Topic 1: The operation of an economy

Question 1

What are the factors of production?

Answer 1

Land, Labour, Capital, Enterprise

Question 2

What are the rewards for the factors of production?

Answer 2

Land: rent
Labour: wage
Capital: interest
Enterprise: profit

Question 3

What is Land?

Answer 3

Land is any natural resources use in the prod’n process.
Rent covers all the income rewards derived from the productive use of land resources.

Question 4

What is Labour?

Answer 4

Physical and mental human effort.
Wage includes: regular weekly payments, executive salaries, commissions, fees for professionals and the earnings of self-employed.

Question 5

What is Capital

Answer 5

Capital is the ‘produced means of production’. Capital G r produced to increase the prod’n productivity for the prod’n of conusmer G & S. Capital G are generally owned privately by firms or individuals. Sometimes they are owed by the community as a whole (eg infastructure)

Question 6

What is enterprise?

Answer 6

Organising the other factors of production together.
Profit is not just revenue earned minus expenses. Entrepreneurs also receive rent for any use of land they own, wages as a return for their labour and interest for any capital invested into the business.

Question 7

Explain how Interest is the reward for Capital

Answer 7

Interest is the reward for capital because when an individual has excess funds, ones deposits said funds to the bank. If an entrepreneur/firm/etc wants to produce capital G, then they would take out a loan from the bank. The money the bank gives them is the same money that came from the deposit of the individual.
The person(s) then bay back the bank loan with interest. The interest is then paid back to the original funder of the loan (the individual who deposited money into the bank).

Question 8

Define ‘Gross Domestic Product’ (GDP)

Answer 8

The total amount of G&S produced in an economy in a given year - total income of a society that is received from the prod’n of G&S.

Question 9

Why dont mkt economies try to distribute output equally among society?

Answer 9

The mkt economy instead rewards individuals for their contribution to the prod’n process. Individuals can then use their rewards to exchange for G&S.

Question 10

What is ‘barter’?

Answer 10

Barter is the non-cash exchange of G&S but it is a rare occurrence nowadays.

Question 11

What is the five-sector circular flow of income model?

Answer 11

It describes the operation of the economy and the linkages between the main sectors of the economy.

Question 12

What are the five sectors in the circular flow of income?

Answer 12

Individuals, Businesses, Financial Institutions, Governments, International Flows

Question 13

what are injections

Answer 13

flows of money that increase aggregate income and level of ec

Question 14

what are leakages

Answer 14

leakages are items that remove money from the circular flow of income, decreasing aggregate income and level economic activity

Question 15

leakage and injection for financial institutions

Answer 15

leakage: savings -
injection: investment

Question 16

leakage and injection for governments

Answer 16

leakage: taxation
injection: expenditure

Question 17

leakage and injection for international flows

Answer 17

leakage: imports
injection: exports

Question 18

How do individuals contribute to the circular flow of income

Answer 18

individuals supply the factors of prod’n (inputs) to produce G&S (outputs). They get rewarded for supplying resources such as labour and enterprise to firms, in the form of rent, wages, investment, and profit.

Question 19

How do businesses contribute to the circular flow of income

Answer 19

(not including financial services) all businesses engaged in the prod’n and sale of G&S
businesses and individuals are interdependent.

Question 20

How do financial institutions contribute to the circular flow of income

Answer 20

institutions engaged in the borrowing and lending of money.
Savings is a leakage because it lessens the money consumers spend on G&S.
Investment is an injection because forgoing current consumption of G&S allows for investments in capital G, improving the future productive capacity of the economy.
The sector is made up of all the financial intermediaries that accept savings (deposits) from individuals and lend them out to businesses for investment purposes.

Question 21

How do governments contribute to the circular flow of income

Answer 21

The government has three levels: commonwealth, state & local.
taxations are injections because it reduces the money individuals have to spend on G&S.
Expenditure is a leakage because is promotes improvements for all of society, leading to more econ activity.
The gov helps satisfy community wants and obtains resources to do so by imposing taxes on other sectors of the econ.
When gov expenditure goes up, so does econ activity

Question 22

what else is the government sector called?

Answer 22

public sector

Question 23

public sector + private sector =?

Answer 23

domestic sector

Question 24

How does international flows contribute to the circular flow of income

Answer 24

exports(X) and imports(M) and international money flows
Imports are leakages because money is withdrawn from the Aust’n econ and paid overseas
Exports are injections because its foreign payments are given to Aust’n businesses - any INFLOW of income stimulates prod’n and employment opportunities.

Question 25

define equilibrium

Answer 25

injections = leakages

Question 26

define disequilibrium

Answer 26

injections do not = leakages

Question 27

what happens when injections>leakages

Answer 27

There will be a downturn in the economy. Leakages will eventually decrease and equal injections over a certain period of time. Equilibrium is then restored at a lower level of income in the circular flow.

Question 28

what happens when injections<leakages

Answer 28

there will be an upturn in the economy. Leakages will eventually increase and equal injections over a certain period of time. Equilibrium is then restored at a higher level of income in the circular flow.

Question 29

equilibrium formula:

Answer 29

savings(S) + tax(T) + imports(M) = investment(I) + Gov Expenditure(G) + Exports(X)

Question 30

What is the business cycle?

Answer 30

fluctuations in the level of economic growth due to either c or international factors

Question 31

Recession:

Answer 31

stage of decreasing econ activity (2 consecutive quarters of negative econ growth)

Question 32

Boom:

Answer 32

stage of increasing econ activity (2 consecutive quarters of positive econ growth)

Question 33

impacts of recessions:

Answer 33

falling prod’n of G&S
falling levels of consumption & investment
rising unemployment
falling income levels
falling quality of life

Question 34

impacts of booms:

Answer 34

rising prod’n of G&S
rising consumption & investment
falling unemployment
rising income levels
rising quality of life