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Economics > 1: Economic Activity and Australia's Goals > Flashcards

1: Economic Activity and Australia's Goals Flashcards

1
Q

What are living standards?

A

The overall wellbeing of a nation.

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2
Q

What are material living standards?

A

The economic wellbeing of individuals, depending on income and consumption levels.

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3
Q

What are non-material living standards?

A

Depend on the quality of life for all people. Relate to intangible aspects of life.

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4
Q

What factors influence material living standards?

A

DIE Hard (to increase national production)

Distribution of goods, services and incomes
Inflation rates
Employment rates
Growing national production and income per person

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5
Q

How does growing national production and income per person influence material living standards?

A
  • improved efficiency in use or in availability of resources = national production and incomes grow at a faster rate than population = rise in GDP per capita = each person can consume more goods and services.

Also, higher employment, incomes per capita.

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6
Q

How does the distribution of goods, services and incomes affect material living standards?

A

Uneven patterns of distribution = small minority of people (richest20% of population) consume majority of goods, services and incomes = most people in poverty

Even patterns of distribution = the benefits of having a bigger economy are shared or spread around so most people can enjoy better material wellbeing

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7
Q

How does the inflation rate influence material living standards?

A

High inflation = lower purchasing power = lower consumption levels = lower material living standards

Low inflation = higher purchasing power = higher consumption levels = higher material living standards

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8
Q

How does employment rate influence material living standards?

A

High unemployment rates = lower average incomes = lower consumption levels = lower material living standards

Low unemployment rates = higher average incomes = higher consumption levels = higher material living standards

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9
Q

What factors influence non-material living standards?

A

happiness

physical and mental health and the absence of stress

positive relationships with others and family cohesion

the absence of persecution, corruption, war, crime and violence

a fair, just, tolerant, compassionate and moral society

social, economic and political freedom

a healthy natural environment both now and into the future

a lack of urban congestion and overcrowding

a long life expectancy

equality of opportunity and the absence of discrimination

considerable leisure time as opposed to hours of work

rich cultural experiences

high literacy rates.

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10
Q

What types of relationships exist between material and non-material living standards? Define each.

A

Conflicting relationships: where there is a trade-off, and progress in one area of wellbeing undermines the other

Compatible relationships: where progress in one area of wellbeing helps to promote the other area.

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11
Q

Can material and non-material living standards be looked at in isolation?

A

No. Both interact with and impact each other.

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12
Q

In what ways can non-material living standards and material living standards have a compatible relationship?

A

Cultural enrichment — Higher incomes can allow for more international travel and cultural enrichment.

Longer life expectancy — Higher incomes can be used to extend life expectancy and reduce daily suffering from pain and curable ailments.

Possibility of reduced environmental damage — Higher incomes can be directed to combating environmental damage and reducing pollution.

More leisure time — Higher incomes enable individuals to reduce their working hours and stress, and increase their leisure time.

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13
Q

Identify one attempt to determine whether life is progressing or regressing

A

Measuring Australia’s Progress (MAP)

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14
Q

Identify one attempt to determine whether life is progressing or regressing

A

Measuring Australia’s Progress (MAP)

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15
Q

What is ‘Measuring Australia’s Progress’ (MAP)?

A

A set of statistical measures broken into four main categories (including the economy, society, governance, and the environment) to evaluate Australia’s living standards.

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16
Q

Define ‘level of economic activity’

A

Refers to pace at which economic activity occurs nationally.

Note: typically, activity levels change from a peak through a contraction to a trough and then a recovery.

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17
Q

What is economic activity?

A

A process which occurs when resources are used to produce goods and services by an economy. This also affects inflation and unemployment rates in an economy.

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18
Q

In what ways does the level of economic activity influence CURRENT material living standards?

A

It affects the quantity and quality of goods and services produced and available to the population in order to help satisfy its needs and wants.

It influences employment opportunities, the number of jobs and the unemployment rate.

It determines our average incomes, prices, purchasing power and consumption levels per person.

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19
Q

How does the level of economic activity influence FUTURE material and non-material living standards?

A

High levels of economic activity exhaust non-renewable, natural resources. This deprives their access by future generations = hindered future production = limiting future non-material and material living standards.

e.g. negative externalities like climate change, urban congestion, reduced leisure time and family tensions

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20
Q

How is economic activity measured?

A

Gross domestic product (GDP)

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21
Q

What is Gross Domestic Product (GDP)?

A

The total market value of all finished goods and services produced within a country’s borders in one year.

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22
Q

What is chain volume GDP?

A

The total market value of all finished goods and services produced within a country’s borders in one year, adjusted for inflation and deflation so one year’s production is comparable to that of another.

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23
Q

For what reasons may chain volume GDP be inaccurate?

A
  1. excluded production
  2. guesstimates and imputed values
  3. adjustments made to remove the effects of price changes
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24
Q

Explain how chain volume GDP may be inaccurate due to excluded production

A
  • fails to include value of all goods and services
  • ignores non-market activity (e.g. black market and cash market)
  • these things too difficult to calculate accurately

Fun Fact: Some estimates suggest that the actual value of non-market production may amount to a staggering 10–20 per cent of current GDP or economic activity! If true, this means that GDP seriously underestimates national production levels.

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25
Q

What is non-market activity?

A

Consists of production that is not sold and occurs mostly within individual households, such as personal housework and gardening, or the black market. Its value is not included in GDP making GDP an underestimation.

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26
Q

Explain how chain volume GDP may be inaccurate due to guesstimates and imputed values

A
  • value of some items may be guesstimated or imputed = uncertain levels of statistical error
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27
Q

Explain how chain volume GDP may be inaccurate due to adjustments made to remove the effects of price changes

A
  • using the chain price index to statistically remove the effects of inflation/deflation is a potentially inaccurate process
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28
Q

What are two alternate ways of estimating GDP?

A
  • the spending approach — by summing up the total value of spending on Australian-made goods and services
  • the incomes approach — by summing up the total value of all incomes generated from the production of goods and services
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29
Q

Identify other aspects of indicators associated with economic activity

A
  • lagging indicators: WHAT ECO ACTIVITY HAS BEEN LIKE IN THE PAST shows changes in eco activity some time after events have occurred as they take time to respond. E.g CPI or Inflation rates and changes in weekly average income, GDP
  • coincident indicators: WHAT ECO ACTIVITY IS LIKE CURRENTLY move very closely with changes in actual levels of eco activity. Eng. Changes in monthly retail sale
  • leading indicators: WHAT ECON ACTIVITY WILL BE LIKE IN THE FUTURE allow economic forecasts or predictions to be made about future levels of economic activity. E.g. changes in eco activity in trading partners, consumer confidence index etc.
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30
Q

Identify patterns in economic activity

A

Long term trend patterns: looking at 10 years or more of economic activity to find trends

Cyclical (AD) patterns: when stats follow a fairly regular wave-like pattern with peaks and troughs. GDP, UE, CAD, Inflation

Seasonal patterns: when patterns are similar at the same time each year. Eg December sales

Erratic Patterns: once off events ay cause a spike in eco activity e.g. commonwealth games

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31
Q

Define the ‘business cycle’

A

refers to the volatility of the level of economic activity in an economy.

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32
Q

Identify 2 important patterns that appear on the business cycle diagram (illustrating the typical path of economic activity)

A
  • short-medium term cyclical swings in level of economic activity/GDP
  • long-term upward trend in the level of economic activity/ GDP
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33
Q

For how long do business cycles last in Australia?

A

3 - 8 years or longer

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34
Q

Explain the expansion/recovery phase

A

rising GDP growth
falling UE
Inflation rising
(injections > leakages) = growth in size of economy

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35
Q

Explain the peak (sometimes boom) phase

A

GDP highest
Unemployment lowest
Inflation highest
high rates of EG

dangerous inflationary boom: consumer prices rise by over 3%

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36
Q

Explain the slowdown or contraction phase

A

GDP rising more slowly or even falling
Unemployment rising
Inflation slowing (as businesses discount their prices to clear their unwanted and unsold stocks of goods)

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37
Q

Explain the trough (and sometimes recession) phase

A

GDP lowest point or even a negative rate
Unemployment highest
Inflation lowest point or even negative rate (deflation)

If GDP falls during at least two consecutive quarters, it is a recession.

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38
Q

Define recession

A

A period of negative GDP lasting for at least two consecutive quarters. Associated with high levels of cyclical employment and low inflation.

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39
Q

What is a depression?

A

A prolonged recession involving very high cyclical unemployment, caused by a significant fall in aggregate demand.

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40
Q

Explain domestic economic stability

A

ideal level of economic activity where, simultaneously, there is low inflation, a strong and sustainable rate of GDP growth and low unemployment.

GDP growth rate: 3%
Low unemployment: low – 4.5-5%
Low inflation: low – 2-3%

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41
Q

Explain stagflation

A

A period of slow GDP growth (stagnation) along with high structural unemployment and rapid cost inflation. It reflects less favourable aggregate supply conditions.

GDP: rising at slow or negative rate
Unemployment: high
Inflation: high

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42
Q

Why can’t stagflation be represented on the business cycle diagram?

A

It assumes that high inflation and unemployment are opposites and cannot coexist

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43
Q

What is the five-sector circular flow model?

A

Illustrates the flow of money, resources and goods/services in an economy
Identifies some of the macroeconomic variables affecting country’s economic conditions, showing hoe they are interrelated.

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44
Q

Define and provide examples of leakages

A
  • Things that slow aggregate demand and decrease economic activity
  • E.g. Savings, taxes, import spending (S+T+ M)
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45
Q

Define and provide examples of injections

A
  • Things that boost aggregate demand and increase economic activity
  • E.g. Investment spending, government spending, export spending (I+G+X)
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46
Q

Identify the five sectors in the five-sector circular flow model. Explain the role of each.

A
  1. household sector: Australia’s population; sells resources to businesses, receives income in return, uses this to demand finished goods and services (to satisfy needs/wants)
  2. business sector: Australian trading firms; buy resources from households, convert them into finished G/S and supply to households
  3. financial sector: Financial institutions (e.g. banks, stock exchange, finance companies etc.); borrow savings (S) from households and lend to customers for investment spending (I)
  4. government sector: Governments; collect taxes (T) to pay for government spending (G)
  5. overseas sector: Trading partners; import G/S (M) to satisfy needs/wants and sell exports (X)
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47
Q

Explain flow 1

A

Household sector supplies resources to business sector

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48
Q

Explain flow 2

A

Represents demand for resources by the business sector through payment of income to the household sector

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49
Q

Explain flow 3

A

Represents aggregate demand (total value of all types of demand for Aussie G/S)
Some income ends up in leakages, other ends up as in injections:
- private consumption of G/S (C) – injection
- household saving in financial sector (S) – leakage (as C is lowered) – financial sector injects some (S) back into model by lending to businesses for private investment spending (I) – injection
- paying government taxes (T) – leakage (as C is lowered) – some (T) injected back into model is used to pay for government consumption/investment (G)
- spending on imports (M) – leakage – compared to overseas spending on exports (X) – injection.

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50
Q

Explain flow 4

A

Represents aggregate supply (total production of goods and services by the business sector). Thus, reflects GDP.

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51
Q

Define Aggregate demand (AD)

A

Represents the total of spending on Australian-made goods and services over a year. It is made up of C + I + G + (X − M)

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52
Q

Define aggregate supply

A

The total production of goods and services over a period of time by the nation’s businesses.

Note: It is especially affected by the availability of a nation’s resources and the efficiency with which these resources are used

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53
Q

Explain how AD affects the value of GDP and national income

A

AD determines short-term cyclical levels of economic activity:
- Leakages>Injections - lower AD = firms discount prices and cut output = slowed GDP = increased unemployment = fall in average incomes = slowing economic activity (contraction) – similar to recession

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54
Q

How the AS influence potential levels of economic activity in the long-term?

A

While AS is influenced in the short-term by changes in AD, in the long-term, the potential national level of output is determined by the quantity and efficiency of resources available for production.

Thus, especially in the longer term, AS - determined partly by the resources available - affects potential level of GDP

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55
Q

Identify and describe each component of aggregate demand

A
  • Private Consumption (C): household expenditure to satisfy needs/wants – 60% of AD NB: Purchases of new properties by household is factored in INVESTMENT not Consumption Spending.
  • Private Investment (I): Private business capital spending on products used to make other goods and services – under 22% + most volatile
  • Government consumption (G1): Public expenditure on G/S to help satisfy community’s needs/wants e.g. defence spending, day-to-day running costs like telephone calls – 17%
  • Government investment (G2): Government capital or investment expenditure on equipment needed to produce public social and economic infrastructure – 3%
  • Net exports (X-M): Difference between foreign spending on Australian exports and local spending on imports – 18-24% each
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56
Q

What are aggregate demand factors?

A

Macroeconomic influences on the level of spending at various price levels.

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57
Q

Identify AD factors

A

epic b&b ted (think lorelai and rory gilmore)

exchange rate of $A 
population growth 
interest rates 
consumer confidence 
business confidence 
budget 
terms of trade 
economic conditions overseas 
disposable income
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58
Q

What is consumer confidence and how does it influence AD?

A

Expectations of households about future income, employment prospects and inflation.

Affect decisions about whether to spend or whether to save.

Weak confidence lifts household savings and depresses C = slow AD and economic activity. 
Strong confidence (reverse effect) -- depresses households savings and lifts C = higher AD and economic activity
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59
Q

What is household disposable income and how does it influence AD?

A

Money available for spending after payment of direct tax and receipt of welfare.

Affects C and M.

Fast growth in disposable income lifts C and M = boosts AD and economic activity
Slower growth in disposable income depresses C and M = slow AD and economic growth

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60
Q

How does the rate of population growth influence AD?

A

Faster rate = multiplication of needs and wants = higher expenditure on C, G, M = boosts AD and economic activity

Slower rate = fewer needs and wants = depresses expenditure on C, G, M = reduces AD and economic activity

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61
Q

What is business confidence and how does it influence AD?

A

Firm’s expectations about their level of future sales and profits.

Strong confidence lifts (I) = boosts AD and economic activity
Weak confidence depresses (I) = reduces AD and economic activity

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62
Q

What are interest rates and how do they influence AD?

A

The annual cost of borrowing or reward for saving money.

Rise in interest rates depresses C and I (borrowing money becomes more expensive and saving money - leakage - becomes more profitable) = slow AD and economic activity

Fall in interest rates lifts C and I (borrowing money becomes less expensive and saving money becomes less profitable) = boost AD and economic activity

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63
Q

How does budgetary policy stance affect AD?

A

Affects C, I, G1, G2, X and M

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64
Q

How does public and private indebtedness influence AD?

A

make more/less likely to spend

Affect C, I and G spending

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65
Q

How does economic activity overseas influence AD?

A

downturn in economic activity overseas depresses X (lower injections) = reduced AD and economic activity
economic growth overseas lifts X (increase injections) = boosts AD and economic activity

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66
Q

What are terms of trade and how do they influence AD?

A

Ratio of average export prices compared to average import prices
Terms of trade index = Export price index/import price index x100

Rise in terms of trade index lifts value of X relative to M = boosting AD and economic activity

Fall in terms of trade index depresses values of X relative to M = slowing AD and economic activity

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67
Q

What is meant by the exchange rate for the Australian dollar and how does it influence AD?

A

The price at which the Australian dollar is swapped for other currencies.

Depreciation of $A = AUD fallen in value; can buy less with one dollar = Xs more price competitive compared to Ms = boosts value of Xs relative to Ms = boosts AD and economic activity

Appreciation of $A = AUD increased in value; can buy more with one dollar = Ms more affordable compared to Xs which are more expensive = slows net exports (depresses value of Xs relative to Ms) = slows AD and economic activity

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68
Q

What is the trade weighted index? (TWI)

A

An overall guide to the value of the Australian dollar measured against other currencies, each weighted according to their relative importance in Australia’s trade.

69
Q

How does change in general price levels affect AD?

A

(movement not shift)
Increases in general level of prices reduces purchasing power and thus decreases spending.
Higher price levels will tend to have a neg effect on int comp. if growth in average prices (inflation) is higher than it is in other countries, there will be reduced demand for Australian exports.
Increase in leakages and reduction in injections thus AD falls

70
Q

How does a rise in the interest rates affect the exchange rate?

A

If Australia’s interest rate is greater relative to other countries, this represents a higher reward for savings to foreign investors. Foreign investors then go to the foreign exchange market (FEM) demanding AUD, which raises demand for AUD relative to supply. This causes the AUD to appreciate in value.

71
Q

How does a rise in the terms of trade affect exchange rate?

A

Tot is the ratio of export prices relative to import prices. A rise in the tot, holding volume constant means there is a rise in export prices relative to import prices. In the FEM, this means the demand for AUD has increased relative to the supply thus the AUD has appreciated in value.

72
Q

What are aggregate supply factors?

A

The main determinants of a nation’s productive capacity, especially in the long-term, at various price levels)

73
Q

Identify the aggregate supply factors influencing Australia’s productive capacity and potential GDP

A

volume & efficiency of labour/capital/natural resources

the number of new businesses versus closures

74
Q

What factors influence our ability to increase the quantity and efficiency of our labour resources and thus enlarge productive capacity and AS?

A
  • POPULATION’S AGE STRUCTURE e.g. Australia’s ageing population causing labour shortages
  • PARTICIPATION RATES proportion of people aged 15+ who are able and willing to work affects size of labour force
  • GOVERNMENT AS POLICIES affect access to and quality of labour resources e.g. immigration policies, education policies, policy about welfare access, financial assistance with children , policy about welfare access e.g. pension access age, financial assistance with children (impacts whether parents join labour force)
  • LABOUR PRODUCTIVITY influenced by access to capital, use of incentives, skills etc.
  • AMOUNT OF LEISURE TIME AND HOURS OF WORK
75
Q

What factors influence our ability to increase the quantity and efficiency of our capital resources and thus enlarge productive capacity and AS?

A
  • INVESTMENT (public and private) can increase capital inputs
  • INTEREST RATES high deter investment and growth of AS while low encourage investment and growth of AS
  • OUTLAYS ON TECH AND R&D can increase volume and efficiency of capital resources
  • TAX RATES low rates incentivise higher (I) = more efficient capital resources = increased productive capacity. also, incentivise greater participation in labour force. high rates depress (I) = less efficient capital resources = productive capacity does not grow. also, disincentivise participation in labour force.
  • ADEQUACY OF NATIONAL INFRASTRUCTURE good infrastructures helps cut costs and improve efficiency = increased productive capacity = higher AS; poor infrastructure hinders ability to minimise costs and maximise efficiency = cannot expand productive capacity = limited AS
76
Q

What factors influence our ability to increase the quantity and efficiency of our natural resources and thus enlarge productive capacity and AS?

A
  • MINERAL EXPLORATION using tech to find new minerals and natural inputs
  • LAND MANAGEMENT lifting productivity and sustainability of mining/farming practices
  • COMBATTING CLIMATE CHANGE policies to reduce global warming (e.g. carbon tax) to avoid reduction of productive capacity due to destruction of natural resources caused by climate change
77
Q

What factors influence the ability of businesses to lower their costs and maximise profitability to grow productive capacity and aggregate supply?

A
  • LABOUR COSTS lower costs boosts profits and reduces closures = boosts productive capacity and AS; higher costs reverse effect
  • EFFICIENCY increasing productivity by enhancing skills, using tech etc. boosts productive capacity and AS
  • INTEREST RATES lower rates incentivise firms to increase (I) to grow productive capacity and AS; high rates reverse effect
  • COST OF RESOURCES influence profits and thus whether firms grow/shrink
  • EXCHANGE RATE affect production costs and hence profits and thus whether firms grow/shrink. Also influences competitiveness, sales and profits of local companies that export - affecting the growth in productive capacity and AS.
  • NEW TECHNOLOGY using new tech can impact efficiency, costs, competitiveness and survival
  • BUSINESS SIZE bigger firms create economic of large-scale as costs spread more thinly over greater volume of output. Can lower costs and boost profits. Able to expand productive capacity and increase AS.
  • TAX RATES lower rates reduce business closures and incentivise firms to increase (I) and expand productive capacity and AS. higher rates reverse effect.
  • OTHER GOV AS POLICIES e.g. trade liberalisation forcing local firms to maximise efficiency, payment of subsidies to particular industries, provision of economic infrastructure, environmental policies to battle climate change
78
Q

What is an aggregate demand-supply diagram?

A

Illustrates the relationship between AS and AD and shows the key factors which impact the economy’s equilibrium level of economic activity.

79
Q

What general economic conditions to aggregate demand-supply diagrams provide some information about?

A
  • level of real GDP
  • levels of employment and unemployment
  • average level of prices/ inflation rate
80
Q

When looking at the AD curve, what happens as general prices rise and what happens when they fall?

A

RISE:
contraction in real GDP purchased per year.

FALL:
expansion in real GDP purchased per year.

81
Q

Identify and explain three reasons for the negative sloping demand line

A
  1. Purchasing power effect: higher prices reduce purchasing power = can afford less
  2. Import substitution effect: households encouraged to buy cheaper imports
  3. Interest rate effect: when general prices rise, so do interest rates. borrowing money becomes more expensive, contracting spending.
82
Q

Outline the effect of stronger demand-side conditions to the aggregate demand curve

A

buyers prepared to purchase larger quantities of local products at all price levels
whole AD line shifts to the right

83
Q

Outline the effect of weaker demand-side conditions to the aggregate demand curve

A

buyers are prepared to purchase fewer quantities of local products at all price levels

whole AD line shifts to the left

84
Q

Identify and outline the meaning of the different sections of the supply curve

A

MUCH EXCESS CAPACITY (horizontal section)

  • low national output
  • easy to expand production in response to little/no increase in price
  • high unemployment
  • low inflation

LIMITED ACCESS CAPACITY (intermediate section of elbow)

  • bigger rises in price needed to increase production profitably
  • gradual onset of full employment

NO EXCESS CAPACITY (vertical section)

  • overemployment
  • larges rises in price not enough to prompt increase in production
  • rapid inflation
85
Q

Outline the effect of stronger supply conditions on the supply curve

A

firms become more willing and able to life supply, increasing potential GDP
whole AS curve shifts outwards

86
Q

Outline the effect of weaker supply conditions on the supply curve

A

Producers less willing and able to produce at general prices prevailing, cutting potential level of GDP
whole AS curve shifts inwards

87
Q

What effect on equilibrium does excessive AD have?

A

Causes an equilibrium which produces…

  1. Maximum GDP growth
  2. Very low cyclical unemployment – increased demand for labour resources + labour shortages
  3. Rapid demand inflation – boom – production can’t keep up causing widespread shortages = rising prices and demand inflation = reduced purchasing power = decline in living standards
88
Q

What effect on equilibrium does insufficient AD have?

A

Causes an equilibrium which produces…

  1. Slower GDP growth – perhaps causing recession
  2. Higher cyclical unemployment – (lower demand for labour due to slow GDP)
  3. Lower demand inflation – higher unsold stock = price discounting to clear
89
Q

What effect on equilibrium does ideal AD have?

A

Causes an equilibrium which produces…

  1. A strong and sustainable rate of economic growth
  2. Full employment – relatively low unemployment rates
  3. Low inflation and prices – no widespread shortages or surplus of goods and services = material living standards maximised
90
Q

What effect on equilibrium do more favourable aggregate supply conditions have?

A

Causes an equilibrium which provides…

  1. Stronger and more sustainable rate of economic growth – higher GDP
  2. Slower cost inflation – lower costs and higher profits = firms can cut prices to be more competitive
  3. Lower structural unemployment and more jobs – fewer firms close down and other expand more rapidly
91
Q

What effect on equilibrium do less favourable aggregate supply conditions have?

A

Cause an equilibrium which leads to…

  1. Lower or stagnant level of GDP
  2. Rising cost inflation – rising costs & falling profits force firms to lift prices
  3. Rising structural unemployment – firms close down and workers lose jobs

+ stagflation

92
Q

What is inflation?

A

When the prices of most goods and services are rising.

93
Q

What is purchasing power?

A

The quantity of goods and services that incomes will buy, after allowing for effects of changing prices

94
Q

Define the goal of low inflation

A

involves aiming for an average increase in the general price level of 2-3% per annum over the course of the business cycle (typically measured by the CPI) - a rate that is consistent with other government macroeconomic goals.

95
Q

Does the goal of low inflation mean that inflation should be zero? Why or why not?

A

No. This would not be consistent with other macroeconomic goals as zero inflation would require weak economic growth and high cyclical unemployment.

96
Q

What are the main measures of inflation?

A
  • Consumer price index (CPI)

- the underlying inflation rate (the core inflation rate)

97
Q

What is the consumer price index (CPI)

A

A measure of inflation or the average level of prices paid by households for a basket of goods and services.

98
Q

Identify and outline the important features of the CPI

A

REGIMEN the range of g/s included in the basket whose prices are to be measured

PRICES SURVEYED prices surveyed from representative range of metropolitan retail outlets from private (e.g. Coles, Myer, Kmart) and public sector (e.g. local council property rates)

WEIGHTING OF ITEMS weighted according to relative importance in overall household expenditure. more expensive and frequently purchased items have greater bearing on index trends than less significant items.

BASE YEAR price changes are compared to the price of regimen in a base year (representative starting period)

99
Q

How is the annual percentage rise (annual rate of inflation) calculated?

A

= number of points increase in CPIx100/value of CPI in first year

100
Q

What is the underlying inflation rate?

A

Measure of inflation generated by removing volatile items (that are from the headline CPI regimen to obtain an inflation rate that is more truly reflective of ongoing or core changes in the level of prices.

101
Q

Identify the differences between the measures of headline and underlying

A

DIFFERENT SIZED REGIMENS measure prices of different baskets of goods and services. headline has bigger regimen. underlying removes volatile items whose prices are affected by one-off events.

DIFFERENT STATISTICAL RESULTS headline usually shows higher rates if volatile items’ prices are rising faster than other items due to one-off events. if prices of volatile items are falling faster than other items, headline rate is lower than underlying rate.

DIFFERENT USES headline CPI used as guide to changes in the cost of living for households, underlying CPI used by RBA to inform what decisions to make about manipulating interest rates to slow persistent or core inflationary pressures.

102
Q

What are some limitations to using CPI as a measure of inflation?

A

Prices surveyed are only those paid by metropolitan households, may therefore not represent the cost of living for people residing outside of metropolitan areas.

The weighting of items in the regimen may not be appropriate for all households and may fail to reflect the actual household expenditure. This can make the measure misleading. E.g. if meat prices pushed CPI up, this would be misleading for vegetarian households.

103
Q

Identify the different types of inflation

A

Demand inflation

Cost inflation

104
Q

What is demand inflation?

A

Rise in general prices caused by excessive aggregate demand when economic is NEAR productive capacity

Occurs in boom when spending (demand) outstrips production (supply), causing widespread shortages.

105
Q

What is cost inflation?

A

Rise in general prices caused by less favourable aggregate supply factors that undermine profits by increasing production costs or decreasing availability/efficiency of resources, forcing them to increase prices to protect profits.

  • reverse: lower production costs = can reduce prices to compete and still make good profit = easing cost inflation pressures
106
Q

What are the impacts of cost inflation?

A

reduced GDP - can be shown on diagram

107
Q

How may demand inflation disappear?

A

weaker AD conditions = rise in stocks due to falling sales = widespread price discounting by sellers = slowing demand inflation

during a contraction (recession/depression; can lead to deflation :( )

108
Q

Illustrate demand and cost inflation on the AD-AS diagram

A

Page 144

109
Q

Identify the consequences of high inflation

A

Rapid Inflation hurts

undermines efficiency in RESOURCE ALLOCATION
INTERNATIONAL COMPETITIVENESS eroded
HOUSEHOLD AND BUSINESS SPENDING behaviour changes
eventually causes UNEMPLOYMENT
RATE OF ECONOMIC GROWTH slowed
incomes and purchasing power redistributed UNEVENLY

REMEMBER THERE ARE 6
2-3% is ideal rate of inflation (goal of low inflation); 2X3=6 consequences of rapid inflation

110
Q

How does rapid inflation redistribute incomes and purchasing power more unevenly?

A

Some peeps gain purchasing power while most peeps’ living standards go down

e. g.
- fixed income = income don’t keep up with rising prices = poorer vs. flexible income = can get rising incomes = richer.

  • exporters less internationally competitive = fall sales, incomes = poorer vs. importers get higher sales, incomes = richer
  • borrowers of money = down disposable income cos interest rates rise = poorer vs. lenders = higher income cos interest rates rise = richer
  • some peeps also lose jobs and have to be on welfare payments = poorer
111
Q

How does rapid inflation undermine the efficiency of resource allocation?

A

prices of shares, property and other assets rise faster than general inflation rate, so people redirect resources away from sustainable and productive long-term uses (e.g. business investment) to more speculative investments that rise faster in value, undermining efficiency in resource allocation

112
Q

How does rapid inflation erode Australia’s international competitiveness?

A
  • local sales suffer as consumers switch to cheaper imports
  • exports likely to go down as overseas consumers prefer importing from countries where inflation is slower
  • imports>exports = exchange rate depreciates = reduced purchasing power and living standards
113
Q

How does rapid inflation slow the rate of economic growth

A
  • demand inflation can incentivise businesses to increase investment spending to grow productive capacity = increasing potential economic growth OR can undermine consumer/business confidence so they slow spending, leading to recession
  • inflation leads to higher interest rates = further undermine confidence = slow credit-based spending = depressing economic growth and material living standards
114
Q

How does rapid inflation eventually cause unemployment?

A
  • international competitiveness reduced = firms producing items for local or export markets can’t compete against cheaper imports = depressed profits = closures = higher structural unemployment
  • business/consumer confidence down = slowed spending = lower profits (AS) = lower employment

can depress both material and non-material living standards (e.g. low self-esteem, higher family tensions, crime rates etc.)

115
Q

How does rapid inflation alter household and business behaviour, affecting saving, consumption and investment spending

A
  • causes higher interest rates = encourage saving and discourage credit-based consumption and investment spending
  • erodes confidence = slowing consumption and investment spending = adding to unemployment = eroding incomes and purchasing power
  • wealth effect – rising prices for shares and property makes some people richer = they may spend more in the short-term
116
Q

What is economic growth?

A

Increase in the level of production of G/S between one year and the next

117
Q

How is economic growth measured?

A

annual percentage rise in real Gross Domestic Product (GDP)

118
Q

Define the goal of strong and sustainable economic growth

A

the fastest possible rate of increase in production of G/S (3-3.5% real GDP growth) so as to cause employment growth without leading to inflationary, environmental, or external pressures.

119
Q

What is meant by sustainable economic growth?

A

Achieving a annual rate of increase in real GDP at which the economy can increase production of G/S without compromising the living standards of future generations (by depleting natural resources and reducing their ability to satisfy their needs and wants).

a.k.a ecological sustainability

120
Q

How can GDP be estimated using the circular flow model?

A
  • 3 of the flows are equal in monetary value – GDP (flow 4), total expenditure (flow 3), total incomes paid (flow 2) are all equal – hence, estimates of GDP made using three different ways:
  1. GDP(E) = total market value of expenditure (AD)
  2. GDP(I) = total market value of incomes paid to suppliers of resources
  3. GDP(P) = total market value of final G/S produced each year = value added in production by firms each year = total market value of sales minus cost of all inputs bought by firms
121
Q

How do changing general prices (inflation and deflation) influence GDP

A
  • inflation exaggerates rise in market value of G/S produced
  • deflation leads to underestimation of market value of G/S produced

= misleading impression of change in national production (GDP)

122
Q

How do we account for the impact of changing general prices on the changing market value of goods and services produced each year?

A

Using chain volume GDP as measure of economic growth :)

123
Q

IDENTIFY AND DESCRIBE LIMITATIONS OF GDP AS A MEASURE OF ECONOMIC GROWTH

A
  • GDP is an underestimation caused by exclusion of non-market production e.g. black market, cash economy, household/individual non-market activity e.g. home repairs, DIY
  • Some values included in GDP are rough estimates that may be inaccurate as some G/S aren’t sold/market in orthodox way e.g. cost of providing public goods, farm production consumed on farm
  • Quality changes may not be reflected in GDP e.g. quality can increase while price paid comes down
  • Statistical errors in adjusting for inflation and deflation
124
Q

IDENTIFY AND DESCRIBE LIMITATIONS OF GDP AS A MEASURE OF LIVING STANDARDS

A

MATERIAL LIVING STANDARDS:
- does not account for uneven distribution of incomes

  • population size - gdp only reflects rise in material living if its rate of increase is higher than that of population increase (causing GDP per capita to rise)

NON-MATERIAL LIVING STANDARDS
- changes in hours worked and leisure time - if economic growth results from workers working longer hours, leisure time may decrease, eroding non-material living standards

  • negative externalities - costs for third parties that lower non-material living standards e.g. pollution, overcrowding etc.
125
Q

What are the main macroeconomic determinants of a country’s rate of economic growth?

A
  • short-term cyclical rate of economic growth influenced by AD factors which determine extent to which the economy’s available productive capacity is used
  • longer-term potential sustainable rate of economic growth is determined by AS factors that govern economy’s productive capacity
126
Q

Explain how AD factors affect Australia’s rate economic growth

A

Pg. 154

127
Q

Explain how AS factors affect Australia’s rate of economic growth

A

Pg. 154

128
Q

What are reasons for pursuing the goal of a strong and sustainable rate of economic growth?

A
  • helps raise real incomes and material living standards
  • creates more jobs and lowers unemployment
  • improves government’s financial and ability to provide essential services
129
Q

How does pursuing the goal of a strong and sustainable rate of economic growth help raise incomes and material living standards?

A

strong rate of economic growth that is faster than increase in population = rise in GDP per capita = real incomes per head and purchasing power rise = higher material living standards

slower rates reverse effect

130
Q

How does pursuing the goal of a strong and sustainable rate of economic growth create more jobs and lower unemployment?

A

stronger rates of economic growth = businesses employ more resources to lift production = boosting jobs and reducing cyclical unemployment – raises per capita incomes, consumption and material living standards + non-material living standards (improved mental health, reduced family tensions etc.)

slower rate have reverse effect

stronger rates due to technological advancement or aggressive cost-cutting or efficiency measures may temporarily cause rise in structural unemployment = fall in incomes, consumption and material living standards for some people (in short-term)

131
Q

How does pursuing the goal of a strong and sustainable rate of economic growth improve the government’s finances and ability to provide essential services?

A

Incomes rise as GDP grows faster and less people on welfare as unemployment decreases, hence government makes more income through taxation and loses less through outlays and welfare = lower budget deficit and possibly budget surplus = can finance higher levels of welfare and outlays for the neediest + better infrastructure for public + public goods = improve society’s wellbeing as more needs and wants met

132
Q

What is the meaning of employment?

A

A person over age of 15 years or over, who is able and willing to work, has a paid job.

133
Q

What is unemploymen

A

When persons aged 15 years or over, who are ‘actively looking for work’, cannot find it.

134
Q

What is the goal of full employment?

A

Having the lowest rate of unemployment, around 4.5-5% of the labour force, consistent with achieving low inflation and other government economic goals.

135
Q

Should there be any cyclical employment? (as prescribed by the goal of full employment?

A

No. There shouldn’t be cyclical unemployment caused by weak AD, slow economic growth and recession.

136
Q

What is cyclical unemployment?

A

Loss of jobs due to weak AD conditions, and a downturn in economic activity or recession.
(think of contraction on business cycle)

137
Q

What constitutes the labour force?

A

People aged 15 years or over who are able and willing to work and are either employed or unemployed.

138
Q

Why doesn’t the government aim for 0% unemployment?

A

Reluctantly accepts that there will always be some natural unemployment., even in a healthy economy

139
Q

What is natural unemployment?

A

The lowest rate of unemployment that does not cause inflation to rise (perhaps 4.5-5%).
Due to seasonal, frictional, hard-core and seasonal factors, and associated with AS conditions.

140
Q

Identify and explain the causes of natural unemployment

A
  1. STRUCTURAL FACTORS
    New tech makes some jobs obsolete e.g. ATMs; mismatch of skills held by unemployed and jobs available; business relocation/closures; microeconomic policies (e.g market deregulation)
  2. FRICTIONAL FACTORS
    People unemployed during job search between one job and the next
  3. SEASONAL FACTORS
    Some unemployment may occur at same time each year e.g. fruit pickers
4. HARD-CORE FACTORS 
Personal characteristics (e.g. disability, criminal record) which make it harder to stay employed and hold down job
141
Q

Explain the concept of NAIRU

A

Non-Accelerating inflation Rate of Unemployment (NAIRU) = the lowest possible rate of unemployment that will not significantly accelerate inflation

142
Q

What would happen if the unemployment rate was 3% for a long time?

A

= labour shortages = increased wage costs = unfavourable AS conditions as production costs higher (ACE) = firms pressured to pass on higher costs to consumers by raising selling prices to protect profits = cost inflation

143
Q

How does the ABS define employed persons? Does it include people who have a job but might not be working due to illness, strikes, holidays or similar interruptions?

A
  • Aged 15 or over
  • Working full-time or part-time for more than 1 hour per week of pay

Yes.

144
Q

How does the ABS define unemployed persons?

A
  • aged 15 or over
  • actively seeking full-time or part-time work but unable to find it
  • able and willing to take up job in week prior to survey period
145
Q

How is the unemployment rate calculated?

A

= number of people unemployed/total number of people in labour force
x 100

146
Q

What is the participation rate?

A

Represents the proportion of people aged 15 and over who are members of the labour force (employed or unemployed)

147
Q

How is the participation rate calculated?

A

= total number of people in labour force/ total number of people aged 15 or over in the population x 100

148
Q

What are job vacancies?

A

Number of unfilled job offers or positions

149
Q

What is the underutilisation rate?

A

Refers to the extent to which the available labour is not working at its capacity

150
Q

How is the underutilisation rate calculated?

A

= Unemployment rate (%) + Underemployment rate (%)

151
Q

What is meant by ‘duration’

A

Refers to the average number of weeks for which a person is unemployed

152
Q

What is hidden unemployment?

A

People who would like to work but are discouraged from seeking work for some reason (e.g. repeated failure to find work), meaning that they have left the labour force and are not ‘actively looking for work’.

153
Q

What is disguised employment/underemployment?

A

The underuse of workers who have jobs but are not working to their capacity e.g. working part time and wanting more hours, left idle, skills not used

154
Q

Explain the limitations of Australia’s unemployment survey data

A
  • Definitions of employed and unemployed are somewhat random e.g. requirement that person works for over 1 hour per week
  • The hidden unemployed are not accounted for; including them would lead to much higher unemployment rate
  • Changes in participation rate and other factors (e.g. duration of unemployment) could cause unemployment rate to look better or worse
  • Not all people (only 0. 7% of Aus Pop) surveyed; thus stats may not be representative of true employment figures
155
Q

Identify the different types of unemployment

A
  • Cyclical Unemployment

- Natural Unemployment, including structural, frictional, seasonal and hard-core unemployment

156
Q

Explain the causes of cyclical unemployment

A

Changing AD conditions:

WEAK AD CONDITIONS
reduced spending = firms notice rising stocks and lower demand = firms cut production = weakened demand for labour = rise in cyclical unemployment

STRONG AD CONDITIONS
heightened spending = firms notice falling stocks and higher demand = firms lift production = increased demand for labour = fall in cyclical unemployment

157
Q

True or False

Cyclical unemployment can only occur in a recession

A

True

158
Q

Can some natural employment exist all the time?

A

Yes

159
Q

What percentage of the labour force does natural unemployment account for?

A

About 5% of the labour force or less (the government’s goal in this area). This figure represents the non-accelerating rate of unemployment or NAIRU - the lowest unemployment rate that will not result in increased inflation.

160
Q

What is structural unemployment?

A

Loss of jobs caused by businesses altering their way of producing goods and services and trying to cut costs and lift efficiency. It can be caused by…

  • use of tech
  • mismatch between skills of unemployed and job vacancies
  • business closures and relocation due to high costs, poor profits and lack of international competitiveness (influences by AS conditions)
  • some recent government aggregate supply policies
161
Q

What is frictional unemployment?

A

When people are unemployed between finishing one job and starting another.

162
Q

What is seasonal unemployment?

A

A type of unemployment resulting from the termination of jobs at the same time each year due to the regular change in seasons e.g. ski instructors, fruit pickers etc.

163
Q

What is hard-core unemployment?

A

The inability to secure a job due to personal characteristics e.g. pessimistic attitude due to past failures, criminal record, physical appearance, over-generous welfare etc.

164
Q

What are the consequences of unemployment?

A

GILT cos you aint providin for the fam

GDP loss
Income inequality increases
Living standards deteriorate
Tax revenue lost

165
Q

How does unemployment lead to GDP loss?

A

Resources (labour) not used to full capacity and are idle. Thus, economy cannot reach PPF and potential level of economic activity and production (GDP) is not reached.

166
Q

How does unemployment lead to increased income inequality?

A

High unemployment reduces average incomes as people lose their jobs. Usually the middle or lower class are disproportionately affected by this as they are more likely to be affected by business closures and downsizing while the rich, who may have invested in assets, can grow richer. Thus, income inequality widens.

High unemployment = less people undertaking paid work = lower average incomes = more people below line of poverty = widens the income gap between rich and poor.

167
Q

How does unemployment lead to deterioration of living standards?

A

Material living standards decline as average income decreases, causing purchasing power and consumption levels go down.

Non-material living standards decline as being without job may cause low self-esteem, health, relationships and lead to higher crime rates
+
Budget deficit might happen due to loss of tax revenue, thus gov can invest less in other areas like edu, healthcare and provision of public goods = reduced non-material living standards.

168
Q

How does unemployment lead to loss of tax revenue?

A

High unemployment means less people pay income taxes and spend on G/S (lowering revenue through GST), reducing budget receipts.
More people qualify for welfare, so budget outlays to provide this support increase
= likely budget deficit

169
Q

How does unemployment affect demand inflation?

A

Very high unemployment:
lower average incomes = lower spending = weak AD = slow demand inflation

Very low unemployment:
higher average incomes = higher spending = strong AD = accelerate demand inflation

Economics (5 decks)

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