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rwfegtbrwhyn > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Economics 2 branches

A

Microeconomics – deals with the economic problem from an individual perspective;
studies the behaviour of individual households and firms
Macroeconomics – deals with the economic problem from society’s perspective;
studies the economy as the whole and is concerned with the big picture e.g. economic
growth, inflation, unemployment

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2
Q

Economics distinguish between positive and normative statements

A

Positive statements can be tested against fact
Normative statements cannot be tested as they reflect personal opinions or values

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3
Q

Why study macroeconomics?

A
  1. Develops ‘economic literacy’, the ability to understand economic events and make decisions
    on a personal level
  2. To understand how the government makes good economic decisions
  3. To enable us to compare Australia to other countries
  4. Enables us to see how Australia is performing over time
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4
Q

The circular flow of income is a

A

A macroeconomic model that describes the flow of resources, goods and services, and
income between parts of the economy

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5
Q

The circular flow of income divides the economy into important sectors -

A

households, firms, the financial
sector, the government sector and the overseas sector

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6
Q

Households and firms assumptions

A

Assumes that households are the owners of the productive resources (land, labour, capital
and enterprise) and the buyers of final goods and services
Assumes that firms are the employers of resources and produce all the goods and services
for the economy

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7
Q

Households and firms shows the exchange to

A

satisfy needs and wants

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8
Q

Households and firms - money flow and real flow

A

Money flow – spending and income (outer)
Real flow – goods, services and resources (inner)

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9
Q

Households and firms - factor and product market

A

Factor market – Households receive income in the form of wages, rent, interest, dividends
and profits form the resources they supply to firms for use in the production process
Product market – Households spend the income they have earned in exchange for goods
and services that have been produced by the firms sector

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10
Q

Savings and Investment -

A

Most households try to save some of their income
The financial institutions that make up the capital market act as an intermediary between
savers and investors

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11
Q

Savings and Investment - savings

A

Savings – the proportion of household income not spent on goods and services for current
consumption
Savings represent a leakage from the circular flow as it reduces the flow of money and goods
between households and firms

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12
Q

What forms the financial sector

A

The financial institutions (banks, credit unions, superannuation) form the financial sector

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13
Q

What is investment

A

Defined as expenditure on goods and services which are not intended for
current consumption
Investment is firms spending on capital equipment that will be used to produce goods and
services in the future

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14
Q

What does investment create

A

Creates an increase in the flow of income in the flow
Investment is an injection that offsets the savings leakage in the circular flow

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15
Q

The government sector buys

A

goods and services from businesses
As a producer it also provides education, health and defence

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16
Q

The govt sector- transfer payments

A

Transfer payments – the provision of social welfare such as pensions, the job search
allowance and childcare allowance

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17
Q

Government regulate economics activity to

A

promote equity and efficiency

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18
Q

Households pay some of their income to the govt

A

(taxation leakage) which is returned
to the flow through government expenditure
The government sector collects taxation from households and spends those funds to provide
goods and services for collective consumption or transfers e.g. social security

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19
Q

Taxation is a leakage; govt spending is the injection

A

Government spending can be classified as either current expenditure (wages, salaries, fuel,
power) or capital expenditure (infrastructure – schools, roads, hospitals)

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20
Q

The overseas sector

A

An open economy is an important contributor to our economic well-being; trade allows us to
buy items we cannot produce ourselves and foreigners to buy products that they cannot
produce with their resources

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21
Q

Imports are a leakage from the circular flow, exports are injections

A

Imports – money flows from Australia to overseas
Exports – the flow of money from overseas to Australia

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22
Q

The full circular model recognises

A

A capital market (financial sector)
The government provides community needs
Trade with other countries provides needs we cant produce ourself
Gives us an overview of interdependence between major sectors of economy

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23
Q

Macroeconomic equilibrium

A

The value of output produced by firms must equal the value of income paid to resource
owners, which must in turn equal the value of spending by households to produce the output

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24
Q

Macroeconomic equilibrium equation

A

output = income = expenditure

25
Q

Equilibrium

A

no tendency for the level of income in the economy to change

26
Q

Inequalities are a powerful force in causing

A

fluctuations in the level of economic activity

27
Q

For equilibrium in the full circular flow..

A

the sum of the withdrawals/leakages must equal the sum of injections

28
Q

When total leakages are greater than injections,

A

the producer output and household income
will fall, this means the economy will contract

29
Q

When total injections are greater than leakages,

A

household income and producer output will
rise; this means the economy will expand

30
Q

Aggregate Expenditure

A

The total amount that firms and housed holds plan to spend on goods and services at each level of income

31
Q

Aggregate Expenditure formula

A

AE = C + I + G1 + G2 + (X-M)
C = Consumption
I = Planned investment expenditure
G1 = Current Government expenditure
G2 = Capital Government expenditure
X = Exports
M = Imports

32
Q

Consumption
AE = C + I + G1 + G2 + (X-M)

A

Expenditure on non-durable goods,
expenditure on services, expenditure on
consumer durables

33
Q

Planned investment
AE = C + I + G1 + G2 + (X-M)

A

Expenditure on new capital equipment which
produces final goods in the future (machines,
factories, tools); expenditure on building and
housing

34
Q

Consumption (consumption)
AE = C + I + G1 + G2 + (X-M)

A

→ expenditure on non-durable and durable goods and services

35
Q

Nondurable goods (consumption)
AE = C + I + G1 + G2 + (X-M)

A

consumed quickly after purchase i.e. food, clothing transport
(approximately 35%)

36
Q

Durable goods (consumption)
AE = C + I + G1 + G2 + (X-M)

A

are expected to last for three or more years such as whitegoods (washing
machine or fridge) or brown goods (furniture, carpets) (approximately 15%)

37
Q

Services (consumption)
AE = C + I + G1 + G2 + (X-M)

A

non-commodity items such as education, health and recreation. (approx. 50%)

38
Q

Expenditure (consumption)
AE = C + I + G1 + G2 + (X-M)

A

on household necessities is quite stable no matter the stage of the business
cycle i.e. boom or recession

39
Q

Expenditure on durable goods and luxuries much more likely to vary due to
AE = C + I + G1 + G2 + (X-M)

A

state of economy
due to larger sums of money involved
People will adjust saving patterns than their consumption of basic needs

40
Q

Private Investment
AE = C + I + G1 + G2 + (X-M)

A

Spending by firms that includes:
fixed investment (privately funded expenditure on equipment and structures used in production)
residential fixed investment (private expenditure on new housing)

41
Q

Private Investment is the most volatile component of AE because
AE = C + I + G1 + G2 + (X-M)

A

it involves risk and will respond the where the economy is
in the business cycle and the resulting business conditions

42
Q

Includes all federal, state and local spending on final goods and services, and investment in capital equipment and infrastructure
AE = C + I + G1 + G2 + (X-M)

A

G1 – Current expenditure that provides for the day to day functions of government such as government employee wages
G2 – Capital expenditure to provide for future needs such as schools, roads, power, communication, dams

43
Q

Net exports is shown in brackets because
AE = C + I + G1 + G2 + (X-M)

A

because exports and imports are actually consumption,
investment or government spending
- The minus sign suggests the aggregate value of imports exceed the value of exports

44
Q

Factors affecting consumption

A
  1. Level of disposable income (Yd)
  2. Expectations
  3. Cost of Credit / Interest
  4. Personal Wealth
  5. Government Policies
45
Q

Factors affecting consumption: Level of disposable income (Yd)

A

Other things being equal households spend more on
consumption at higher income levels; income after taxes

46
Q

Factors affecting consumption: Expectations

A

Expectations are positive or negative sentiments (feelings) people have
about the economy in the future. More positive their expectations the higher their
consumption especially on durables

47
Q

Factors affecting consumption: Cost of credit (interest rates)

A

credit allows purchasing decisions to be bought forward.
Falling interest rates means lower cost of money and greater consumption. Rising interest rates means cost of money rises, more is spent in repayments on borrowings and saving
becomes more attractive, decreasing consumption

48
Q

Factors affecting consumption: Personal wealth

A

The wealthier households feel the more they tend to consume i.e. holders of property and shares feel more wealthy

49
Q

Factors affecting consumption: Government policies

A

Fiscal Policy (taxation and govt spending through budget) affect disposable income levels which affects consumption. Monetary policies (RBA) affects interest
rates and therefore cost of credit and money

50
Q

Factors affecting investment

A
  1. Risk
  2. Rate of interest
  3. Business expectations
  4. Profitability
  5. Government Policies
51
Q

Factors affecting investment: Risk

A

→ investment rises and fails depending on perceived risk. Higher the risk the less likely the investment. Political decisions, international events, changes in consumer tastes all affect risk.

52
Q

Factors affecting investment: Rate of Interest

A

→ Rate of interest and investment are inversely related.

53
Q

Factors affecting investment: Why are rate of interest and investment inversely related?

A

When interest rates are rise so too does the repayments for capital funds bought with borrowed funds.
As interest rate increase, opportunity cost increase (money could be used for other things than investment)

54
Q

Factors affecting investment: Business Expectations

A

What businesses think about current economic activity, trends
for the future and the impact on profitability.

55
Q

Factors affecting investment: Profitability

A

Many firms retain a portion of profits for investment. When profits are low,
firms tend to run down capital equipment rather than invest. Business fixed investment seems
to lag about a year behind corporate profitability in Australia.

56
Q

Factors affecting investment: Govt Policy

A

Fiscal and monetary policy
affect investment because they affect business costs i.e. taxation and economic activity

57
Q

Factors Affecting Government Expenditure

A

Tend to be stable from year to year.
Some government vary in line with economic conditions. For example, in a trough, welfare
payments rise

58
Q

Factors affecting net exports:

A

Agricultural production change due to seasons
Overseas demand fluctuate due to oversea economic conditions
High economic activity Australia increase purchasing of imports
Exchange rate

59
Q

Changes in Investment and Consumption

A

Investment is based on confidence and expectations which are subjective and unstable
Producer goods are durable and can be repaired ‐ replacement can be postponed until times
are more promising.
Some non-durable basic consumption is necessary for ‘survival’.

rwfegtbrwhyn (9 decks)

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