Ch 6: Macroeconomic Activity Flashcards
What is macroeconomics?
studies the economy as a whole. It focuses on the business cycle - why economic activity fluctuates, inflation, unemployment, economic growth and govt. economic activity
What are the government’s macroeconomic objectives?
- Price stability (low levels of inflation 2-3%)
- Unemployment (low levels 4.5%, 4-5%)
- Economic growth (3-4%)
- Equitable distribution of income - fairer Gini coefficient. Achieved through direct taxation, transfer payments and indirect payments
- Efficient resource allocation - regulations and microeconomic reforms i.e. labour market efficiency improvements
- External balance - make sure can service debit. Not a problem in Australia
What are the assumptions of the simplified circular flow?
- there are only 2 sectors
- households: owners of factors of production resources and the buyers of final g & s
- firms: employers of resources and produce all the g & s in the economy to the consumers
- households spend all their income on g & s
When is the economy in equilibrium?
When income = output = expenditure (Y=O=E)
How do you increase/expand the circular flow of income?
increase output (by investing) which will increae income which will increase expenditure
What are the types of resources?
Land
- all natural resources
- paid for by rent
Labour
- all work done by humans, can be skilled and unskilled
- paid for by wages
Capital
- machinery and equipment used in the production process
- paid for by interest
Enterprise
- combines other resources to produce g & s
- paid for in profit
What is the product and factor market?
product market: households and firms spend the income they have earned on g & s produced by business firms
factor market: firms hire resources from households, in return for which housholds receive income
What does the expanded circular flow look like?
What are the components of the capital market/financial sector?
- savings - proportion of income not spent on g & s for current consumption. LEAKAGE
- investment - ecpenditure on g & s which are not intended for current consumption (purchase of capital goods). Leads to increase production of g & s, increasing future flow of income. Is an INJECTION as is adds to the stock of capital equipment in the economy
What are the components of the government sector?
- taxation - households pay some of their income to the government. LEAKAGE
- government expenditure - INJECTION
- G1: current expenditure (spending on g & s such as wages, salaries, fuel, power, stationary)
- G2: capital expenditure (spending on capital/investment goods, sometimes called infrastructure includes schools, roads, railways, hospitals)
What are the components of the overseas sector?
- imports (M) - transaction when the money flow goes from Aus. to overseas. LEAKAGE
- exports (X) - money flow is from overseas to Aus. INJECTION
What is GDP?
Gross Domestic Product is the toal market value of all final g & s produced in a country in a period of time. Most frequently used measure of economic performance
How is GDP measured?
- Income and earnings approach: all incomes (y/national income) received are added allowing for depreciation of capital equipment and net indirect taxes
- Expenditure approach: total expenditure on g & s produced is measured, AE = C + I + G + (X-M). Imports are subtracted because households and firms spend money on them
What is MPC and MPS and what does it equal?
MPC - Marginal Propensity to Consume, determines the slope of the consumption curve i.e. if MPC = 0.6, for every $1, $0.60 is spent and $0.40 is saved
MPS - Marginal Propensity to Save
MPC + MPS = 1
What is the consumption component of aggregate expenditure?
CONSUMPTION (C)
- expenditure on non-durable goods i.e. food, clothing
- expenditure on services i.e. health, plumbers, mechanics, education
- expenditure on consumer durables i.e. white goods, furniture, cars
