Task 1 Flashcards
Define Economic Growth
Economic growth is the increase in the volume of goods and services that an economy produces over a period of time. It is measured in changes to real GDP, adjusted for inflation
Whats the formula for GDP growth rate %
Change in Real GDP/ Real GDP
how do you calculate real GDP using nominal GDP
nominal GDP* Base CPI/Current CPI
What component of AD contributes the most
Consumption is at 50-60% of AD
Whats the formula for AD
C+I+G+(X-M)
What does aggregate demand determine
the level of spending and employment in the economy, affecting eco growth
What is aggregate supply
Aggregate supply is the total level of income in an economy over a given period and this plays an important long term role in influencing levels of economic growth
when does AS increase
- AS increases when theres a higher level of output for same cost
- increase in the quantity or improvement in the quality of CELL
What are the benefits of economic Growth
- Higher per capita income leading to higher living standards
- higher levels of employment through higher participation rate as more workers are needed to meet the increased AD
- higher levels of savings for future investment
- greater taxation revenue for govt.
What are the costs of economic growth
- Damaging to the environment, with more demand meaning more production and more pollution
- Higher structural unemployment due to large changes
- increasing levels of income inequality with benefits concentrated at the top, with those who own businesses
- higher levels of inflation
- Higher levels of imports, leading to depreciated dollar
- emphasis on materialism over morals
- unbalanced growth can occur with capital being underutilised
what are the three types of govt policies and describe them
Fiscal policy is a form of macroeconomic policy, directly affecting the government spending, with lower spending(contractionary) reducing the AD, and higher spending increasing AD
Monetary policy is another form of macroeconomic policy, which is done through the setting of the cash rate by the RBA
Microeconomic policy ensures AS remains on pace with the AD, with large imbalances needing to be solved through government expenditure into CELL through market reforming
What is inflation
The general increase in price levels within a particular economy
Whats the measure of inflation
the Consumer Price Index(CPI) is the measure, with is summarising the movement of prices of a basket of goods and services, weighted according to their significance for the average Aus household
CPI formula
CPI change/Previous CPI *100
Headline vs Underlying Inflation
Headline inflation is the raw inflation, not adjusting for any outliers or one-off factors
Underlying inflation is adjusted for outliers, removing the effects. This means it is less volatile than headline inflation
Whats demand-pull inflation
Demand-pull inflation occurs when:
When Aggregate deamdn exceeds aggregate supply of an economy, prices are driven up to deter consumption from increasing further. This is due to firms not being able to meet the increased level of demand in the short term.
Whats Cost-Push Inflation
Cost push inflation is when theres an increase in the costs of the factors of production, leading to firms passing costs onto consumers
Whats inflationary Expectations
If individuals expect higher inflation, they may act in a way to increase inflation- aka speculation
eg. Prices expected to increase
Whats imported inflation
Imported inflation is when there are changes with international transactions and export markets around the world
(cost-push inflation)
What are the effects of inflation
- it discourages business investment
- but low inflation incentivises investment
- high inflation distorts decision making of consumers, as purchasing power is reduced
whats the effect of inflation on wages
if purchasing power decreases then wage demands will increase, and more wages means higher costs for firms, pass onto consumers leading to wage-price inflationary spiral
Analyse the effect of cyclical unemployment
Cyclical unemployment rises in a recession as spending and GDP growth fall, causing employers to lay off some existing workers and cease hiring new workers.
Define Cyclical unemployment
a lack of employment as a result of changes to an economy’s business cycle.
Define Frictional unemployment
form of unemployment reflecting the gap between someone voluntarily leaving a job and finding another.
define Seasonal unemployment give two examples
Seasonal unemployment occurs when people are unemployed at particular times of the year when demand for labour is lower than usual.
Apple Picker, Ski teacher
Define underemployment
a measure of the total number of people in an economy who are unwillingly working in low-skill and low-paying jobs or only part-time
define hidden unemployment
when people are not officially counted as unemployed, but would probably work if they had an opportunity.
cause of cyclical unemployment
deficiency in aggregate demand
whats the effect of inflation on unemployment
if inflation goes up govt do contractionary tings like higher interest rates, AD decreases so businesses will lay off workers, leading to higher unemployment
Define the NAIRU
non-accelerating inflation rate of unemployment: the rate of unemployment at which inflation is neither accelerating nor decelerating: Also called: natural rate of unemployment.
What Policies reduce unemployment
Stimulatory monetary policy through cuts to interest rates by the Reserve Bank of Australia;
Expansionary fiscal policy through an increase in government spending and/or cuts in taxes;
Industrial relations policy or wages policy to contain the growth in aggregate wages; and
Microeconomic reform policies to improve the economy’s resource allocation and productivity.
Causes of unemployment are?
A deficiency in aggregate demand leads to a deflationary/unemployment gap in the economy;
Structural changes in production, consumption and technology may make some labour redundant due to a mismatch of labour skills demanded by employers and the skills supplied by the labour force; and
Excessive wage expectations may lead to rising wage costs for employers and lower demand for labour, causing some employers to substitute capital for labour in production.
Main groups affected by unemployment
young people; women with children, workers with low levels of education, skills and training; blue-collar workers in manufacturing; migrants from non-English speaking backgrounds; and Aborigines and Torres Strait Islanders.
Define distribution of income/wealth
The distribution of income and wealth is a reflection of how the benefits of economic growth including rising real incomes are shared amongst the population as a whole.
How is distribution of income and wealth measured
The distribution of income and wealth is measured by economists through the construction of a Lorenz Curve showing shares of income or wealth for equal groupings of the population such as 20% quintiles.
Define the gini coefficient
the extent of inequality in the distribution of income or wealth over time. The Gini coefficient varies in value from zero to one. A rise in the value (towards unity) of the Gini co-efficient implies an increase in inequality, whereas a fall in the value (towards zero) of the Gini co-efficient implies a reduction in inequality
What are the main sources of income in Australia?
compensation of employees (wages and salaries); gross operating surplus and mixed income (profits from business enterprises); property income (rent, interest and dividends); and social benefits receivable (pensions, allowances, Job Seeker and other transfer payments) paid by the government to households with zero or low levels of income
What are the main sources of wealth in Australia?
The main sources of wealth or net worth in Australia include owner-occupied dwellings and other property; the value of superannuation; the value of businesses; the value of household contents; financial accounts; shares, trusts, debentures and bonds; and the value of motor vehicles.
Social benefit of income inequality?
u can use all types of policies to deal with inflation
