Circular Flow of Income Real Flashcards
What percentage of GDP does consumption typically comprise?
Around 55%.
How much of the final value is counted in GDP
For example a farmer grows wheat and sells it to a flour mill for $10,000. The mill produces flour and sells it to the grocery chain for $20,000. The supermarket sells the flour to consumers for $30,000.Only the final value of $30,000 is counted in GDP.
What is consumption expenditure?
he market value of all goods and services purchased by households, including both durable and non-durable goods.
What are the components of the expenditure method of measuring GDP?
GDP = C + I + G + (X - M)
What are the determinants of aggregate consumption?
a) Disposable income b) Household wealth c) Consumer expectations d) Government policies
Why is consumption spending relatively stable over time?
arge proportion of consumption is on essential goods and services such as food, rent, and healthcare.
What does investment expenditure refer to?
Investment expenditure refers to purchases of capital goods such as machinery, equipment, and new construction.
What are the three main categories of investment?
- Business investment 2. Residential investment 3. Inventories
What are the determinants of aggregate investment?
a) Rate of interest b) Real rate of interest c) Business expectations d) Government policies
What types of government spending are not counted in GDP and why?
Transfer payments, such as unemployment benefits and pensions, are not counted in GDP because no new good or service is created.
What is included in aggregate government expenditure?
Expenditure on government programs in health, education, social welfare, and defense.
What are the two main categories of government expenditure?
- Current expenditure 2. Capital expenditure
What are the determinants of aggregate government expenditure?
The state of the economy (economic fluctuations).
How are net exports defined in the context of GDP?
Net exports are the difference between the value of exports (money flowing into the economy) and imports (money flowing out of the economy).
What are the determinants of net exports?
Exchange rate and terms of trade.
What are the key indicators of economic performance?
- Gross Domestic Product (GDP) 2. Unemployment rate 3. Inflation rate
What is aggregate expenditure (AE) and how is it calculated?
Aggregate expenditure is the total spending on final goods and services produced by the economy, calculated as AE = C + I + G + (X - M).
What is the government’s target rate for economic growth, unemployment, and inflation?
GDP growth at 3-4%, unemployment at 5-6%, and inflation at 2-3%.
What is inflation?
nflation is a sustained increase in the general price level of goods and services over a period of time, reducing the purchasing power of money.
What causes demand-pull inflation?
Demand-pull inflation occurs due to increased consumer, business, government, and foreign spending.
What is cost-push inflation?
Cost-push inflation is the rise in prices of goods due to increased production costs, which companies pass on to consumers.
What are examples of factors that contribute to cost-push inflation?
Increases in the cost of raw materials, electricity, labor, and oil.
How did the Russia-Ukraine war affect global inflation?
It created supply shocks by increasing prices for key resources like crude oil and gas, leading to higher prices for many goods and services.
What recent example of cost-push inflation occurred in Australia?
The increase in lettuce prices due to floods, which led to substitutions in food products like KFC’s use of cabbage instead of lettuce.
What is the business cycle?
The business cycle is a model that describes short-term fluctuations in economic activity, showing increases and decreases in GDP over time.
What can cause economic growth to increase?
Economic growth can increase due to consumer spending, government actions, and measures such as Job Keeper, infrastructure projects, decreasing interest rates, and buying bonds.
What are the four phases of the business cycle?
he four phases are:
Peak (Boom)
Recession (Contraction)
Trough
Expansion (Upswing)
What can cause economic growth to decrease?
Economic growth can decrease due to natural disasters, spread of diseases like COVID, and droughts that destroy crops.
What characterizes the Peak/Boom phase?
High levels of consumption
Low levels of unemployment
High tax revenue for the government
Less government spending
High inflation rates
charactersitcs of contraction phase
Business investment decreases
Unemployment increases
Consumption falls
What happens during the recession/contraction phase?
During a recession/contraction phase:
Consumption and investment slow down
GDP growth slows
A recession is defined as two successive quarters of falling GDP
Extended recessions are called depressions
What characterizes the trough phase?
Low levels of consumption
High unemployment levels
Low tax revenue for governments
Increased government spending to stimulate economic growth (e.g., welfare services)
Low inflation rates
What happens during the expansion/upswing phase?
Economic activity increases
Characteristics:
Consumption starts to rise
Unemployment levels drop
Government spending slows
Tax revenue increases
