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Economic Policy > Module 1 > Flashcards

Module 1 Flashcards

1
Q

What is GDP and how is it determined?

A

Gross Domestic Product. Determined in one of three ways:
1) the value of goods and services produced less the cost of production
2) the sum of incomes generated by production
3) the sum of final expenditure on goods and services produced plus exports minus imports.
An average of the three approaches may be used.

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2
Q

What is GDP used for?

A

As a key measure of the value of the economic production in the economy and the standard of living.

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3
Q

Is GDP a reliable indicator?

A

It ignores non-market activities. ABS stats indicate paid work (which enters GDP calcs) makes up only 40% of all work. Also leisure, environmental and quality of living (education and healthcare) are not included.

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4
Q

What is economic efficiency?

A

How to allocate resources to obtain the maximum income or welfare for the whole community

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5
Q

What is equity issues referring to?

A

How to distribute the income and the need to address tax, social, welfare and government intervention.

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6
Q

What is economic analysis?

A

The study of forces that determine the distribution of scarce resources. It provides insight into how market operate and offers methods for attempting to predict future market behaviour in response to events, trends and cycles. It is also used by governments to determine tax rates and evaluate the financial health of the nation or state.

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7
Q

What is economic policy?

A

These are the actions taken by a government to influence its economy. These need to include legal, social, cultural and political considerations and often include value judgements.

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8
Q

What is a positive statement?

A

It is an objective statement that can be tested, amended or rejected by referring to the available evidence.

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9
Q

What is positive economics?

A

It deals with objective explanation and the testing and rejection of theories, eg a fall in incomes will lead to higher demand for non brand supermarket items or higher interest rates will reduce house prices.

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10
Q

What is a normative statement?

A

It is a subjective statement - it carries a value judgement.

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11
Q

What are the goals of economic policy?

A 
Full employment
Price stability
Economic Growth
Environmental standards
Economic efficiency
Economic security
External balance
Economic freedom
Equitable income distribution
Equitable tax burden
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12
Q

When considering the goals of economic policy, what is it important to remember?

A
  • Interpretation on goals can differ
  • Some are complimentary goals
  • Some are conflicting goals
  • Priorities help determine which goals to pursue at a particular time.
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13
Q

What are the four steps of formulating policy?

A

1) Specification of goals
2) Analysis of policy options
3) Implementation
4) Evaluation

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14
Q

What is the role of government in economic policy?

A
  • Provision of legal and institutional structure in which markets operate
  • Intervention in allocation of resources (where public policy deems it appropriate)
  • Redistribution of income
  • Stabilisation of the economy.
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15
Q

What is market failure?

A

Where market forces fail to produce and allocate scarce resources in the most efficient way.

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16
Q

What are the six causes of market failure?

A

1) Externalities - negative or positive
2) Missing markets
3) Asymmetric knowledge
4) Lack of competition
5) Unstable prices
6) Labour market failure

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17
Q

What are negative externalities?

A

They occur where consumers and producers fail to take into account the effects of their actions on third parties and these third parties suffer as a result, eg. cars cause congestion and pollution, so may need policy control

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18
Q

What are missing markets?

A

If left to market forces these would never be produced, includes items like roads, street lights etc. They are public goods and produce non-rivalry (consumption by one does not reduce amount available) and non-excludability (anyone can use it and cannot be stopped).

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19
Q

What is the free-rider problem?

A

Where everyone waits for someone else to purchase or create an item and then will use it for free.

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20
Q

What is asymmetric knowledge?

A

Where there is a lack of symmetry of knowledge between the buyer and the seller, eg dentist tells patient that more dental services are required.

21
Q

What is lack of competition in the market?

A

Where monopolies exploit power and build up barriers to entry. Oligopolies may also collude to reduce participation and exploit buyers.

22
Q

What are unstable prices and why is this a market failure?

A

Fluctuating prices (particularly applicable to natural resources. Suppliers cannot plan so cannot commit to future investment. Govts intervene with price floors or ceilings. Product production is also inelastic so cannot react to changes quickly.

23
Q

What is labour market failure?

A

Includes labour immobility for reasons of occupational (skill match), geographical, discrimination, lack of information and disincentives.

24
Q

What are counters to market failure?

A
  • Government provisions
  • Tax or subsidy policies
  • Regulation
25
Q

What is Government failure?

A

Where a government’s intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources.

26
Q

What are some examples of Government failure?

A
  • Subsidies protect from competition
  • Taxes distort market operation
  • fixed prices - distort efficient operation of the market
  • information failure - they don’t know enough to make decisions
  • excessive bureaucracy
  • moral hazard is created through welfare payments
27
Q

What is economic rationalism?

A

The argument that market forces are better trusted than government policy - Pusey (1991) ‘is the dogma which says that markets & money can always do things better than governments’ - Stone (1992) ‘markets usually provide more satisfying answers to questions of choice, consumer preference and so on than decisions by politicians and bureaucrats’. Economic rationalism favours deregulation, a free market economy, privatisation etc.

28
Q

What is Keynesian economics?

A

Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. It refers to the concept that optimal economic performance could be achieved – and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered to be a “demand-side” theory that focuses on changes in the economy over the short run.

29
Q

Ann Neville cited three reasons why financial deregulation occurred, what are they?

A

1) Ideas - social influence
2) Institutional structures and economic forces - external influences including business, international, markets
3) political interests - socially acceptable.

30
Q

What is the argument that Evans (2004) expressed about the problems with economic policy?

A

That some problems are too immovable or costly to fix, so policy is second best, and unwittingly can cause more problems eg. Welfare limits put in place to encourage people to work, also cause some to limit earnings to attract welfare. Govt job creation to reduce unemployment does not address the underlying problems eg labour market failure (skills shortages and lack of education)

31
Q

What is the OECD?

A

The Organisation of Economic Cooperative & Development

32
Q

What are Australia’s economic problems?

A
  • dependence on low value added commodity exports in a world of high-tech manufacturing and service industries
  • persistant current account deficits despite commodities boom and excellent terms of trade
  • imports are growing in volume and value.
33
Q

What is neo-liberalism?

A

It overestimates the benefits of free markets and understates the role of a capable State in economic development.

34
Q

What is laissez faire economics?

A

Is an economic environment in which transactions between private parties are free from intrusive government restrictions, tariffs and subsidies, with only enough regulations to protect property rights. Broadly laissez faire means let it be or let them do as they will.

35
Q

What is regulatory capitalism?

A

The extending regulatory supervision that is growing and prevalent in a number of public and private enterprises.

36
Q

What are ‘nation-building’ ideals?

A
  • Keep prices down
  • reduce unemployment
  • improve general standards of living
  • improve health and social services
  • Reduce poverty
  • cut crime
  • make business pay fair wages
  • create more job security
  • support families to reduce the gap between rich and poor
  • to control economic change
  • to hold society together
  • to support communities.
37
Q

What is meant by the term of ‘nation-building’ in Australia?

A

Refers to a deliberate policy framework whose aim is to construct the social and economic infrastructure of the nations state (Butcher 2008)

38
Q

Explain the complexity between economics and economic rationalism

A

Economics is the study of use, production and distribution of scarce resources. The market sets the price of any particular item by way of equilibrium being created at the point where demand and sales cross. The study evolves into action to correct or guide the market, which is formulated in government policy. Economic rationalism believes the market is better placed than the Government to determine price.

39
Q

What is the purpose of the National Competition Policy?

A

To promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets.

40
Q

What are the key NCP reforms?

A

1) Review of anti-competitive laws - removing red tape such as set shop trading hours
2) Structural reform and competitive neutrality
3) Access to infrastructure
4) Improvement to energy - free & fair trade, split monopolies
5) Water reforms - higher prices to cover costs etc.

41
Q

How does the NCP relate to economic growth?

A

It has assisted in:

  • a surge in productivity growth and therefore reduced unemployment
  • per capita GDP climbed to 8th best (2002)
  • OECD links stronger Australia to NCP
42
Q

How does the NCP relate to lower inflation?

A
  • telecommunication charges down 29% for business
  • electricity prices down 25% for business
  • rail freight costs fell up to 42%
  • Port charges fell by up to 50%
43
Q

What are the negatives for the NCP?

A
  • loss of privileges for some groups
  • Some adverse regional impacts
  • Adjustment assistance required by Government
44
Q

What are the environmental considerations for the NCP?

A
  • Water conservation
  • Green energy
  • Wider gas availability
  • Avoids unnecessary duplication to infrastructure.
45
Q

What is the 2010-2015 Reform agenda with regards to the NCP?

A
  • access to water and waste networks
  • access to financial and equity market clearance and settlement systems
  • access to fuel refining storage and distribution facilities
  • access to carbon geosequestration and associated facilities
46
Q

Why is trade important?

A

To create jobs, boost incomes and improve living standards. It also benefits local regions, encourages international investment and increases competition.

47
Q

What does Australia’s trade policy aim to do?

A

Open up trade opportunities for Australian businesses of all sizes through the World Trade Organisation (WTO), Free Trade Agreements (FTAs) and the Asia Pacific Economic Cooperation (APEC).

48
Q

What are best practice FTAs?

A

Free Trade Agreements that are:

  • Comprehensive
  • Go beyond WTO commitments
  • Simple rules of origin
  • Transparent
  • Open to accession by third parties.
49
Q

Who does Australia have an FTA with?

A

Singapore, Thailand, USA and New Zealand - working towards Chile, China, Malaysia, Japan and Korea.

Economic Policy (6 decks)

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