Economics pt.2 Flashcards
consumer sovereignty
the power that consumers as a whole, have to decide what will be produced
enterprise
organisational skills needed to produce goods and services
interdependence
a system in which people rely on each other to satisfy their wants
collective goods
goods and services that are supplied by government for the benefit of the entire country
the producers
- supply the goods and services
- use different resources (materials,tools,labour) to deliver goods and services to those that demand them
- consists of various businesses who work cooperatively to produce goods and services
- ensure that the goods and services they want are always available
the government
- represents the interests of the community
- provide some goods and services (collective), for for from taxes
- create a stable, efficiently functioning economy (living standards, income distribution, employment)
the employees
- people who work for wages or salary (household sector)
- maximise their income but also to gain job satisfaction from the work they do
- more specialised the commercial economy becomes, the better the quality of goods and services and higher standard of living
the employers
- people who are in business for profit (producer sector)
- employ workers to maximise profits
- may provide their employees with a pleasant working environment to get the best from them
global trade links
linked to the world economy via export sales, generated from foreign exhange earnings
- foreign exchange earnings are funds from other countries as a results of selling the australias goods and services to overseas buyers
- consumers, businesses and government can import and consume overseas produced products (raise standard of living)
- if imports are greater than exports, it creates a negative balance of trade, which can lead to foreign debt
economic indicators
statistics or graphs that illustrate trends in a particular aspect of the economy
recession
economic downturn - negative growth
- caused by lack of spending, not inability to produce goods
- influenced by the level of economic confidence
- cut back on production and employees lose their jobs
- total spending gall even further as peoples confidence is shaken
key features of a recession…
- income and production at lowest
- unemployment at highest
- wages fall or grow slowly
- consumer demand and profit at lowest
- businesses have unused resources & no incentive to purchase
- interest rates remain low
- inflation rate staay low
peaks
- production, spending and employment rise.
- consumer and business confidence high
- pushes up prices - inflation
- will eventually bring to end of growth
key features of peaks…
- income and production high
- full employment of labour
- wages and salaries high
- business operate at full capacity
- interest rates high
- inflation rises
human development index (HDI)
combines life expectancy, educational attainment and income in a single index
unemployment
-difficult to make simple comparisons over time because of factors such as participation rate, discouraged workers and creation of new jobs
participation rate
the proportion of the working age population who are actually in the workforce
monetary policy
using interest rates to exercise control over the economy
fiscal policy
using the federal budget to exercise control over the economy
rise in interest rates
- effectively slow the economy by discouraging consumers from spending and businesses from expanding
- increase the cost of borrowing = reduces amount of borrowing
fixed interest rates
- remain the same throughout the course of the loan
- borrowers know their repayments will remain unchanged
variable interest rates
- increases or decreases according to economic conditions
- moves up and down with market interest rates (reserve bank of australia cash rate)
long term interest rates
taking a home loan with the interest fixed for 20years (long time)
short term interest rates
- borrowing money at an interest rate that can change in the short term (eg car loan - shorter time)
- rates tend to be high than long term rates
interest rate
the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding
reasons people borrow money
…
advantages + disadvantages of fixed interest rates
Advantages
- Borrower will know exactly their payment each month
- Safe guard against rising interest rates in the future
Disadvantages
- Interest rates could possible drop in the future - borrower continues to pay at higher rate
- Harder to obtain from lender due to higher payments
advantages + disadvantages of variable interest rates
Advantages
- Lower payments in the short-term
- Good for small loan terms
- Allow you to borrow a larger amount of money if credit is less than perfect
Disadvantages
- Risk that rates will rise could rise during the long-term
- Varying monthly payments
- Might not be able to meet payment obligation due to hikes
role of reserve bank of australia
- RBA is the Reserve Bank of Australia and it Australia’s central bank.
- foster financial system stability and promotes the safety and efficiency of the payments system.
- provides selected banking and registry services to a range of Australian government agencies and to a number of overseas central banks and official institutions. -manages Australia’s gold and foreign exchange reserves.
Goals of RBA
- Low inflation
- Keep consumer price index within target range of 2-3% -over the course of economic cycle
- Strong and sustainable economic growth
- Full employment
- Economic prosperity and welfare of people in AU
cash rate
Cash rate is the overnight money making interest rate. It uses this as the instrument for monetary policy, and influences the cash rate through its financial market operations. It is the inflation target that is charged on overnight borrowings between financial institutions.
current governer of the RBA
Glenn Robert Stevens
inflation
a general rise in prices, causing money to lose its value
effects of inflation
- decrease in the purchasing power of dollar and its depreciation.
- influences the investments of a country.
- changes the allocation of income.
- leads to a handful of the consumers in making extensive speculation, low consumer confidence
hyperinflation
-when the prices of goods and services skyrocket - increase by more than 50% a month.
-Usually due to rapid increase in money supply and unrestrained printing of fiat currency.
Eg. Germany overprinting money due to the costs of WWI
stagflation
- slow economic growth, high unemployment accompanied by high inflation
- rising prices & decline in GDP.
eg. United States in 1970s when world oil prices increased drastically increasing costs of goods and services whilst employment decreased
deflation
-decline in prices usually due to reduction of the supply of money or credit.
-Can lead to unemployment and less demand
Eg. Japan in early 1990s when the government tried to lower interest rates to stimulate stimulate inflation
ECONOMIC MODEL
…
appreciation
an upward movement of the au dollar against another currency
specialisation
when people perform one specific job
foreign exchange rate
ratio of one currency to another - tells how much a unit of one currency is worth in terms of another
balance of trade
difference between the money received by a country when exporting goods and the money paid to other countries when importing goods
depreciation
downward movement of the au dollar against another currency
foreign exchange market
market determines the price of one currency relative to another
consumer price index (CPI)
measures quarterly changes in retail prices purchased by consumers - indicator of inflation rate
default
inability to replay borrowed money
foreign exchange rate
ratio of one currency to another
financial institutions
organisations (banks,insurance,credit unions) which borrow some money from households, firms and businesses and lend it to others
business cycle
cyclical fluctuations in the level of economic activity that an economy goes through over time
causes of inflation
Demand-pull inflation
- price levels increase because of an unbalance between aggregate supply and demand
Cost-push inflation
- general prices rise due to higher costs of production and increases in wages/ raw materials. Develops due to higher costs of production factors decrease in aggregate supply in the economy. Because of less demand and goods produced, the price of finished goods cause inflation to increase.
