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HSC Economics > Economic Issues > Flashcards

Economic Issues Flashcards

1
Q

Explain

What is the simple multiplier and how do you calculate it?

Economic growth

A

It is the number of times the increase in national income exceeds initial increase in expenditure.

1/MPS | 1/1-MPC

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2
Q

Identify

What influences consumption in economic growth?

Economic growth

A
  • Consumer expectations
  • Interest rates
  • Distribution of income
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3
Q

Identify

What are the influences on investment in economic growth?

Economic growth

A
  • Relative cost of capital
  • Business expectations
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4
Q

Identify

What influences imports and exports in economic growth?

Economic growth

A
  • Global economic activity
  • International competitiveness
  • Global protection
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5
Q

Identify

What are the influences of aggregate supply in economic growth?

Economic growth

A
  • Discovery of new resources
  • Population growth
  • Workers acquiring new skills
  • Increased capital
  • New technology
  • Improvement in efficiency (automation)
  • Government policy
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6
Q

Outline

How can an economy establish long-term economic growth?

Economic growth

A

Ensuring aggregate supply grows relative to aggregate demand to avoid inflationary pressure.

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7
Q

Identify the equation

Calculate Real GDP

Economic growth

A

Nominal GDP × 100/CPI

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8
Q

Identify the equation

How do you calculate economic growth?

Economic growth

A

(Current Real GDP - Previous Real GDP) ÷ (Previous Real GDP) × 100

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9
Q

Identify

What are the positive impacts of economic growth?

Economic growth

A
  • Higher living standards
  • Higher employment levels
  • Higher business investment
  • Improved budget outcomes
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10
Q

Identify

What are the negative impacts of economic growth?

Economic growth

A
  • Inflation
  • Rise in income inequality
  • External stability
  • Environmental impacts

Environmental impacts not important for Assessment 3

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11
Q

Explain

How can external instability arise from economic growth?

Economic growth

A

External stability arises when consumers have higher incomes which can be spent on more imports. If exports do not rise, it can worsen the Current Account Deficit, which may undermine confidence in the economy.

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12
Q

Analyse

How can government policy influence economic growth?

Economic growth

A

Macroeconomic (AD)
* Fiscal: govt expenditure to stimulate aggregate demand or by reducing taxation.
* Monetary: cash rate can be increased or decreased by RBA to influence interest rates, thus spending in economy.

Microeconomic (AS)
Improve effiency and productivity of producers and industries.
* Reduce trade barriers: expose domestic industries to force productivity improvement.
* Labour market reform: apprenticeships, training and education programs to improve skilled workforce.

Microeconomic policy is not covered in detail in topic 3.

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13
Q

Outline

What is inflation?

Inflation

A

Inflation is the sustained increase in the general level of prices in an economy.
* Purchasing power decreases

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14
Q

True or False

A decrease in inflation increases the purchasing power for consumers.

Inflation

A

False
Any level of inflation reduces purchasing power of consumers! Inflation must be 0 for inflation to stop and negative for deflation.

E.g., 7% to 5% inflation: there is still inflation!

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15
Q

Identify and explain

How is the CPI calculated and measured?

Consumer Price Index

Inflation

A

(Current index - Previous index) ÷ (Previous index) × 100
* A quarterly measurement of movement in retail prices of a basket of commodities
* Each category of purchases is weighted differently

The CPI measures inflation.

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16
Q

Compare and contrast

Identify the two ways to measure inflation and how are they different?

Inflation

A

Headline and Underline
* Headline measures price changes of all goods and services.
* Underline omits price changes of goods that have experienced high-volatile changes.

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17
Q

Identify

What are the causes of inflation?

Inflation

A
  • Demand-pull
  • Cost-push
  • Imported inflation
  • Inflationary expectations

Imported inflation and inflationary expectations are considered their own types of inflation.

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18
Q

Explain

Explain demand-pull inflation

Inflation

A
  • Occurs when AD > AS
  • When AS is near or at productive capacity
  • Consumers will bid up prices to purchase the same G+S
  • General level of prices will increase

Monetary policy is effective at curbing demand-pull inflation.

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19
Q

Explain

How can cost-push inflation occur?

Inflation

A

Producers will increase prices to maintain profits.
* Wage increases
* Rise in cost of raw materials used in production
* Domestic or global supply disruptions (e.g., floods, war)

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20
Q

Analyse

Despite inflation levels being higher currently, why is the Cash Rate not as high compared to during the GFC?

Type of inflation, recent trends

Inflation

A

During the GFC, inflation was occuring from demand-pull inflation. Now, both demand-pull and cost-push inflation are contributors.
* Macroeconomic policy (monetary) is only effective in managing aggregate demand.

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21
Q

What is the current inflation rate?

CPI, recent statistics

Inflation

A

March Q 2023 - 7%

https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release#key-statistics

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22
Q

Identify

What are the positive impact(s) of inflation?

Inflation

A
  • Assets will rise in cost
23
Q

Identify

What are the negative impacts of inflation?

Inflation

A
  • Falling living standards
  • Higher wage demands
  • Macroeconomic contraction
  • Higher interest rates
  • Lower investment levels from firms
  • Less business confidence
  • Lower international competitiveness
  • Misallocation of capital
  • Worsening of budget outcome
  • Higher inflationary expectations
24
Q

Outline

Define unemployment

Unemployment

A

Unemployment is the proportion of labour force not working but actively seeking work.

25
Q

Identify

Who is part of the labour force?

Unemployment

A
  • People 15+ yrs
  • Minimum 1hr paid work/week
  • Actively seeking employment
26
Q

Identify

How is the labour force measured?

Unemployment

A

Labour force = Employed + Unemployed

27
Q

Identify and outline

What is the labour force participation rate (LFPR)

Unemployment

A

Labour force expressed as percentage of working age population (aged 15+).
LFPR = (Labour force ÷ Working age population) × 100

28
Q

Identify and outline

What is the unemployment rate?

Unemployment

A

Percentage of labour force actively seeking employment.
UR = (Total unemployed ÷ Labour force) × 100

29
Q

Identify and outline

What are the types of unemployment?

Unemployment

A
  • Cyclical
  • Structural
  • Underemployment
  • Frictional
  • Hidden
  • Seasonal
  • Long-term
  • Hard-core
30
Q

Explain

How does structural unemployment arise?

Unemployment

A

It occurs when structural changes occur in an economy.

It involves chaning patterns of production which results in some products, processes or industries dissapearing while others emerge.

31
Q

Explain

What is hidden unemployment and its influence on the participation rate?

Unemployment

A

People discouraged from seeking employment from economic conditions or given up from trying to obtain work.

If hidden unemployment ↑, participation rate ↓.

32
Q

Outline

Who are considered to be long-term unemployed?

Unemployment

A
  • Out of work longer than 12 months.
  • Usually resulting from structural unemployment.
  • May not have skills to match job vacancies.
33
Q

Identify

What does NAIRU stand for?

Unemployment

A

Non-accelerating inflation rate of unemployment.

https://www.rba.gov.au/education/resources/explainers/nairu.html

34
Q

Explain

What does the short/long run philips curve represent.

Unemployment

A

Shows the inverse relationship between unemployment + inflation in short-medium term in a diagramattic form.

Elements
* Short-run philips curve (the curved one)
* Long-run philips curve (vertical line denoting the natural unemployment level, AKA the NAIRU)

35
Q

Outline

What is the state of unemployment at the NAIRU?

Unemployment

A

Level of unemployment when no cyclical unemployment exists.

Includes:
* Structural
* Frictional
* Seasonal

36
Q

Outline

What is the limitation of the short-run philips curve

Unemployment

A

SRPC does not show underemployment, a limitation of the depiction of spare capacity.

37
Q

Identify

What are the main groups affected by unemployment?

Unemployment

A
  • Young/less educated labour force
  • Low educational attainment
  • Aboriginals and Torres Strait Islanders
  • Migrants
38
Q

Identify

What are the economic costs of unemployment?

Unemployment

A
  • Opportunity cost of lost output and income
  • Rise in long-term unemployment
  • Loss of human capital
  • Decreased govt revenue and increased expenditure
  • Lower living standards
39
Q

Identify

What is the social cost of unemployment?

Unemployment

A
  • Rise in income inequality

Increasing rates and duration of unemployment linked to rising crime rates, drug and alcohol dependency etc.

40
Q

Explain

Why is external stability an issue?

External stability

A

External stability seeks to promote stability on the external accounts so that Australia can service its foreign liabilities in the medium to long term and avoid currency volatility.

41
Q

Outline

What are the measurements of external stability?

External stability

A
  • Current account deficit
    (CAD ÷ GDP) × 100
  • Net foreign debt
    (NFD ÷ GDP) × 100
  • Net foreign liabilities
    (NFL ÷ GDP) × 100
42
Q

Identify

What are the causes of external stability?

External stability

A
  • Global economic activity
  • Investment opportunities
  • Interest rate differentials
  • Superannuation

Cyclical impacts on BOGS and NPYA cause CA balances to change significantly - the reason for current stability on external accounts.

43
Q

Outline

How can the government improve external stability?

External stability

A
  • Microeconomic reform
  • Compulsary superannuation
  • Contractionary monetary policy
    Reduce import spending and company profits
44
Q

Identify

What are the impacts of external instability?

External stability

A
  • Falling credit rating
  • Lower standard of living
  • Risk of debt trap
  • Contractionary monetary policy
45
Q

Compare

What is the difference between income and wealth inequality?

Distribution of income and wealth

A
  • Income inequality: degree to which income is unevenly distributed.
  • Wealth inequality: degree to which assets are unevenly distributed
46
Q

Outline

What is the Lorenz Curve?

Distribution of income and wealth

A

A graphical method of representing income inequality or wealth inequality.
* Shows how income is distributed between H|H percentile groups.

47
Q

Explain

What is the GINI coefficient and how is it calculated?

Distribution of income and wealth

A

Mathematical indication of income/wealth inequality.

GINI = (Area A) ÷ (Area A + Area B)

Range: 0 (absolute equality) - 1 (absolute inequality)

48
Q

Identify

What are the main sources of income?

Distribution of income and wealth

A
  • Wages/salaries
  • Profits
  • Rent, interest, dividends
  • Social benefit
49
Q

Analyse

What is the progressive income tax system?

Distribution of income and wealth

A

The progressive income tax system reduces income inequality by increasing the proportion of income paid as tax as income increases.

Under a progressive tax system, the average tax rises as income rises.

50
Q

Compare and contrast

What is the difference between progressive, regressive and proportional tax?

Distribution of income and wealth

A
  • Progressive: as income rises, tax paid increases.
  • Regressive: as income rises, proportion of income paid as tax decreases.
  • Proportional: tax is a fixed percentage.
51
Q

Identify

What are the economic benefits of inequality?

Distribution of income and wealth

A
  • “Incentive effect”
  • Boost national savings pool
  • Encourages geographic mobility
52
Q

Indentify

What are the economic costs of inequality?

Distribution of income and wealth

A
  • Reduce economic growth
  • Increases govt expenditure
  • Utility is reduced
  • Creates poverty and social problems
  • Creates conspicuous consumption
53
Q

Identify

What are the social costs of inequality?

Distribution of income and wealth

A
  • Creates social class division
  • Poverty
54
Q

Explain

Why is inflation occuring now?

Recent events

Inflation

A

Cost-push
* Global oil crisis, floods
* Shortage of fruit and veg
Import
* Supply disruption from Covid - construction
Demand-pull
* Delayed impact of Covid stimulus packages
* CPI rent inflation increasing from higher rental prices

HSC Economics (4 decks)

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