Macroeconomics Flashcards
GDP
Gross Domestic Product: Total value of all goods and services produced in an economy in a given time (year)
Underlying Inflation rate
Measured by removing volatile items affected by once off events from the normal CPI regimen in order to obtain an inflation rate that is more accurate and reflective of ongoing change in level of prices.
CPI
Consumer Price Index - Measures quarterly changes in retail prices of local and foreign made goods and services. Representing a high proportion of expenditure of metropolitan households living in capital cities.
How Inflation rate can be measured
It is measured by the Australian Bureau of Statistics, CPI is the most common was of measuring
Regimen of CPI
The range of goods and services included in the basket whose prices are to be measured. 100000 individual items are subdivided into 11 categories.
The eleven categories of CPI
- food
- transportation
- education
- financial and insurance services
- clothing and footwear
- tobacco and alcohol
- recreation
- housing
- health
- communication
- household contents and services
CPI feature: Prices surveyed
A quarterly survey is conducted in a representative range of metropolitan retail outlets from both the private and public sector.
CPI feature: Weighting of Items
Each item is weighted according to its relative importance in overall household expenditure. Reviewed every five years (items more expensive or frequently purchased have a greater bearing on the index trends then items of less significance)
CPI feature: Base year
Price changes over a period of time are compared against the price or cost of the regimen in a representative start year.
Limitations of CPI: Lack of representativeness of the prices
There may be misleading figures/indicators for people who do not live in capital cities as only 100 000 consumer items are chosen that are appropriate for metropolitan households included in the CPI
Limitations of CPI: Weighting limitations of items in the regimen
Weighting of specific items may be inappropriate and unreflective of the actual pattern of expenditure for some categories of households.
Limitations of CPI: The effect of once-off volatile events on the headline inflation rate
The rate of inflation measured by Headline CPI is largely affected by once-off, volatile and sometimes unavoidable events and developments that influences prices.
Limitations of CPI: Other Limitations
Doubts about the appropriates of the base year that has been selected. Unless it is representative, figures could appear relatively more or less favourable.
Alternative ways of measuring Living standards: GPI
Genuine Price Indicator uses GDP data, but makes both negative and positive adjustments to reflect the good or bad effects on societies welfare of different types of activity and spending, this taking some negative externalities and other issues into account.
Alternative ways of measuring Living standards: MAP
Measuring Australia’s Progress is a statistical ‘tool’ used by the A.B.S to examine progress across both material and non-material living standards. By looking at four broad domains which have subsections (dimensions)
The four domains of MAP
- Environment
- Governance
- Society
- Economy
Weakness of MAP
- Living standards cannot be condensed to a single statistic or figure.
- The selections of specific measures is subjective
The goal of Full employment
The goal of full employment describes achieving the lowest possible rate of unemployment without causing inflation. Therefore we aim for zero cyclical unemployment, however, we still have a level of unemployment due to Structural, Frictional, seasonal and Hardcore unemployment
NAIRU
Non-Accelerating Inflation Rate of Unemployment: the lowest possible rate of unemployment that will not significantly accelerate inflation.
Employed person
Aged 15 years and over, who is either working full time or paid part time (more than one hour a week) or has a job but is prevented from working due to illness, strikes, holidays or similar interruptions.
Unemployed person
Aged 15 years and over, who are either looking and unable to find a job, able and willing to take up a job prior to the survey period or waiting to resume work after being laid off or stood down without pay.
The Labour Force
Consists of all individuals aged 15 years and over who are able and willing to work. Includes people who are defined as employed and those unemployed.
Unemployment measures: Underutilisation Rate
Describes the extent to which the labour force is not working to capacity. Includes the unemployment rate plus those who are working part time but would like to work full time or more working hours.
Hidden Unemployment
Those who would like to work but are discouraged from looking for work due to a weak labour market (high unemployment)
The Business Cycle
The wave-like or cyclical pattern created by the various the phases the level of domestic economic activity passes through over a period of time. Includes expansion, peak, contraction, and trough. The government aims to smooth out the business cycle using that budgetary and monetary policies.
Boom/Peak
A period of economic instability where the economy experiences over-full employment and inflation caused by an excessively rapid expansion of aggregate demand.
In a peak (Boom) there is
- low unemployment - good
- high eco growth - bad
- High Inflation - bad
Trough
The lowest point on the business cycle where unemployment is high and production is down.
Contraction
The downturn phase of the business cycle associated with rising unemployment, slowing output levels, often lower inflation, and a stronger current account and exchange rate. Usually caused by a drop in aggregate demand and may lead to a recession or depression depending of severity.
Expansion/Recovery
A period in which levels of national production and employment are rising.
economic Activity
Usually measured by GDP and includes all production in a given time period.
Indicators of Economic Activity: Lagging
Only tells the reader what level of activity was happening some time ago. Statistics do not tell us what the economy is doing currently
eg. GDP by the ABS, CPI, Unemployment rates
Indicators of Economic Activity: Coincident
Move very closely with actual changes in level of economic activity. Published regular at short intervals and more or less tell us what is happening right now.
eg. monthly changes in retail prices.
Indicators of Economic Activity: Leading
Predict, in advance, where the economy is heading in the near future. Not completely reliable, often forecast change in activity before it occurs.
Aggregate Demand
represents the total spending on all goods and services in the economy in a given year. Shown by the Equation:
AD= C + I + G1 + G2 + (X-M)
volatile items on the regimen
anything that can be affected by sudden unpredictable damaging event that effect prices.
e.g. fruit
private consumption- C (ADE)
- Includes household expenditure designed to satisfy our immediate needs and wants.
- Whilst more stable than I, rate of growth varies, contributing to economic instability.
- Susceptible to the influence of macroeco/ aggregate demand side factors
Private Investment - I(ADE)
- Involves private business capital spending on physical plant, manufactured materials and equipment used to make other goods and services.
- This expenditure only helps to raise nations productive capacity, should also improve efficiency of labour and natural resources
- fluctuates the most
Government Consumption - G1 (ADE)
- government or public expenditure on goods and services used to help satisfy the communities needs and wants.
- includes spending on staff wages for government departments
- gov spending does not include welfare outlays because they are not actual spent by the gov.
factors affecting AD: consumer confidence
describes consumers expectations regarding future employment and therefore current and future spending. CC increase = increase in C
factors affecting AD: Business confidence
describes business expectations regarding future sales and profit and therefore effects to future investment.
BC increase = increase in I
factors affecting AD: Overseas sector
Describes eco activity oversea’s especially for our key trading partners. e.g. increased eco growth in china leads to an increase in X
OS eco activity increase = in X
factors affecting AD: Household disposable income
Describes money available for spending by individuals after tax is paid and/or benefits received.
HDI increase = increase in C
factors affecting AD: Exchange rate
Describes the value of the $AUD when swapped for foreign currency. Appreciation means an increase in $AUD compared to $US. Depreciation means a decrease in $AUD compared to $US.
- Depreciation of $AUD = increase X and AD and grease in M
- Appriciation of $AUD = increase in M and decrease in X and AD
factors affecting AD: Credit Growth
describes changed in consumer and household borrowingCG increase = increase in I, C and AD
factors affecting AD: population growth
includes natural increase plus net migration
pg increase = increase in C, G1, G2 and AD
factors affecting AD: Budgetary Policy
Describes govt taxation and spending
increase in G1 or G2 = increase in Ad
Decrease in taxation = increase in C and AD
factors affecting AD: Monetary policy
official cash rate as set by the RBA then passed onto retail banks and effects interest rates
decrease in Interest rates = increase in C and AD
factors affecting AD: Terms of trade
describes the price of our exports compared to the price of inputs. When terms of trade increases (favourable) means our Xp is relatively higher than MP
increase in ToT = Increase (X-M) and AD
Terms of Trade
An index of the average price of exports compared to average price of imports
Provides a guide about the volume of imports able to be purchased with a given volume of exports
the goal of low inflation
The goal of low inflation or stability is achieved when the general level of prices for goods an services are increased “fairly slowly” and within the target band of 2-3 percent p.a.
Low inflation does not mean zero inflation.
problems with not achieving low inflation
- cause a decrease in eco growth as RBA responds with increase interest rates with slows C and I and inflation undermines business confidence increasing I
- cause high unemployment, (makes X uncompetative)
- hurts external stability - X uncompetitive
- hurts income distribution
Inflation target
Used by the RBA as the priority guiding changes in its monetary policy stance to achieve an annual average inflation rate of between 2-3 percent over the duration of the business cycle.
Structural Unemployment
caused by the changing composition and structure of industry
possibly associated with:
- introduction of new tech and processes
- cost cutting by firms
- change in geographic’s
- gov microeconomic reform
- mismatch of skills of unemployed preventing them for getting a job
seasonal unemployment
occurs when climatic and other factors cause some workers to be unemployed at the same time each year
Hardcore unemployment
experienced by an individual who finds it difficult to obtain or hold a job because of personal characteristics
- disabilities
- illness
- poor work ethic/attitude
Frictional unemployment
people temporarily unemployed between leaving one job and starting another. common among tradespeople.
Demand inflation
typically occurs in a boom when spending passes production and there are widespread shortages of goods and services.
Cost inflation
exists when cost rises are passed on by firms as higher prices to protect their profit margins.
Real GDP
a measure of GDP which removes the effect of inflation
Positive of MAP
- easy to use tool
- better indication than GDP alone
Weakness of GPI
some adjustments have a subjective or imprecise nature
Positive of GPI
better reflection on wellbeing than GDP alone with both pos and neg adjustments to GDP
Goal of strong and sustainable Economic growth
- rate of eco growth needs to be growing in a manner that does not adversely effect the other Eco goals
- the rate of growth needs to be environmentally sustainable and not reduce the material and non-marterial living standards of current and future generations
The other economic goals
- low inflation
- full employment
- equity
- external stability
Government Investment - G2 (ADE)
Incorporates public expenditure on capital equipment. used to satisfy societies wants, expand Australia’s productive capacity and improve other resources efficiency.
Making up 3% of AD
Net Exports - X-M (ADE)
difference/Balance between exports minus imports of goods and services.
Representing 18-24% of AD, greatly affected by macroeconomic demand side factors
Low inflation and Economic growth
- zero inflation disrupts the achievement of other goals = really slow economic growth = increased unemployment rate and reduces equity
Factors effecting aggregate supply
Availability - the factor changes how much of the G or S can be produced (e.g. Decrease in minimum working age = Increase A, or increased business profit (attracting more businesses) = increase A)
Cost - the factor changes the cost of production (e.g. decease price of materials = decreased C)
Efficiency - the factor changes the efficiency of production (e.g. strike levels decrease = E increase)
GDP eco growth indicator expressed as an average of 3 estimates - GDP (E)
GDP should be equal to total annual market value of EXPENDITURE on final G and S produced by a nation
GDP eco growth indicator expressed as an average of 3 estimates - GDP (I)
GDP should be equal to total market value of INCOME paid to those selling resources for production
GDP eco growth indicator expressed as an average of 3 estimates - GDP (P)
GDP should be equal to the total market value of final goods and services PRODUCED each year
GDP eco growth indicator expressed as an average of 3 estimates - GDP (E)
GDP should be equal to total annual market value of EXPENDITURE on final G and S produced by a nation
GDP eco growth indicator expressed as an average of 3 estimates - GDP (I)
GDP should be equal to total market value of INCOME paid to those selling resources for production
GDP eco growth indicator expressed as an average of 3 estimates - GDP (P)
GDP should be equal to the total market value of final goods and services PRODUCED each year
