Economics AT3 Flashcards
GDP definition
Total value of all goods and services produced in the economy in a single year
Periods of GDP
Contraction – decreasing economic activity (GDP)
Expansion– increasing economic activity (GDP)
Recession – 2 quarters of falling GDP
Depression – 4 quarters of falling GDP (sustained recession)
How is GDP measured and what is it
Aggregate Demand - a measurement of the total amount of demand for all finished goods and services produced in an economy.
GDP formula
C + I + G1 + G2 + (X-M) (Private sector consumption + Private sector investment + Government spending/investment + Exports - Imports)
Problems with measuring GDP
Does not consider income distribution or impacts to environment
GDP Per Capita meaning
The value of goods and services that each member of the economy has access to.
Problems with GDP Per Capita
More productivity not equal to higher standards of living, environmental impacts
Target Economic (GDP) growth
3-4%
Types of income
Income from labour (wages, salary, etc.),
Income from property or wealth (dividends, rent, etc.)
, Income from the government (social welfare payments, transfer payments, etc.),
Income in kind - company-lended assets
Laissez-faire capitalism
No interference with income distribution (Free Market)
Egalitarian
Egalitarian societies (Australia) value equality and fairness, freedom of dignity, religion and respect the rule of law.
Income distribution example
Over half of Australia’s wealth is owned by the top 20% of income earners.
Macroeconomics meaning
The study of the national economy and impacts of aggregate demand
Microeconomics meaning
The study of individual people and businesses and the interaction of those decisions in the market.
Adam Smith
Market based economy with free trade, prices based on supply and demand and no govt. intervention
Karl Marx
Socialist economy, Government distribution of goods and services
John Maynard Keynes
Mixed economy, price and activity based on supply and demand and some degree government regulation
Mixed economy meaning
a system in which individuals and businesses make their own decisions with a degree of government involvement.
Roles of government in mixed economy
Producer of goods and services (services and infrastructure), Redistribution of income (taxes), Controller of commercial lives (taxes), Regulator of economic activity
Monetary Policy definition
The Reserve Bank of Australia (RBA) sets interest rates to affect the amount of consumption, savings and investment (C), (S), (I)
RBA purpose
The RBA is Australia’s central bank and is a product of the Reserve Bank Act 1959. Australia’s government bank and influences amount of money in short term money market
Direct and indirect taxes with examples
Direct taxes are levies imposed directly onto the incomes of individuals and companies. E.g. Personal income tax, capital gains tax, medicare levy
Indirect taxes are taxes placed on the sale of goods and services and added onto the price of items. E.g. GST, Excise duty (unhealthy tax cigs, etc.), Customs duties (tax levied on imported goods)
Target inflation
2-3%
Cash rate meaning
the interest rate that banks pay to borrow funds from other banks in the money market overnight
Process of RBA
Current economic and financial conditions, Outlook for economy, Financial stability risks —> Policy recommendation —>Board meeting —> every first tue of month except jan —> Public communication
Microeconomics purpose
Microeconomics strives to improve productivity of markets, support competition and improve consumer outcomes
Trade liberalisation
involves removing barriers to trade between different countries and encouraging free trade.
Tariffs: a tax on imports that raise the price of imported goods.
Quotas: a limit on the quantity of imported goods.
Subsidies: government spending to support local producers
Example: Australia-U.S. Free Trade Agreement (AUSFTA) 2005
Labour market reforms
Labour Market reforms are policies that reduce labour controls and eliminate government power in the Labour Market to increase productivity.
Pros: Increases worker productivity, potential for higher wages, more employment
Cons: Working conditions worse, longer working hours, Common law contact which may be exploitable
Example: Decrease in working week in Chile from 45 to 40 hours bill passed 2023
Market deregulation
The removal of any unnecessary government controls, restrictions and supervision in various areas of the economy.
Pros: Promotes government economic goals such as lowering inflation, higher employment, etc.
Cons: Loss of important collective wants due to high costs and conflict between shareholder and consumer interests
Example: Eastern suburbs bus services
National Reform Agenda
A collection of measures designed to strengthen the competition and level of efficiency in product and service markets. (1995 establishment of ACCC (Australian Competition and Consumer Commission))
Makes illegal certain anti-competitive practices illegal such as price fixing (collab higher prices) or predatory pricing (manipulating prices to drive competition bankrupt)
Examples: prosecuted three east coast gas producers that control 90 plus percent of the east coast gas production and reserves in Australia
CPI and Purchasing Power meaning
Consumer Price Index - Measures the change in Purchasing Power and Real Income
Purchasing Power - The value of a currency expressed in terms of the number of goods or services that one unit of money can buy.
Real income
Income adjusted for inflation
Inflation formula
Price_y2 - Price_y1 / Price_y1 x 100% (Year 2 = current year and year 1 = previous)
Regiment
basket of goods and services whose prices are surveyed to calculate inflation
Purchasing power/Real income formula
Income - (income x inflation rate) = Real income
Demand Side inflation
Factors that lead to an increase in demand exceeding the current level.
Supply side inflation
Factors that lead to an increase in the cost of producing goods and services.
Cost Inflation
a sustained increase in the price of goods and services caused by producers passing on increased production costs to consumers
Example of supply side inflation
Banana price increase after $180m damage from storm in Queensland 2021
Balance of Trade
(X-M) the difference between the value of a country’s exports and the value of its imports over a specific period of time
Free Trade = minimal barriers to trade
Free trade
minimal artificial barriers to trade
Protectionism
protection of local businesses through tariffs, quotas and subsidies
bilateral agreement
an agreement between two nations
Multilateral Trade Agreements
three or more nations agreement
Income Distribution
The relocation of productive income amongst participants in the production process to other dependent members of the economy.
Income
Income is the money received in return for a factor of production (wages, rent, interest, profits)
Budget Deficits and Surpluses
Budget deficits are designed to be expansionary; and budget surpluses are designed to be contractionary
When asked on expansionary and contractionary
make sure to talk about why leakages are greater/less than injections
How is inflation measured
Measured with CPI calculated every quarter by ABS and measures the change in price of a basket of local and imported goods and services
Fiscal Policy Definition
A macroeconomic policy where governments use a budget to redistribute and reallocate income and resources within an economy
Subsidies
An amount of money given to local producers to help them lower their price and compete with imports
Exports
goods and services sold by local businesses to overseas consumers
Economy
all activities undertaken for the purpose of production, distribution and consumption of goods and services in a region or country
Labour
the human skills and effort required to produce goods and services
Environmental policy
Environmental policies: Measures that improve the quality of the environment.
Example: Paris agreement 2016 to reduce greenhouse gas emissions
