the economic environment Flashcards
explain real GDP
Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country’s standard of living.
GDP measures how well the economy produces these goods and services that people find useful—the necessities, conveniences and luxuries of life.
explain the unemployment rate
The unemployment rate can be measured by the number of unemployed people divided by the total labour force (the sum of the unemployed and the employed).
The unemployment rate is the best indicator of how well the economy is doing relative to its productive potential.
There is a direct correlation between the unemployment rate and the GDP growth rate. When the economy has witnessed growth from period to period, as indicated by the GDP growth rate, unemployment levels tend to be lower. This is because with rising (real) GDP levels, the output produced is higher, and hence more employees are required to keep up with the increased levels of production.
explain the inflation rate
A third key economic indicator is the inflation rate i.e. the rate at which prices rise. Inflation is measured in two ways: via the Consumer Price Index (CPI) and the GDP deflator. The CPI provides the current price of a selected basket of goods and services that is updated periodically. The GDP deflator is the ratio of nominal GDP to real GDP. If nominal GDP is higher than real GDP, we can assume that the prices of goods and services have been rising. Both the CPI and GDP deflator tend to move in the same direction and differ by less than 1%.
explain interest rates
Most of the times interest rate refers to ‘cash rate’ set by the Reserve Bank of Australia. However, there are many different interest rates applying to loans of different durations and different degrees of risk.
Whenever interest rates are low—that is, when money is ‘cheap’—investment tends to be high, because businesses find that a wide range of possible investments will generate enough cash to pay the interest on borrowed money, repay the principal of the loan, and still produce a profit.
explain the stock market
The level of the stock market is the key economic indicator you hear about most often. The level of the stock market is an index of expectations for the future. When the stock market is high, investors expect economic growth to be rapid, profits to be high, and unemployment to be relatively low.
explain the exchange rate
The sixth and last key economic indicator is the exchange rate. The nominal exchange rate is the rate at which the currencies of different countries can be exchanged for another. The exchange rate governs the terms on which international trade and investment take place.
When the domestic currency is appreciated, its value in terms of other currencies is high. This makes goods produced overseas relatively cheap for domestic buyers, but domestic-made goods are relatively expensive for foreigners. In these circumstances the volume of imports are likely to be high; the volume of exports are likely to be low.
When the domestic currency is depreciated, the opposite is the case. Domestic-made goods are cheap for foreign buyers. When this occurs, the volume of exports is likely to be high. But domestic consumers’ and investors’ power to purchase foreign-made goods is limited, so the volume of imports is likely to be low.
list the responsibilities of the RBA
The Reserve Bank of AustraliaLinks to an external site. (RBA 2021a) is Australia’s central bank and derives its functions and powers from the Reserve Bank Act 1959.
The RBA’s duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation’s banknotes.
The Reserve Bank Board makes monetary policy decisions in terms of the cash rate (RBA 2021b) (the interest rate on overnight loans in the money market).
The RBA’s Monetary policy decisionsLinks to an external site. (RBA 2021c) in terms of the cash rate then affect a range of other market and institutional interest rates. For further information and details see About monetary policy (RBA 2021d)
list the responsibilities of Australian Competition and Consumer Commission (ACCC)
Australian Competition and Consumer CommissionLinks to an external site. (ACCC n.d.) promotes competition in the financial services sector (as part of its wider brief to regulate competition).
The ACCC regulates national infrastructure services and has the primary responsibility to ensure that individuals and businesses comply with Australian competition, fair trading, and consumer protection laws - in particular the Competition and Consumer Act 2010 (Cwlth).
list the responsibilities of Australian Prudential Regulation Authority (APRA)
The Australian Prudential Regulation AuthorityLinks to an external site. (APRA 2021), which was originally established in 1988, has three main types of powers in regulating financial institutions:
Authorisation or licensing powers.
Supervision and monitoring powers.
Powers to act in circumstances of financial difficulties to protect depositors, policyholders and superannuation fund members, including powers relating to taking control of entities and/or winding up insolvent entities
list the responsibilities of Australian Securities and Investments Commission (ASIC)
The Australian Securities and Investments CommissionLinks to an external site. (ASIC 2021) has broad-ranging powers, which include being able to:
investigate situations where a breach of its legislation might have occurred
prosecute in a criminal court
bring a civil action
apply for a civil penalty order, accept and enforce an undertaking to comply with the law
apply to the Takeovers Panel
disqualify people from managing corporations or dealing in financial services
The four phases of the business cycle are:
Expansion, peak, downswing and recession.
How could the Reserve Bank encourage banks to lend out more of their reserves?
Reduce the interest rate.
The rate the Reserve Bank charges banks for a loan is the:
Cash rate
The use of taxes and government spending to affect the economy is the:
Fiscal policy.
Which policy refers to government revenue, spending and debt?
Fiscal policy.
