KEY DEFINITIONS Flashcards
Relative prices
the price of one good or service in terms of another
Allocative efficiency
Using resources in ways that maximise society’s satisfaction in terms of needs and wants and living standards
Productive efficiency
Maximum outputs for given inputs
Increased productivity
Increased outputs for fixed inputs
Equilibrium price
The market price when quantity demanded equals quantity supplied
Demand
Willingness and ability of consumers to purchase at every given price point
Supply
Willingness and ability of producers to supply at every given price point
Opportunity cost
The benefit foregone by choosing one alternative over another
PPF
Production possibility frontier - looks at the trade off of producing two goods or services
Shortage
When the quantity demanded exceeds the quantity supplied
Surplus
When the quantity supplied exceeds the quantity demanded
Law of demand
Describes the inverse relationship between the price of a product and the quantity demanded. As price increases, the quantity demanded for the product decreases
Law of supply
Describes the positive relationship between the price of a product and the quantity supplied.
Price rises = businesses incentivised to increase the quantity supplied
Material living standards
Living standards as measured by the ability of individuals to access goods and services. Measured using real GDP per capita.
Non-material living standards
aspects of a person’s standard of living not related to goods and services but instead related to their overall quality-of-life factors
Price elasticity of supply
A measure of the responsiveness / sensitivity of quantity supplied (QS) to changes in price ($)
Price elasticity of demand
(PED) is a measure of the responsiveness / sensitivity of quantity demanded (QD) to changes in price ($).
Dynamic efficiency:
The speed at which resources are reallocated from one area of production to another in response to a change in consumer preferences or tastes.
If staff and firms become adaptive and innovative in production and apply the best technology available. Achieving allocative efficiency over time.
Inter-temporal efficiency
When a firm, government or nation achieves the right balance between resources used for current and future consumption.
Interest rates
An interest rate is the price of the cost of money
Disposable income
The personal income that is available for spending. It is gross income less direct tax, interest, and transfers payments
Cost of production (product cost)
Refer to the costs incurred by a business from manufacturing a product or providing a service
Technical change
Refers to either a new form of physical capital that improves productivity growth or a new production technique that improves productivity growth
Market failure
Occurs in a free market which fails to achieve an efficient allocation of economic resources. An over or under allocation of economic resources relative to the socially optimum level.
The socially optimum level of resource allocation
Is an allocation of resources that considers both private and social costs and benefits. Socially optimum level = private cost + social cost
Economic activity
Refers to behaviour concerned with production, consumption, and income-earning.
Economic growth
An increase in the size of a country’s economy over a period. The size of an economy is measured by the total production of goods and services (output) in the economy
Nominal GDP and Real GDP
Nominal GDP is the market value of all final products produced domestically, in a period, at current prices. Equals AD
Real GDP is nominal GDP adjusted for changes in prices to measure changes in the volume of output.
The five-sector circular flow of income model
Illustrates the relationship between spending, income, and output. The five-sector model represents the components of AD growth.
Aggregate demand and its equation
AD is the total intended expenditure on domestic production.
AD is the sum of C + I + G + NX
The exchange rates
The value of one currency in terms of another
Inflation
A sustained increase in the average level of prices (the price level).
The business cycle
Refers to real GDP growth rate fluctuations above and below the full employment level of output over time.
The goal of price stability
To achieve low and stable rates of inflation.
The target is an annual increase in the consumer price index (CPI) of between 2 and 3 per cent per annum, on average, over the medium term.
Headline rate of inflation
Includes volatile items, for example, petrol and fruit prices both of which are prone to vary dramatically in price. Thus, headline rate of change in the CPI can fluctuate dramatically.
Underlying CPI (core inflation)
Removes the effects of volatile items to better measure changes in the rate of inflation
Demand-pull inflation
Occurs when AD growth accelerates, shortages are created, and this leads to upwards pressure on the price level.
Cost-push inflation
Occurs when SRAS or LRAS growth decelerates, shortages are created, and this leads to upwards pressure in the price level.
The goal of strong and sustainable economic growth (SSEG)
To achieve the highest rate of output growth whilst simultaneously achieving price stability, external stability, and inter-temporal efficiency.
The target is to achieve an increase in the rate of real GDP growth of around 3% per annum.
The goal of full employment (NAIRU)
To achieve the lowest possible unemployment rate without resulting in unsustainable rates of inflation.
The target for the goal of full employment in Australia is an unemployment rate of around 4.5%
Disguised or underemployed
A person who is working fewer hours than they want to and cannot find extra work.
Hidden unemployed
People who are not actively seeking work because they have given up are also not counted as unemployed.
Cyclical unemployment
Caused by changes in the level of output and correlates with changes in the business cycle. E.g., when the business cycle is in a peak cyclical unemployment would be low
Structural unemployment
Unemployment caused by changes in the structure of firms (restructuring) and the economy resulting in a mismatch between the skills an employee has and those an employer demand. (Technological change indicator)
Frictional unemployment
Is temporary unemployment caused by people moving between different jobs or jobs in different states or territories. Occurs when employees recognise, they are more productive in another area of the economy. E.g., New career path (Dynamic efficiency indicator)
Net foreign Debt
Foreign owned Australian debt – Australian owned foreign debt
Net foreign Equity
Foreign owned Australian Equity – Australian owned foreign equity
Equity
Is the value of residual interest in the assets of an entity after deducting all its liabilities
Liability
A present obligation of the entity arising from past events
The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
Net Foreign Liabilities OR International Investment Position
Sum of the Net Foreign Equity PLUS Net Foreign Debt
Essentially a balance sheet showing the total holdings (stock) of foreign assets owned by Australian’s, and the total holdings of domestic assets owned by foreign residents at a point in time.
Efficiency
Obtaining the maximum output for given inputs
Natural unemployment rate
Sum of structural unemployment and frictional unemployment, excluding cyclical unemployment
The Consumer Price Index
measures consumer price inflation as a weighted average of price changes for a fixed basket of goods and services
Balance of payments
Bonus: components of transactions
Record of a country’s value of all transactions (flows) between the residents of the country and residents of all other countries.
Transactions include: international trade, borrowing, lending, capital and investment flows
Current Account Balance
Sum of the net goods account, the net services account, and the net primary and secondary income accounts.
Trade balance
Sum of the net goods and services accounts balances
Net income account balance
Sum of the net primary and net secondary income accounts
Capital account components
The sum of migrants asset transfers, overseas debt relief and the sales and purchases of non-produced, non-financial assets
Current account deficit
When the total value of debits is greater than the total value of credits over a period of time on the current account
Financial account and its components
Comprised of the direct, portfolio, derivative, reserve, and other investment accounts
Record of foreign purchases of domestic physical and financial assets, minus domestic purchase of foreign physical and financial assets.
Terms of Trade
A ratio of export prices to import prices.
Above 100 = favourable
Trade Weighted Index (TWI)
Measures the value of one currency against a basket of currencies weighted by trade volumes.
Essentially a multilateral exchange rate.
International competitiveness and factors affecting
The ability of a country’s exports to compete on price and quality in foreign markets
Productivity, production costs, availability of natural resources, exchange rates and relative inflation rates are factors
Trade liberalisation
The process of removing restrictions to trade such as tariffs, import quotas, and subsidies
Also involves the introduction of free trade agreements
Australian government securities (AGS)
Debt instruments used by the government to borrow money to finance a budget deficit, included treasury notes and bonds.
Public debt
The total amount of money owed by the public sector, the public sector being the three levels of government (local, state and federal)
Private debt
The value of business debt and household debt
Open market operations
Involve buying and selling bonds to manipulate the supply of cash in the overnight money market and achieve the cash rate target
Stance of AD policy
Can be expansionary, contractionary or neutral.
Aggregate demand policies
Actions the government or the Reserve Bank of Australia take to inhibit or stimulate aggregate demand growth. Includes budgetary and monetary policy
Budgetary policy
Refers to changes to tax and government outlays designed to achieve an economic or social objective
Automatic stabilisers
Features of government budgets which act spontaneously and without deliberate action to change tax revenue and welfare outlays in a countercyclical manner to help stabilise AD and flatten the business cycle
Comparative advantage
Occurs when one country can produce a good or service at a lower opportunity cost than another. Thus, they can produce at a lower relative price
Absolute advantage
Means that an economy can produce a greater total of goods for the same quantity of inputs. Fewer resources are needed to produce the same amount of goods.
Discretionary stabilisers
Deliberate changes in tax rates, the tax mix and budget outlays to help steady economic activity and fluctuations in the business cycle.
Underlying budget/cash outcome
Headline cash balance minus net cash flows from investment in financial assets such as asset sales
Transmission mechanisms and the different channels
Monetary policy component: refers to the various ways that changes in interest rates work to influence AD and the level of economic activity.
- Cash flow channel (existing loans of households and businesses)
- The availability of credit channel
- The exchange rate channel
- The wealth/asset value channel (wealth effect)
- Savings and investment/cost of credit channel
Headline cash balance
Differences between the total cash value of budget receipts minus the cash value of total outlays from all sources
Aggregate supply policies
Government actions taken to improve the efficiency of resource allocation, the conditions for business and the productive capacity of the economy
Productive capacity
The maximum potential level of output in an economy, modelled using the production possibility frontier diagram.
Productivity
Quantity of output per unit of input
welfare
A transfer payment made by the government to improve the living standards of the unemployed or disadvantaged
Efficient allocation of resources
Where all the nation’s resources are used in the production of
goods and services that yields the maximum net benefits for society
Aggregate supply
The total volume of goods and services that has been or can be produced over time
