Chapter 4 - The nature and purpose of macroeconomic activity Flashcards
What is macroeconomic activity?
Macro-economic activity refers to the production of goods and services in an economy over a period of time.
It is generally measured by total expenditure in an economy, the volume of production and the income that is generated from the activity.
What are the three approaches used by the ABS to provide estimates of the level of GDP over time?
- The Income Approach (I) - based on estimates of all earned incomes in the economy.
- The Expenditure Approach (E) - based on estimates of total expenditure on final goods and services.
- The Production Approach (P) - based on estimates of total output produced. This is calculated by looking at the value added at each stage of the production process.
Define Nominal GDP
Nominal GDP is economic output without the inflation adjustment. Nominal GDP is usually higher than real GDP because inflation is typically a positive number. Nominal GDP is used when comparing different quarters of output within the same year.
What is Real GDP or Chain Volume Measure?
Calculated by using prices from the previous period and applying them to the current period volumes, so any increase in value must have occurred because of increased volume.
What is Gross National Expenditure (GNE)?
GNE represents the total expenditure by Australians on goods and services produced in Australia and the rest of world. Therefore, we do not include spending on exports in this calculation.
If GNE is greater than GDP it will mean there is a shortfall of production when compared to expenditure. (Difference equal to the difference between exports and imports).
What is Aggregate Demand? (and equation)
AD is the total expenditure on Australian-made goods and services.
AD = C + I + G + X - M
C - Private Consumption Expenditure
I - Private Investment Expenditure
G - Government Expenditure
(X - M) - Exports minus imports
What is the ‘C’ component of AD?
Private Consumption Expenditure
Defined as the total value of all expenditures on individual and collective consumption goods incurred by resident households and non-profit institutions serving households.
Makes up 60% of AD.
- Consumer Durables (cars)*
- Consumer Semi-Durables (clothing)*
- Single-use goods (food)*
- Services (hairdressing)*
What is the ‘I’ component of AD?
Private Investment Expenditure
Defined as the purchase of new equipment and plant, buildings and vehicles. The purpose of investment expenditure is to expand the productive capacity and productivity of firms.
Makes up 15-20% of AD.
What is the ‘G’ component of AD?
Government Expenditure
Includes expenditure by all areas of government and is broken into G1 (stable) & G2 (volatile).
- G1 is Government Current (consumption expenditure) on goods and services that are not capital in nature and necessary to run government.
- G2 is Government Investment Expenditure on goods that are capital in nature. e.g. new buildings, roads…
Makes up 20% of AD.
What is ‘(X - M)’ component of AD?
Net Exports (Exports - Imports)
- X is spending on exports, which are defined as Australian made goods and service that have been purchased by foreign households.
- M is spending on imports, which is defined as foreign-made goods and service that have been purchased by Australian households & businesses.
Makes up 20% of AD.
Define Aggregate Supply.
AS represents the total volume of goods and services that suppliers are willing to supply to the market
What is Productive Capacity?
Productive Capacity (capacity utilisation rates) is where an economy has reached the point where it is supplying the maximum possible at that point in time.
What are Aggregate Supply Factors?
- Quantity and Quality of productive resources and their availability (e.g. lack of key resource).
- Cost of production and profits (e.g. electricity prices, wages)
- Efficiency (e.g. technology advancements)
Explain the relationship between AD and the general level of prices.
The relationship between AD and general level of prices can be represented graphically and is an inverse relationship.
- Growth in the general level of prices will decrease the purchasing power of a given nominal income and reduce the real amount that can be spent on goods and services.
- Higher prices in Australia encourage substitution to cheaper imported goods.
Factors that affect the AD are those that will affect any of the components of AD (C, I, G, X, M) and will result in the AD curve shifting.
Demand Factor increasing economic growth:
Explain the relationship between AS and the general level of prices.
The AS curve represents the total real value of production that producers are willing and able to supply at various price levels. The relationship between the general price level and AS is positive and becomes steeper with increasing levels of output:
- As output increases and an economy reaches productive capacity it becomes increasingly difficult to expand production.
- Supply factor decreasing economic growth.*
What are the phases of the business cycle?
-
Stage 1: PEAK
- Strong rates of economic growth
- High consumer and business confidence and increased propensity to spend
- Low unemployment
-
Stage 2: CONTRACTION/DOWNTURN
- High Inflation, higher interest rates and strong growth in asset prices that result in overvalued assets which typically results in a market ‘correction’ that eventually leads to a fall in private consumption and investment as more households save and deleverage.
- Slowing economic growth.
-
Stage 3: TROUGH
- Downturn eventually reaches a point where the level of economic activity reaches its minimum point in the cycle. Could turn out to be a recession, if prolonged enough even a depression.
-
Stage 4: RECOVERY
- During the trough, relatively low inflation rates combine with lower labour costs and lower interest rates to spark an economic recovery. Consumption, Investment and Net Exports all increase, helping to promote growth in production, employment, income adn expenditure.
