Chapter 4

Question 1

Define micro economics

Answer 1

The study of the individual parts of the economy that interact to make up the whole economy

Question 2

Define economic activity

Answer 2

Volume (or real value) of production, employment, incomes and expenditure in an economy

Economic activity generates goods and services to meet the needs and wants of households (the end users of the production), employment and income.

Question 3

Explain the purpose of Eco activity

Answer 3

Not too high = productive capacity may not be able to satisfy demand for that production – and demand inflation may occur
Not too low = there is not enough production and employment – these recessionary periods generally mean inefficient allocation of resources + low eco growth

Question 4

Define GDP

Answer 4

The final market value of all goods and services produced in the Australian economy over a given period of time – it is the same as the total ‘value added’ during each stage of the production process and is calculated every quarter by the ABS
The inclusion of the word “gross” indicates that it does not deduct the cost of capital deprecia

Question 5

Define chain volume GDP

Answer 5

An estimate of the real GDP in the economy – it involves using prices from previous periods and applying them to current period volumes

Question 6

the ABS uses 3 approaches to estimating the level of GDP over time:

Answer 6

The income approach (I) – based on the estimates of all the incomes earned in the economy
The expenditure approach (E) – based on the estimates of total expenditure on final goods and services
The production approach (P) - based on the estimates of total output produced. This is calculated by looking at the value added each stage of the production process

Question 7

What is the purpose / reason for real GDP

Answer 7

Given that the Australian Gov’t an economists are concerned about economic activity in terms of it’s impact on employment, income and living standards, statisticians have devised a away to remove the price effect so that any increase in the GDP is real in the sense that it represents an increase in the volume (or real value) of production.

Question 8

What is the chain volume measure of the GDP

Answer 8

The chain volume measure of the GDP is used by the ABS to provide an estimate of real GDP in the economy, in simple terms it involves using prices from the previous period and applying them to current period volumes, it is this that provides the most accurate measure of the economic growth in our economy which in turn provides and indication of how well the economy is performing in terms of income/wealth generation and improvements in (material) living standards
Growth in real GDP above 0 means the economy has experienced economic growth in real terms (after removing affects of inflation)

Question 9

Define gross national expenditure

Answer 9

Total expenditure by Australians on goods and services produced in Aus’t and the rest of the world

Question 10

Importance of GNE

Answer 10

If GNE is greater than the GDP it will mean that there is a shortfall of production compared to expenditure – this will mean the difference will be equal to the difference between exports and imports

Question 11

Define macro economics

Answer 11

The study of the economy as a whole focusing on aggregate variables such as national income, production and expenditure (real GDP), inflation, unemployment, the CAD and net foreign debt. It is therefore concerned with the “big picture” of how the economy works and how gov’t may influence