QCE Economics - Unit 4 - Macroeconomic objectives and theory

Inflation, Unemployment and External Stability | QCE Economics

Learn inflation types, unemployment types, participation, underutilisation, external stability and macroeconomic trade-offs for QCE Economics.

Updated 2026-05-18 - 5 min read

Economic indicators turn broad objectives into measurable evidence. In Unit 4, you need to define the indicator, calculate changes where needed, explain what caused the movement, and evaluate what the movement means for different groups.

Inflation, unemployment and external stability are closely connected. A strong expansion can reduce unemployment but increase inflation and imports. A weak economy can reduce inflation but worsen unemployment and living standards. A depreciation can improve export competitiveness but increase imported inflation.

Inflation

Inflation is a sustained increase in the general level of prices. It is usually measured by the Consumer Price Index, or CPI, which tracks changes in the price of a basket of household goods and services.

| Type | Meaning | Example | |---|---|---| | Headline inflation | The overall CPI inflation rate | Fuel and food prices push the total CPI higher. | | Underlying inflation | Inflation after reducing volatile or temporary price effects | Trimmed mean inflation filters out unusually large price movements. | | Demand-pull inflation | Aggregate demand grows faster than the economy's capacity to supply | A boom in consumption and investment raises prices. | | Cost-push inflation | Production costs rise and firms pass costs to consumers | Higher energy, rent, wages or imported input prices. | | Imported inflation | Import prices rise because overseas prices rise or the AUD depreciates | A weaker AUD makes imported electronics and fuel more expensive. | | Inflation expectations | Workers and firms expect future inflation and adjust wages or prices now | Higher expected inflation leads to larger wage claims and price setting. | | Deflation | The general price level falls | Can signal weak demand and delayed spending. | | Stagflation | High inflation and weak growth or high unemployment occur together | A supply shock raises costs while output slows. |

Price stability matters because volatile inflation makes planning harder. It can reduce real wages, redistribute income from savers to borrowers, damage export competitiveness and create uncertainty for investment.

Unemployment and underutilisation

The unemployment rate measures unemployed people as a share of the labour force:

$ \text{Unemployment rate}=\frac{\text{Unemployed people}}{\text{Labour force}}\times 100 $

The participation rate measures the share of the working-age population that is in the labour force:

$ \text{Participation rate}=\frac{\text{Labour force}}{\text{Working-age population}}\times 100 $

Labour force underutilisation includes unemployment plus underemployment. Underemployment occurs when people have work but want and are available for more hours. It matters because headline unemployment can look low while many workers still have insufficient paid work.

| Type of unemployment | Cause | Policy implication | |---|---|---| | Cyclical | Weak aggregate demand during a downturn | Demand management can help. | | Structural | Skills, location or industry structure do not match available jobs | Training, mobility and industry reform are needed. | | Frictional | People are between jobs or searching for better matches | Usually normal in a dynamic economy. | | Seasonal | Employment changes with seasons | Common in agriculture, tourism and retail. | | Long-term | People remain unemployed for an extended period | Skills erosion and lower confidence can make it harder to re-enter work. | | Hidden | People want work but are not counted as unemployed because they are not actively looking | Participation data helps reveal this. | | Natural | The unemployment that exists when the labour market is in long-run equilibrium | Linked to frictional and structural unemployment. |

The non-accelerating inflation rate of unemployment, or NAIRU, is the unemployment rate at which inflation is stable. If unemployment is below the NAIRU for a sustained period, wage and price pressures may rise. If unemployment is above it, spare capacity may reduce inflation pressure.

External stability

External stability means Australia's international transactions and liabilities are sustainable. It is not the same as always having a trade surplus. A country can run deficits if the capital inflows finance productive investment and debt servicing remains manageable.

Important external indicators include:

• exchange rate movements
• terms of trade
• current account balance
• net foreign debt and foreign liabilities
• export and import volumes
• income payments to foreign investors

A high terms of trade can increase national income, support export receipts and strengthen the AUD. A falling terms of trade can reduce income, weaken the AUD and worsen the trade balance unless export volumes rise enough to offset lower prices.

Phillips curve trade-offs

The short-run Phillips curve shows a possible inverse relationship between inflation and unemployment. When aggregate demand rises, firms increase output and employment, but prices may also rise. When demand falls, inflation pressure may ease, but unemployment may increase.

In the long run, the trade-off is weaker because expectations adjust. If workers and firms expect higher inflation, wage and price setting can shift upward. This means policymakers cannot permanently reduce unemployment below its sustainable level simply by accepting higher inflation.

Percentage points and basis points

Economics responses often require careful language. A percentage point change is the arithmetic difference between two percentages. If unemployment rises from 4 percent to 5 percent, it has risen by 1 percentage point, not 1 percent.

A basis point is one hundredth of a percentage point. A 0.25 percentage point cash-rate increase is 25 basis points.

Worked example

Quick check

Sources

• QCAA Economics subject page
• QCAA Economics 2025 syllabus
• RBA: Inflation and its measurement
• ABS: Employment and unemployment