment leads to lower inflation in the short term, as there is an excess of labour supply, lowering wage levels, and thus lowering inflation, as short in the Short Run Philips Curve
• Unemployment has little effect on inflation according to the Long Run Philips Curve
• Inflation leads to unemployment due to increasing wage demands causing the price of labour to increase
• Inflation leads to contractionary monetary and fiscal policy, resulting in slower economic growth, and more unemployment
• Inflation reduces international competitiveness, which could lead to industries demanding less labour, and unemployment

Unemployment and External Stability:
• Unemployment means less people have money to spend on imports, improving external stability
• Unemployment reduces the productive capacity and hence, profit making ability of firms, reducing ability to pay back debt overseas, and reducing external stability
• Unemployment reduces profit of firms, leading to lower dividend payments overseas, improving external stability
• External stability may lead to the ‘balance of payments constraint’, reducing economic growth and hence, increasing unemployment

Unemployment and Distribution of Income and Wealth:
• Unemployment leads to income inequality as there is a loss of income for those who are unemployed
• Income inequality leads to an incentive to improve skills, which improve unemployment in the long term
• Income inequality improves the geographical mobility of the labour force due to the incentive effect, decreasing unemployment
• Income inequality means more savings, leading to less consumption, lower economic growth, and increased unemployment

Unemployment and Environmental Sustainability:
• Unemployment leads to greater disregard for the environment, reducing environmental sustainability
• Environmental policies may cause lower economic growth, and lead to unemployment
• Environmental sustainability creates new industries that require new jobs, improving unemployment

Inflation:

Inflation and External Stability:
• Inflation causes loss in international competitiveness, reducing goods balance, and external stability
• Inflation erodes the value of debt to be paid overseas, improving external stability
• Inflation leads to less confidence in the economy, lowering investment, and improving external stability
• Inflation causes depreciation of the currency, due to less financial and trade inflows, causing debt payments to increase, reducing external stability
• Inflation leads to contractionary monetary policy, raising interest rates and creating more investment, reducing external stability
• External stability leads to increased confidence in the economy, appreciating the exchange rate, and reducing imported inflation
• External stability increases consumer confidence, leading to more consumption, and increased inflation

Inflation and Distribution of Income and Wealth:
• Inflation leads to people being pushed up tax brackets, and those with higher incomes pay more due to progressive taxation, thus improving income equality
• Inflation might not be accompanied by wages going up, meaning those with lower income need to spend a greater portion of their income on necessities, worsening income inequality
• Inflation increases the price of assets, benefitting those with high wealth, worsening wealth inequality
• Inflation leads to contractionary monetary policy, which raises the price of mortgage repayments, usually owned by lower income earners, thus worsening income inequality
• Income inequality leads to less spending, which dampers demand, leading to reduced demand pull inflation

Inflation and Environmental Sustainability:
• Environmental sustainability policies such as the carbon tax may increase cost of production, increasing inflation
• Environmental sustainability that considers the future use of resources would stabilise the depletion of natural resources, so that their price would not be too high in the long run, reducing inflation

External Stability:

External Stability and Distribution of Income and Wealth:
• External instability leads to the ‘balance of payments constraint’, restricting the growth through contractionary fiscal and monetary policy, which both give less money to those with low incomes, thus worsening income inequality
• Income inequality leads to increased savings, raising the household savings ratio, so that less investment needs to funded overseas, improving external stability

External Stability and Environmental Sustainability:
• External instability means greater disregard for the environment, reducing environmental sustainability
• Environmental sustainability ensures that production is adequate in the future, meaning economic growth is sufficient enough to maintain external stability

Distribution of Income and Wealth:

Distribution of Income and Wealth and Environmental Sustainability:
• Income inequality leads to a greater portion of the population disregarding the environment leading to lower environmental sustainability

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Note: Most of the issues link to economic growth, which then link back to every other issue.

Another note: The last few are too complicated without linking back to economic growth.

So revise the links, understand them and apply them in your essays to ensure the highest marks!