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rwfegtbrwhyn > Test > Flashcards

Test Flashcards

1
Q

The key objectives when managing the economy are

A

Sustainable economic growth
Price stability (low inflation)
Full employment (low unemployment)

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2
Q

Economic growth

A

The increasing capacity of the economy to satisfy the wants of its members. It is about improving living standards for future generations. The sustainable component means the natural environment is preserved. Growth measured by GDP - 4% per annum

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3
Q

The increasing capacity of the economy to satisfy the wants of its members. It is about improving living standards for future generations.

A

The sustainable component means the natural environment is preserved. Growth measured by GDP - 4% per annum

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4
Q

Price Stability

A

Occurs when the inflation rate is low. The official target by the RBA is 2-3%. Inflation adversely affects decision making for both households and firms, reduces international competitiveness, distorts income distribution and influences resource allocation

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5
Q

Occurs when the inflation rate is low. The official target by the RBA is 2-3%. Inflation adversely affects decision making for both households and firms,

A

reduces international competitiveness, distorts income distribution and influences resource allocation

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6
Q

Full employment

A

occurs when everyone in the workforce who is willing to work can find employment. theres always some unemployment because some people will be between jobs. natural rate of unemployment is about 4.5%

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7
Q

The rates of economic growth, inflation and unemployment are used to measure the performance of the economy.

A

Its not possible to achieve all the objectives together because they’re not compatible.

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8
Q

Measuring GDP is the most common measure of economic performance.

A

GDP is the total value of all final goods and services produced in a country during a period of time (1 year). The absolute value of gdp is unimportant, rather the trend in GDP data or rate of change is useful

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9
Q

Nominal GDP

A

using current prices, not accounting for inflation

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10
Q

Real GDP

A

an inflation-adjusted measure

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11
Q

The effect on price level. changes in price level (inflation) will distort GDP figures.

A

the monetary value of transactions is equal to quantity sold multiplied by price. if price increases but quantity sold remains constant then on the surface it appears that monetary value increased but no real growth occured

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12
Q

the effect on changes of population. as the population grows any increase in GDP has to be shared amongst more people.

A

adjusting for population growth allows us to identify the effect of growth on the individual. real gdp per capita is the most useful measure of growth

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13
Q

gdp doesnt account for:

A

improvements in working conditions, non market (non paid) work, changes in import/export prices, non material quality of life

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14
Q

gdp doesnt describe how the benefits

A

of growth are distributed

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15
Q

gdp doesnt measure improvements

A

in quality (utility) of goods

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16
Q

determinants of economic growth (supply) the potential rate of growth over time is determined by the 4 factors of production. land, labour, capital and entrepreneurship.

A

that is the stock of natural, human and capital resources available for use in production. as well as how they are managed (enterprise). the quantity and quality of this stock also determines the potential of growth

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17
Q

stock of natural resources (land and minerals) play a role in the early stages of economic development

A

the quantity and quality of the natural resources affect how much potential sales can occur. enterprise/entrepreneurship (management) can be applied to increase productivity

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18
Q

stock of human resources, increasing quality and quantity (human capital) of human resources leads to growth because it

A

increases production capacity (supply) and demand for goods and services (demand)

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19
Q

migration can also increase the quality of labour force through education, training and skills

A

quality of labour force can be improved by increasing education participation rates
increasing participation of women the size of the labour force has increase

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20
Q

human capital (quality) can be defined as the stock of

A

knowledge and skills that people develop through education and experience

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21
Q

human capital (quality) can be defined as the stock of knowledge and skills that people develop through education and experience. developed by:

A

provision of basic building blocks of a productive workforce (schools, hospitals)
education which develops skills, knowledge and understandings for life in general and the workforce
on going training which develops job related skills

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22
Q

the supply side creates the potential for economic growth.

A

the actual rate of growth at any point in time depends on the willingness of people to buy goods and services produced (demand side)

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23
Q

benefits of economic growth

A

increasing real income and material welfare
more economic opportunities (sales)
taxation dividend to govt which enables more spending
higher quality goods and services

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24
Q

higher quality goods and services

A

growth is associated with improvements in resource use efficiency because it promotes knowledge, skills, productivity and technological change. these lead to higher quality goods and services being available

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25
Q

costs

A

may not raise living standards of everyone in the community
structural change in the economy
inflationary pressure
social costs
economic bads and goods

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26
Q

costs economic growth - may not raise living standards of everyone in the community

A

unequal distribution of wealth due to growth, gap may widen

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27
Q

costs economic growth - structural change in the economy

A

changes in the types of employment available due to changes in how products are made and what is demanded by consumers

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28
Q

costs economic growth - social costs

A

higher levels of material welfare that we enjoy as a result of growth have been associated with materialism - where people measure their welfare by the number of material possessions they own. also associated with social problems like crime, stress-related diseases, suicide and loneliness

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29
Q

costs economic growth - economic bads and goods

A

environmental problems, GDP doesnt account for climate change, pollution and resource depletion

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30
Q

sustainable economic growth

A

a rate of growth which can be maintained without creating other significant economic problems especially for future generations

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31
Q

economic sustainability

A

people should be able to find decent jobs which fund their needs and support others in their community

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32
Q

Free trade agreements (FTAs) are agreements between 2 or more countries with the purpose of reducing or even eliminating barriers to trade and investment.

A

these barriers include tariffs (taxes on imported goods that increase their cost), quotas (limits on the quantity of a good that can be imported), and subsidies (government payments or incentives that give an unfair advantage to domestic producers)

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33
Q

How do you as an individual benefit from global trade?

A

Access to a wider variety of goods and services
Lower prices
Higher quality products
Job opportunities

34
Q

How do businesses benefit from global trade?

A

Increased market access (expanded)
Lower production costs
Access to new resources and suppliers
Increased competitiveness

35
Q

When looking at GDP, we first look at the total for the year and compare it over time. When GDP is increasing the economy is said to be growing,

A

whereas when it is falling, the economy is contracting. This tells us how we are progressing economically as a country.

36
Q

The problem with using GDP on its own is that it does not take into account that countries with bigger populations would have bigger GDP simply based on the levels of transactions.

A

This can be adjusted by determining the GDP per capita.

37
Q

Effectively this divides the GDP by the population and gives a number that is the dollar value per citizen,

A

which can then be compared between countries. However, this is not a perfect tool for comparison because it does not account for income inequality within a country.

38
Q

unemployment rate

A

The unemployment rate is the percentage of the labor force that is currently unemployed but actively seeking employment.

39
Q

labour force

A

The labor force includes all individuals who are either employed or actively looking for work. The unemployed are those who are not working but are actively seeking employment, and are available to start work immediately.

40
Q

The Australian government aims to have an unemployment rate around

A

5% or lower.

41
Q

There is an inverse relationship between Economic Growth and Unemployment.

A

As Economic Growth (or GDP) increases, unemployment will decrease.

42
Q

Peak

A

The highest point of economic growth, where the economy is growing at its fastest rate.

43
Q

Contraction

A

The period of economic decline, where the economy is slowing down or shrinking.

44
Q

Trough

A

The lowest point of economic growth, where the economy has stopped contracting and is about to start growing again.

45
Q

Expansion

A

The period of economic growth, where the economy is growing and recovering from a contraction.

46
Q

High Unemployment

A

During the Contraction phase, unemployment is typically high as businesses lay off workers and economic activity slows down.

47
Q

Low Unemployment

A

During the Expansion phase, unemployment is typically low as businesses hire more workers and economic activity picks up.

48
Q

Referring to the circular flow model, explain how increases in the level of investment expenditure can result in an increase in the level of income.

A

Increase in investment expenditure leads to an increase in aggregate demand because investment expenditure injects new money into the economy, creating demand for goods and services. Businesses respond by increasing production, which leads to an increase in income for households. Households receive income in the form of wages and salaries from businesses. The increased income, in turn, leads to an increase in consumption spending, which further boosts aggregate demand. This creates a multiplier effect, where the initial increase in investment expenditure leads to a larger increase in income.

49
Q

Increase in investment expenditure leads to an increase in aggregate demand because investment expenditure injects new money into the economy, creating demand for goods and services. Businesses respond by increasing production, which leads to an increase in income for households.

A

Households receive income in the form of wages and salaries from businesses. The increased income, in turn, leads to an increase in consumption spending, which further boosts aggregate demand. This creates a multiplier effect, where the initial increase in investment expenditure leads to a larger increase in income.

50
Q

Define consumption spending.

A

Consumption spending refers to the expenditure by households on goods and services. It includes spending on durable goods, non-durable goods, and services.

51
Q

Explain the effects of a low interest rate on the level of aggregate expenditure in Australia.

A

Make borrowing cheaper, which can lead to an increase in consumption spending and investment expenditure.
Reduces the cost of debt servicing, freeing up more income for households and businesses to spend or invest.
An increase in asset prices, such as housing and shares, which can increase household wealth and confidence, leading to higher consumption spending.

52
Q

With reference to aggregate expenditure, explain the effects rising house prices may have on the broader economy. POSITIVE

A

Increase household wealth, leading to higher consumption spending as households feel more confident and wealthy.
Rising house prices can lead to an increase in construction activity, boosting investment expenditure and creating jobs.

53
Q

With reference to aggregate expenditure, explain the effects rising house prices may have on the broader economy. NEGATIVE

A

Reduce housing affordability, leading to a decrease in consumption spending as households allocate a larger proportion of their income to housing costs.
Rising house prices can lead to an increase in household debt, reducing consumption spending and increasing debt servicing costs.

54
Q

Explain the inter-relation between the exchange rate and the level of aggregate expenditure in an economy.

A

Net exports
Import prices

55
Q

Net exports

A

A depreciation of the Australian dollar (AUD) can make exports cheaper and more competitive, leading to an increase in net exports and aggregate expenditure. On the other hand, an appreciation of the AUD can make exports more expensive and less competitive, leading to a decrease in net exports and aggregate expenditure.

56
Q

Import prices

A

A depreciation of the AUD can lead to higher import prices, reducing consumption spending and increasing production costs for businesses. An appreciation of the AUD can lead to lower import prices, increasing consumption spending and reducing production costs.

57
Q

The desirable rate of economic growth is about 3 to 4% per year.
if growth is slower

A

the economy may not be able to fully employ its resources, especially labour. Unemployment will increase higher than desirable.

58
Q

The desirable rate of economic growth is about 3 to 4% per year.
if growth is faster

A

inflation will build as demand for goods and services grows faster than the capacity of the economy to provide them.

59
Q

What is the definition of economic growth?

A

Economic growth is defined as an increase in the productive capacity of the economy.

60
Q

How is economic growth measured?

A

Economic growth is measured by calculating the change in the value of production over time, using the formula: the change in economic growth from one year to another, divided by the original GDP, multiplied by 100.

61
Q

What is the difference between real GDP and nominal GDP?

A

Real GDP is the GDP of a nation after removing the effects of inflation, whereas nominal GDP is the raw GDP value without accounting for inflation.

62
Q

Why is a desirable rate of economic growth around 3 to 4% per year?

A

A desirable rate of economic growth is about 3 to 4% per year because slower growth may lead to higher unemployment, and faster growth may result in inflation due to demand for goods and services outpacing the economy’s capacity to provide them.

63
Q

Real GDP per capita refers to the GDP of a country per person (or per capita).

A

Real GDP per capita is an important concept as it is a measure of a country’s living standards. It reflects the average value of income per person.
As long as real GDP per capita increases over time, then the average living standards will also increase over time.

64
Q

What does real GDP per capita refer to?

A

The GDP of a country per person, adjusted for inflation

65
Q

Why is it important to distinguish between GDP and real GDP per capita?

A

Because GDP per capita may not increase even if total GDP increases due to population growth

66
Q

How is real GDP per capita related to living standards?

A

It shows the average value of income per person, indicating living standards

67
Q

law of diminishing returns

A

The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output

68
Q

rate of inflation may effect

A

Purchasing Power
Business costs
Wages and salaries
Interest Rates
Government Policies
Savings and investment
Income Equality

69
Q

CPI

A

The CPI measures changes in the prices of a basket of goods and services bought by Australian households from one month to another.

70
Q

CPI weighting

A

The CPI applies weightings to each item to ensure that the most important items and the items that contribute a higher proportion of a households expenditure are weighted higher.

71
Q

Consumption

A

Expenditure on non-durable goods – food and clothing
 Expenditure on service - medical and education
 Expenditure on durable goods - furniture and cars

72
Q

Investment: Purchase of capital goods, additions to inventory and housing

A

Business expenditure on new capital equipment
This capital equipment will produce final goods and services in the future
Include spending on new building and housing

73
Q

Government spending

A

Includes all federal, state and local spending on final goods and services, and investment in capital equipment and infrastructure

74
Q

Net exports

A

The value of goods and services overseas minus the value of goods and services brought from overseas

75
Q

Factors affecting consumption

A
  1. Disposable income: higher income = higher consumption
  2. Cost of credit: falling interest rates have positive effect on consumption
  3. Stock of personal wealth: households with property or shares will spend more when
    these are rising
  4. Expectations: how does a country feel about the economy
  5. Government policies
    o Fiscal- tax levels and government spending o Monetary- cost of available credit
76
Q

Factors affecting investment

A

Investment: expenditure on producers or capital goods that are used to produce final goods and services in the future. Private investment is the most volatile element of aggregate expenditure. Investment decisions concern the future as the future is unknown and involves risk.

77
Q

Many factors influence risks, including

A

economic events, political decisions, international events, and changes in consumer tastes. Investment in more efficient equipment often lowers production costs and increases productivity.

78
Q

Nominal rates:

A

the headline price of borrowed money

79
Q

Real interest rate:

A

takes rate of inflation into account

80
Q

Factors affecting government

A

Fairly stable year to year
 Economists not overly concerned with government expenditure
Affected by political and social rather than economic factors

81
Q

Factors affecting exports

A

Exchange rate: are determined by market forces (demand and supply)
Government policy: such as trade restrictions can limit exports into other countries and hinder imports
Overseas business cycle: economic trend in other parts of the world influence the demand for mineral commodity exports
Domestic business cycle: Australia’s imports are elastic with respect to GDP
Terms of trade

82
Q
A

rwfegtbrwhyn (9 decks)

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