Topic 1: The operation of an economy Flashcards
What are the factors of production?
Land, Labour, Capital, Enterprise
What are the rewards for the factors of production?
Land: rent
Labour: wage
Capital: interest
Enterprise: profit
What is Land?
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.
What is Labour?
Physical and mental human effort.
Wage includes: regular weekly payments, executive salaries, commissions, fees for professionals and the earnings of self-employed.
What is Capital
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)
What is enterprise?
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.
Explain how Interest is the reward for Capital
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).
Define ‘Gross Domestic Product’ (GDP)
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.
Why dont mkt economies try to distribute output equally among society?
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.
What is ‘barter’?
Barter is the non-cash exchange of G&S but it is a rare occurrence nowadays.
What is the five-sector circular flow of income model?
It describes the operation of the economy and the linkages between the main sectors of the economy.
What are the five sectors in the circular flow of income?
Individuals, Businesses, Financial Institutions, Governments, International Flows
what are injections
flows of money that increase aggregate income and level of ec
what are leakages
leakages are items that remove money from the circular flow of income, decreasing aggregate income and level economic activity
leakage and injection for financial institutions
leakage: savings -
injection: investment
leakage and injection for governments
leakage: taxation
injection: expenditure
leakage and injection for international flows
leakage: imports
injection: exports
How do individuals contribute to the circular flow of income
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.
How do businesses contribute to the circular flow of income
(not including financial services) all businesses engaged in the prod’n and sale of G&S
businesses and individuals are interdependent.
How do financial institutions contribute to the circular flow of income
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.
How do governments contribute to the circular flow of income
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
what else is the government sector called?
public sector
public sector + private sector =?
domestic sector
How does international flows contribute to the circular flow of income
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.
define equilibrium
injections = leakages
define disequilibrium
injections do not = leakages
what happens when injections>leakages
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.
what happens when injections<leakages
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.
equilibrium formula:
savings(S) + tax(T) + imports(M) = investment(I) + Gov Expenditure(G) + Exports(X)
What is the business cycle?
fluctuations in the level of economic growth due to either c or international factors
Recession:
stage of decreasing econ activity (2 consecutive quarters of negative econ growth)
Boom:
stage of increasing econ activity (2 consecutive quarters of positive econ growth)
impacts of recessions:
falling prod’n of G&S
falling levels of consumption & investment
rising unemployment
falling income levels
falling quality of life
impacts of booms:
rising prod’n of G&S
rising consumption & investment
falling unemployment
rising income levels
rising quality of life
