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Commerce > Our Economy > Flashcards

Our Economy Flashcards

1
Q

How is the size of an economy measured?

A

GDP - This is the total value of all goods and services produced in the economy in a single year. Per capita is GDP per person

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2
Q

How do we measure GDP

A

Rather than using production we use the aggregate demand and expenditure of consumers, firms and governments within the economy.

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3
Q

What is Aggregate demand?

A

It is the measurement of the total amount of demand for all finished goods and services produced in an economy. Total amount of money exchanged for those goods and services at a specific price level/point in time.

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4
Q

Formula for calculating GDP - Aggregate demand method

A

GDP = C + I + G1 + G2 + (X-M)

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5
Q

What are the problems with aggregate demand method?

A
  • Data is collected from surveys that may cause inaccurate results
  • It doesn’t reflect the standard of living such as the amount of wants met by each household
  • Environmental sustainability of a country eg. use of renewable resources
  • Equality of income distribution
  • Inflation and currency fluctuations
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6
Q

Who measures GDP?

A

Australian Bureau of Statistics releases the Government National Accounts every quarter.

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7
Q

What are the 4 ways of assessing the performance of the Australian Economy?

A
  1. Standard of Living
  2. Economic Growth
  3. Income distribution
  4. Environmental sustainability
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8
Q

What are indicators of standard of living?

A
  • Housing
  • Job sustainability
  • Transport
  • Quality of food
  • Air quality
  • Education
  • Employment opportunities
  • Health services
  • Recreation opportunities
  • Safety
  • Right to vote
  • legal system
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9
Q

Why do we use GDP per capita

A

We must adjust GDP to account for a growing population. GDP per capita is the vale of goods and services that each member of the economy has access to. An increase in GDP per capita should indicate that the material living standards of each individual has improved.

Or does it? it is an average, not equally distributed. GDP improvements could come from longer working hours or technology replacing labour which are not improvements to living standards. No environmental impact.

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10
Q

Why economies should always have growth?

A

To replace the goods and services that have been consumed, to account for population growth, a desire to continually improve the quality of products and services provided.

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11
Q

What is the target economic growth?

A

3-4% per year

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11
Q

Why should environmental sustainability be taken into account for economic growth?

A

To maintain environmental sustainability we must make sure we are aware of the consequences of our economy’s consumption and production on future generations. whether we are depleting non-renewable resources unsustainable, degrading the environment and if we are valuing the environment.

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12
Q

What is income distribution and what are the types of income?

A

The manner in which productive income is divided amongst participants in the production
process and other dependent members of the economy. Different types of income include: labor wages, income from property or wealth assets, government income subsidies, income in kind like company car, work phone, housing.

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13
Q

What are the 2 extents at which the government has to ensure income distribution?

A

Laissez-faire capitalism: no interference with income distribution, complete free market
Or
Government intervention: regulation of income distribution through taxation. to what extent?

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13
Q

What are some causes of inequality?

A

Demand Side:
- unemployment, hours worked and income
- Inflation (reduced purchasing power of incomes)
- Free trade approach of our economy (capitalism)

Supply side
- Increases in costs of production
- New technology

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14
Q

What is Macroeconomics?

A

The study of the national economy and impacts of aggregate demand.

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15
Q

What is Microeconomics?

A

It examines the operation of the smaller units that make up the economy like businesses, an industry, specific markets and sectors of the economy.

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16
Q

What are the origins of Modern Macroeconomics?

A

Adam Smith:
- Advocated market based economy with free trade
- The Market is free to set prices and levels of activity based on supply and demand.
- Theory that every individual competing in pursuit of their self-interest makes us all better off.

Karl Marx
- Promoted socialist economy critiquing capitalism as it causes inequality
- Governments should decide on distribution of goods and services

John Maynard Keynes
- Developed modern macroeconomics with the idea of Mixed Economy
- Government should increase it’s spending and thereby eliminate unemployment.

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17
Q

What is a market based economy?

A

The market is free to set prices and levels of activity based on supply and demand.

It is criticised for causing inequality in social and economic circumstances as we’ll as environmental issues.

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18
Q

What is a mixed economy?

A

A system in which individuals and businesses make their own decisions with a degree of government involvement.

All modern economies are mixed where the means of production are shared between the private and public sectors.

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19
Q

What is the role of government in our mixed economy?

A
  • A producer of goods and services eg. roads, health, education
  • A regulator of the level of economic activity
  • An influence on the redistribution of income eg. taxes
  • A controller of our commercial lives eg. taxes
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20
Q

How are the level of economic activity regulated?

A

Through monetary policy controlled by the RBA and Fiscal Policy controlled by the government

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21
Q

Expansionary fiscal policy vs. contractionary fiscal policy

A

Expansionary - Government spending is increased and taxes are decreased to expand the economy

Contractionary - Government spending is decreased and taxes are increased to slow the economy

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22
Q

What is fiscal budgetary policy?

A

The government adjusts the level of government spending or taxes to expand or contract the circular flow of money / nations economy.

Effects:
- The level of government spending (G)
- Disposable income levels (T)

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23
Q

What is the monetary policy?

A

The RBA sets interest rates to affect the amount of savings/consumption/investments

It sets the short term money lending market - Cash rate, it is a means of controlling the money supply of a country.

Effects:
- Levels of consumption vs saving
- Levels of business investment

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24
Q

Direct taxes vs indirect taxes

A

Direct taxes are those that refer to levies imposed directly onto the incomes of individuals
and companies.

Indirect taxes are those placed on the sale of goods and services and added onto the price of
items.

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25
Q

What are some examples of direct tax?

A
  • Personal income tax
  • Capital gains tax
  • The medicare levy
  • Withholding tax
  • Company tax
  • Fringe benefits tax
  • Superannuation tax
  • Petroleum resource rent tax
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26
Q

What are some examples of indirect tax?

A
  • Excise duty
  • Customs duties
  • Goods and services tax (GST)
27
Q

How does the government pay for deficits in their budget

A

They pay for it through debt.
- Government bonds (local or foreign)
- Borrow from RBA
- Financial institutions

28
Q

What are the objectives of monetary policy?

A

By manipulating interest rates to alter costs it changes the availability and demand for borrowing money.

by altering the level of spending in the economy they can achieve the governments goal of low inflation, strong sustainable economic growth and full employment. Improved living standards.

29
Q

What is the role of the RBA

A

The Reserve Bank of Australia monitors Australia’s key performance indictors such as inflation, economic growth. Sets the cash rate and monetary policy to ensure:
- Stability of the currency
- Full employment
- Inflation target of 2-3%
- economic prosperity and welfare of the Australian people.

30
Q

What are the RBA’s means of influencing the flow of money?

A
  1. Changing interest rates - by setting the cash rate
  2. Influencing the exchange rate - by setting the cash rate
  3. Persuasion - influence on Australia’s lending activities
31
Q

How does the RBA use persuasion?

A

A strategy used by the RBA to talk up or down the level of borrowing, spending and economic activity. consumers and investors react and change their level of spending and borrowing as a result. Eg. statements by the RBA suggest that the economy is performing well, this will increase consumer and business confidence and increase economic activity.

32
Q

What is cash rate?

A

The price of money in the cash market between banks overnight where they lend and borrow many from each other. This is used as the basis for interest rates set by banks.

33
Q

What is the difference between direct vs. indirect tax

A

Direct tax is tax that is directly paid to the government on income or wealth eg. personal tax, capital gains tax, the medicare levy, withholdings tax, company tax, fringe benefits tax, superannuation, petroleum resource rent.

An indirect tax is imposed on an individual who consumes goods/services. eg. GST, customs duties, exercise duty.

34
Q

What is the cash rate?

A

The price of money in the cash market, where banks lend and borrow funds from each other overnight. It is used as the basis for interest rates set by banks.

35
Q

What are the purposes of microeconomic policies?

A
  • Improve productivity of industries or markets
  • Support competition
  • Improve outcomes for consumers
  • Increase employment opportunities
36
Q

What are the 6 microeconomic policy focuses?

A
  1. Trade liberalisation
  2. Labour market reforms
  3. Market deregulation
  4. National reform agenda
  5. The environment
  6. Immigration
37
Q

What are the tools of managing trade?

A
  • Tariffs: a tax on imports that raise the price of imported goods eg. vehicle parts or dairy
  • Quotas: a limit on imported goods eg tobacco. This can also be to protect the environment (HFC quotas)
  • Subsides: an amount given to local producers to help them lower prices and compete with cheaper imports eg. agricultural products, dairy

The imposition of these tools help protect local businesses from overseas competition

38
Q

What is trade liberation and how is it achieved?

A

Trade liberalisation involves removing barriers to trade between different countries and encouraging free trade.
- Cut tariffs
- Reduce subsidies
- Abolishing import quotas
- Increasing Bi-lateral free-trade agreements

39
Q

What is free trade?

A

When there are no artificial barriers to trade between nations

40
Q

What are negative impacts of trade liberalisation?

A
  • Local manufacturares have struggled to remain competitive
  • Labour reform policies cause increased labour costs compared to overseas labour costs
    eg. Car industry has shut down in Australia
41
Q

What is labour market reforms deregulation?

A

Labour market regulates wages, working conditions, includes the system of award and enterprise agreements as regulated by the fair work commission.

Deregulation of the market is introduced to reduce labour controls.
- workers paid more for increased productivity
- increased productivity means lower costs and more competitive prices
- increased competition provides employment opportunities

42
Q

How can labour markets be deregulated?

A
  • Make it easier to hire and fire workers
  • Abolish redundancy pay or right of appeal
  • Reduce maximum working weeks and minimum holiday pay
43
Q

What are negative impacts of labour market deregulation?

A
  • Loss of working conditions
  • Increased productivity usually means longer working hours
  • More workers covered by common law contracts which may exploit vulnerable workers
44
Q

What is the aim of market deregulation?

A

The removal of any unnecessary government controls, restrictions or supervision in various areas of the economy
- Markets will allocate resources more effectively if left to manage themselves
- this leads to lower prices with stronger competition.

Eg. SA powerlines to decrease energy prices, eastern suburbs bus service deregulation.

45
Q

What is the national reform agenda?

A

A collection of measures designed to strengthen the competition and level of efficiency in product and service markets.

  • 1995 establishment of ACCC
  • Create a level-playing field to ensure operation of free market forces
  • Enforces anti-competitive practices
46
Q

What are anti competitive practices

A
  • Price fixing
  • Exclusive dealing
  • Collusive bidding
  • Market zoning
  • Predatory pricing

Eg. Oil cartel, construction companies, energy providers

47
Q

What are environmental policies?

A

Increased focus on measures that improve the quality of the environment. Eg.
- Kyoto agreement 2008 and Paris agreement 2016 to reduce greenhouse gas emissions and minimise the impact of climate change
- National home insulations to reduce power bills
- Carbon Tax

48
Q

What is participation rate?

A

The proportion of people aged 15 and over employed or actively looking for work as opposed to those declining to participate.

Participation rate = labour force / working-age population x100

49
Q

What are types of unemployment?

A

Cyclical- unemployment resulting from the business cycle movement
Structural - unemployment because of a fundamental shift in the operation of society. Eg. work in the farming industry has become more mechanised, meaning fewer workers are necessary, loss of jobs.

50
Q

What is inflation?

A

The value of money per unit goes down resulting in the rise of general level of prices across the economy. loss of purchasing power and less real income.

51
Q

How is inflation measured?

A

Consumer Price Index (CPI).
Calculated quarterly by ABS, it measures the average rate of change in the surveyed prices paid by households of a basket of goods and services. The regimen is grouped into categories such as food, clothing, housing, transport, recreation and health.

Inflation = price year 2 - price year 1 / price 1 x100

52
Q

What is purchasing power?

A

The value of a currency expressed in terms of the number of goods or services that one unit of money can buy.

53
Q

What causes inflation?

A

Demand side
increase in:
- Consumer optimism
- Business Confidence
- Household or business income
- Exports

Supply side
Increase in:
- Wages paid
- Interest rates
- Government taxes, oil prices or utility prices
- Cost of raw materials
- Cost of imports, part to components
- Weaker exchange rate
- Import tariffs

54
Q

What are the two types of inflation?

A

Demand side inflation: Factors that lead to an increase in demand exceeding the current level

Supply side inflation: Factors that leads to an increase in the cost of producing goods and services.

Cost inflation: a sustained increase in the price of goods and services caused by producers passing on increased production costs to consumers.

55
Q

What are the impacts of inflation?

A
  • Causes local producers to lose out to overseas competitors because of their inability to compete with lower overseas prices
  • Undermines economic growth as inflation erodes consumer and business confidence as consumer spending decreases, this stops investments and the rate of economic growth.
  • Changing the allocation of resources, investments in growth assets become more profitable
56
Q

How is inflation used in Monetary policy?

A

Stability of inflation supports business and consumer confidence and certainty about employment decisions, high inflation can lead to excessive fluctuations of the economic business cycle. The cash rate is reviewed monthly by RBA

57
Q

What is the target for inflation?

A

2-3%

58
Q

What are exports and how do they stimulate the economy?

A

Exported goods and services are sold to both consumers and producers overseas.

Exports stimulate Australia’s economic activity by providing employment, business profits, larger customer base as our population is small

59
Q

What are imports and why are they brought into the economy?

A

Imports from other countries are purchased by customers and businesses. They are brought into the country because:
- some products can’t be make as efficiently in Australia
- Specialised nature of machinery
- Competition makes prices cheaper for consumers

60
Q

Formula for balance of trade.

A

Balance of trade = Exports - imports (X-M)

Results should ideally be positive

61
Q

What are the positive effects of imports on our economy?

A
  • Enables more of a range in goods and services for consumers to buy
  • Forces Australian businesses to make goods and services using resources in the most efficient way so that they can compete with cheaper overseas exported products.
  • It encourages countries that we import from to buy our exports
  • Australian workers may move overseas and learn new languages and experience new cultures.
  • Trade between countries encourages more peaceful relations and cultural exchange
62
Q

What are the negative effects of imports on our economy?

A
  • Australian jobs may be lost to countries with cheaper labour costs for that industry.
  • Imported resources may lower employment opportunities in Australia
  • leads to closures of industries and loss of skills as Australian industries find it difficult to compete with some overseas countries.
  • Money leaves the Australian economy and circulates overseas. This affects the exchange rate of the Australian dollar.
  • Harmful animal species and diseases such as bird flu may be brought into the country in various ways.
63
Q

What are International trade agreements?

A

Governments can control the impact of trade on an economy, this is done by:

Adopting a trade policy
- Free trade = minimal barriers to trade (trade liberalisation)
- Protectionism = protection of local businesses through tariffs, quotas and subsides

Establishing trade agreements
- Bilateral trade agreements - two nations
- Multilateral trade agreements - three or more nations

64
Q

What are the benefits of trade Agreements?

A
  • Increased production leading to profits and employment
  • Improved economic activity which expands the economy
  • Specialisation in producing goods falls to countries that are most efficient in production
  • Surplus resources are converted to profits eg, Australian iron ore
  • Goods will be cheaper for consumers
  • Easy access to goods and services from another country
  • Technology exchanges
  • Cultural exchanges
65
Q

What does the Department of Foreign Affairs and Trade and the World Trade Organisation do?

A

DFAT manages these agreements, as well as integration with the World Trade Organisation (WTO)

The WTO attempts to facilitate agreements that adhere to global standards:
- Agricultural protection
- Minimal labour standards
- Environmental protection

66
Q

What are the 6 examples of multilateral trade agreements?

A
  • World Trade Organisation
  • European Union
  • North American Free Trade agreement
  • Trans Pacific Partnership
  • ASEAN
  • Asia Pacific Economic Cooperation

Commerce (4 decks)

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