Economics Unit 2 Flashcards
for exam revision purposes
Economics
the study of human behaviour, where this involves in looking at the way individuals, families, businesses and governments make decisions or choices about how they use their limited resources to satisfy their basic needs and unlimited wants
natural resources
resources that are provided straight outta the wild
labour resources
intellectual properties
capital resources
machinery
economic activity
a term to describe the process of making or selling goods and services. Where scarce resources are used to produce and sell goods and services in exchange for income
Main purpose of economic activity
TO use resources efficiently to produce and sell those goods and services that best help to maximise the general satisfaction on society’s wants and wellbeing
economic activity examples
working at maccas, or a shop with income in exchange for the service you provide
non-economic activity
it is generally not sold for money but are done for emotional reasons
non-economic activities example
helping someone out in a volunteer aspect
Living standards
relate to our general level of wellbeing, and there are two main elements that affect our general or overall living standards
The two types of living standards
Material and non-material living standards
Material living standards
elements of wellbeing dependent on a person’s level of income and consumption of goods and services
non-material living standards
element of wellbeing not related to the quantity of good sand services but related to social and emotional fulfilment
the connection between the living standards
Both living standards are interconnected where that normally with a higher living standard there is higher non-material living standards
some examples for material living standards
income per person, the level of consumption of goods and services per person, the purchasing power of people
some examples for non-material living standards
The quality of life: happiness, life expectancy, health, leisure time (things that are not directly connected to income)
The benefits of an increased economic activity (material living standards)
a higher production results in increased jobs and incomes, boosting consumption spending thereby improving material living standards
The benefits of an increased economic activity (non-material living standards)
higher employment reduces stress and social isolation of which this allows people to engage in things that make them happy thereby improving the non-material living standards
the backoffs of increased economic activities(material living standards)
when economic activity becomes too strong it can lead to inflation and erode purchasing power
the backoffs of increased economic activities (non-material living standards)
the environment is likely to suffer due to depletion of non-renewable resources and accelerated climate change.
decreased economic activity
lower production generally results in decreased jobs and incomes, reducing consumption spending thereby undermining material living standards
decreased economic activity benifits
with less employment and less production there will be less environmental impact
the 5 sector circular flow model
consists of the 5 different sector, with each of them having a different function
the full name of the 5 sector flow model
a macroeconomic circular flow model of the Australian economy
Consumer / household sector
provides resources to businesses and spend their incomes on goods and services
Business sector
use the resources to supply / sell finsihed goods
financial sector
financial instutions such as banks which collect household savings then re-lend the money for investment purposes
government sector
collects tax from households / businesses and provide public goods and services
overseas sector
all money spend by australian customers on imports and all money spent by foreign customers on out exports
exports
to send (goods or services) to another country for sale
imports
to bring (goods or services) into a country from abroad for sale
commodity
a raw material or primary agricultural product that can be bought and sold
injection
An addition of money or spending into the economy, increasing economic activity
leakages
The withdrawal of money from the economy, reducing economic activity
when injections > leakages (flow 1)
Businesses employ more resources including labor, as they can increase output
when injections > leakages (flow 2)
there is a rise in the total value of incomes paid to those selling resources
when injections > leakages (flow 3)
there is higher spending or AD caused by increased injections relative to leakages, leading to general shortages and lower levels of unsold stocks of goods and services
when injections > leakages
producers try to life national production so the total value of GDP rises
leakages > injections (flow 1)
businesses employ fewer resources including labor, as they try reducing the output
leakages > injections (flow 2)
there is a drop in the total value of incomes paid to these selling resources
leakages > injections (flow 3)
lower spending or AD is caused by increased leakages relative to injections, leading to surplus unsold stocks of goods and services
leakages > injections (flow 4)
collectively, producers cut national production to the total value of economic activity falls (GDP falls)
Economic indicators
give the insight into a nation’s economic conditions
Lagging indicator
tells the reader the level of activity that occurred sometime ago (unemployment rate)
Coincident indicators
it moves very closely with actual changes in the level of economic activity (for example monthly sales)
leading indicators
predict where the economy may be heading in the near future
Aggregate demand
the total value of all spending on Australian goods and services over a period of time. C+I+G+X-M
over short to medium term, changes in ad factors affect total spending on Aussie made goods and services hence the national level of economic activities
Aggregate supply
this refers to the total volume of goods and services a nation in able to produce over a period of time
something to be remembered about stronger AS factors
strong AS factors –> increased productive Capacity / GDP –> More Jobs (less unemployment) –> reduced inflation
the measurement of economic growth using real GDP
Real GDP
total value adjustef for inflation
GDP
stands for gross domestic product
potential benefits of economic growth
- there can be more employment opportunities and jobs, thus lower employment rates as firms expand production
- there will be an increase in personal incomes, consumption and material living standards
- There will be an increase in government tax revenue and lower welfare outlays, strengthening the government’s financial position and making the provision of essential service benifits more affordable
the potential costs of economic growth (economic costs)
- reduced future generations to enjoy reasonable living standards due to resource depletion and environmental issues (intergenerational)
- acceleration on inflation rate eroding purchasing power
the potential costs of economic growth (environmental costs)
- the creation of negative externalities
- degrading of quality of common access resources
The potential costs of economic growth Cont’d (continue)
opportunity cost
the loss of other alternatives when the another one is chosen
economic indicators
lagging indicator
reflects economic changes after they happen (unemployment rate)
leading indicator
predicts future economic trends (stock market)
coincident indicator
moves with the current money
limitations of using real GDP to measure living standards
- real GDP fails to account for population size
- real GDP per Capita may not be able to measure this in accurate manner as it doesn’t show how even or unevely goods, services and incomes are distributed
- GDP statistics do not include the value of all economic activity such as DIY home production and black market
Alternative measures of economic activity and living standards
**MAP (Measuring Australia’s progress), HDI (human development index), Green GDP and GNH (gross national happiness)
MAP (measuring Australia’s progress)
MAP determines whether living standards are improving in Australia based on 4 main categories: society, the economy governance and the environment
HDI (human development index)
this measure combines both economic and social indicators to give countries a score between 0 to 1
GNH (gross national happiness)
a composite index made up of several indicators including GDP per head, social support, health and life expectancy, freedom to make life choices…
Define income
income represents a flow of money or rewards into households over a time period, where there are 3 forms of income: earned income, unearned income and transfer income
Earned income
wages and salaries that come from the provision of labor
unearned income
this can be the rent from property, interest and profits from investments
transfer income
this is the government welfare payments to the neediest individuals
gross income
gross income is the 3 incomes combined (earned income + unearned income + transfer income)
Disposable income
gross income minus taxes
Social wage income
Gross income minus taxes plus provision of government services
Wealth
it is not income levels or what, wealth is the value of assets owned by individuals at a point in time minus their debts and liabilities, where this is known as net worth
where that wealth can generate unearned income for their owners (interest, dividends), but here it is just the assets
income distribution
this can be refered as the nations ‘income cake’ where this is the dividend or shared between individuals and income units making up the total population
even pattern of income distribution
all people receive similar slices of the pie
uneven pattern of income distribution
people receive vastly different sized slices of the pie
How is income distribution measured
income survey ==> rank income recipients by income level from lowest to highest ==> divide income recipients into five equal sized quintile groups and calculate the average income ==> use the data to draw a lorenz diagram ==> calculate the gini coefficient as a measure of inequality
international economics
looks at why countries trade, the patterns of trade and how we measure it
international trade
this refers to the two-way exchange of goods and services across national borders. IT involves Australia exporting or selling goods and services to other countries, as well as us buying imports of goods and services from abroad
international competitiveness
this refers to whether a business or country is able to produce and sell its goods and services profitably at prices that are below those of similar goods or services made aborad
How international transactions are made
BOGS, also can be known as balance on goods and services, is that of credits minus debits
credits
is the money that are received from overseas, from our exports of goods plus export of services
debits
this is all the money that are paid overseas for out import of goods
the three possible outcomes of BOGS
- when exports (credits) > imports (debits) trade surplus
- when exports (credits) < imports (debits) trade deficit
- when exports (credits) = imports (debits) trade balance
In the BOGS formula, the X represents exports and M represents imports
a trade surplus will be a + (positive value) and trade deficit will be a - (negative value)
the benifits of international trade
- exports allow local firms to gain more economies of large-scale production
- exports help grow AD and increase GDP, employment and incomes
economies of large scale production
- for most businesses, it is more efficient and profitable for them to manufacture and produce goods and services on a large scale with bigger production runs
- production involves in some fixed costs regardless of production volume, for example: buying machinery
Exchange rate
More exports = more demand for AUD = increase in AUD
More imports = More supply of AUD = lower AUD
increasing economic activity
import spending increased + lower competitivness (bad for trade balance)
decreasing economic activity
import spending decreased + increased competitiveness (good for trade balance)
increasing overseas economic activiy
greater export spending + better competitiveness of Australian products
decreasing overseas economic activity
lower export spending and competitiveness of Australian products
Free Trade
there are no tariffs, subsidies, quotas and other restrictions on the movement of goods, services and capital between countries
Protectionism
the government uses policies that deliberately to restrict the level of foreign competition from imports in local markets, such as tariffs, subsides and quotas, so the local firms and their employees can survive
