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economics yr 12 > topic 3 > Flashcards

topic 3 Flashcards

1
Q

what are the functions of the government

A
  • stabilising economic activity (fiscal&monetary)
  • resource allocation (fiscal)
  • redistribution of income (fiscal)
  • market regulation (legislation)
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2
Q

why does government intervene

A

government does this to prevent market failure: resources not always allocated by operation of price mechanism to achieve maximum utility

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3
Q

how government stabilises economic activity through

A
  • economic growth (change in GDP&AD)
  • internal balance (balancing INF&U/E)
  • external stability (BOP, net debt, exchange rate stability)
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4
Q

how government redistributes income through

A
  • to fix excessive inequality by balancing incentives (efficiency) vs equity (fairness)
  • want to bridge income gap through progressive tax system and transfer payments
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5
Q

how government redistributes environmental regulation

A
  • managing externalities
  • intergenerational equity
  • policies conflict with EG/UE
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6
Q

6 economic issues

A
  1. economic growth
  2. inflation
  3. unemployment
  4. environment
  5. external stability
  6. inequality
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7
Q

quality of life meaning

A

a qualitative concept of wellbeing

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8
Q

sustainable economic growth meaning

A

government’s aim for sustainable economic growth which doesn’t impact other indicators and raises quality of life
- trade off between current GDP and future GDP

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9
Q

2 key factors of internal stability

A
  • full employment (no cyclical employment and aim to achieve U/E rate near NAIRU)
  • price stability (by managing inflation)
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10
Q

managing external stability 3 key factors

A
  • current account position
  • net foreign liabilities
  • exchange rate volatility
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11
Q

intergenerational equity

A

leaving the environment for the next generation in at least as good condition as the present –> future generations can enjoy the same quality of life

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12
Q

what are macroeconomic policies

A

are mainly focused on stabilising economic activity on the demand side
- mainly short or medium term things

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13
Q

fiscal policy definition

A

the use of government expenditure and taxation revenue to influence AD, the allocation of resources distribution of income

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14
Q

budget outcome definition

A

summary of government expenditure and revenue for a year

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15
Q

fiscal stance definition

A

the relationship between budget outcome over the years

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16
Q

monetary policy definition

A

aim to use interest rate changes to stabilise aggregate (AD) level of economic activity
- RBA manipulates the cash rate influences money supply –> flow on effects

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17
Q

microeconomic policy definition

A

are mainly focused on stabilising economic activity on the supply side (AS) and targets improving Australia’s productivity

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18
Q

allocative efficiency definition

A

when resources are distributed so that the net benefit to consumers is maximised –> resources given to most productive suppliers

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19
Q

technical efficiency definition

A

when productive output is increased from a set volume of resources

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20
Q

dynamic efficiency definition

A

the economies ability to adapt to changing economic conditions –> strong short-term performance while also improving long-term goals

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21
Q

what are the areas of micro-reform

A
  • deregulation (removal of government controls over a sector over product and factor market)
  • privatisation (sale of state owned enterprises)
  • legislation (to increase economic liberalisation)
  • competition policy (competition & consumer)
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22
Q

economic management conflicts

A
  • price stability & full employment (wage price spiral)
  • price stability & economic growth (AS<AD therefore INF)
  • EG & external stability (increase in M worsens AD)
  • EG & environment (increase EG from resource consumption)
  • EG & distribution of income (increase inequality as EG increases)
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23
Q

economic management compatibilities

A
  • INF & external stability (improving CAD)
  • EG & full employment (increase demand for output)
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24
Q

economic growth definition

A

refers to the increase in output (GDP) of an economy over a period of time
- an outward shift in the PPF can demonstrate EG

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25
Q

what can cause an outward shift in PPF can be from

A
  • additional resources
  • resources increase their productivity
  • technology improves
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26
Q

if conA>capA

A

increase short term SOL, decrease long term SOL

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27
Q

if conA<capA

A

decrease short term SOL, increase long term SOL
- capital goods help move curve outwards

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28
Q

capital widening meaning

A

capital grows with pace of labour workforce therefore EG increases while productivity is the same

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29
Q

capital deepening meaning

A

capital per worker grows greater than labour force therefore EG and productivity increases

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30
Q
  • POG
  • NOG
A
  • actual output»potential output
  • actual output«potential output
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31
Q

real GDP definition

A

quantitive measure of the increase in output of an economy after adjusting for inflation

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32
Q

economic growth formulas

A
  • real GDP ($) = nominal (money value) GDP x Base CPI/Current CPI
  • EG (%) = current GDP - prior real GDP/prior real GDP x 100/1
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33
Q

revision economic growth formulas

A

Y=C+S
Y=O=E
1=MPS+MPC
O=C+I
C+I=C+S
AD=C+I+G+X-M

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34
Q

to reach equilibrium at AD=O=Y

A
  • if AD>current O&Y then increase in EG
  • if AD<current O&Y then decrease in EG
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35
Q

what did keynes do

A

keynes identified that AD was the leading FOP changes and that the difference between leakages and injections would change O&Y and stop at a new equilibrium level of national income

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36
Q

consumption function and 3 sector model formulas

A

C = Co + mpcY
S = -Co +mpsY
AD = Co + I + mpcY

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37
Q

what is the k-multiplier

A

k-multiplier is a relationship between the change in AD component and the change in national equilibrium level of income as when a leakage or injection changes, there is a magnified affect on the change in income
- due to AD=Y=O and leakages=injections equilibrium)

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38
Q

k-multiplier formula =

A

1/mps = 1/1-mpc = change in income/change in AD component

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39
Q

change in equilibrium income formula

A

= k-multiplier x change in AD component

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40
Q

characteristics of k-multiplier

A
  • inversely related to MPS
  • works for any changes in AD components
  • takes time to work
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41
Q

inflation definition

A

inflation is a sustained increase in prices of G&S over time
- fall in purchasing power of money
- measured by monitoring the price of a selected basket of metropolitan G&S sorted into 11 regimes

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42
Q

inflation formula (%)

A

current yrs CPI - prior yrs CPI/prior yrs CPI x 100/1

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43
Q

headline inflation meaning

A

raw inflation figure as reported through the CPI without removing ‘volatile’ price movements
- more commonly used

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44
Q

what is the consumer price index

A

weighted index numbers are used to convert the price movement of a wide range of common metropolitan household items into a measure of the rate of inflation

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45
Q

why is CPI not accurate

A
  • basket content is subjective
  • calculated quarterly (RBA meets monthly)
  • excludes FOP and raw materials
  • lagging indicator of changes in spending
  • mortgages (50% of household expenses) are NOT in CPI
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46
Q

core or underlying inflation definition

A

is measured by taking the CPI outcome and excluding volatile and other items such as government charges
- less commonly used

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47
Q

broad structural causes of inflation

A
  • demand pull –> demand for G&S rises
  • import inflation –> import prices rise
  • cost push –> cost of production rises hence G&S price rises
  • expectations –> speculation about inflation
  • quantitive easing
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48
Q

demand pull inflation drivers

A

C (income, interest rates)
I (profit, interest rates)
G (fiscal, monetary policy)
X (int. comp., TOT, fx rates)
M (NY and other economies demand)

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49
Q

demand pull inflation graphically

A

AS and AD demand graph
- AD shifts right

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50
Q

cost push inflation drivers

A
  • mainly by increasing labour costs
  • increasing raw material cost
  • costs passed onto consumers
  • increasing interest rates
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51
Q

import inflation meaning

A

caused by increases in the price of tradable products imported into Australia

52
Q

import inflation drivers

A
  • price rises for G&S in the exporting country
  • a depreciation of AUD
53
Q

expectations drivers

A
  • households expect an INF increase they will increase C (demand pull) –> therefore INF increases
  • if workers expect an INF increase they will ask for higher wages (cost push) –> therefore INF increases
54
Q

specific causes of higher INF

A
  • high wages and non-wage benefits
  • depreciation of AUD
  • increased food prices from natural disasters
  • supply constraints (restricted warehousing to avoid surplus)(transport constraints)
  • government intervention (higher protection) (GST and carbon tax)
  • high oil prices
55
Q

negative effects of inflation on firms

A
  • increased production costs (some cost passed to consumers, some absorbed by firms hence reduce profit margins)
  • loss of international competitiveness (higher X prices)
  • loss of profitability and market share (discourages firms investment in long term growth)
56
Q

negative effects of inflation on households

A
  • loss of real wages (erodes purchasing power, decrease SOL)
  • impact of C&S (increase C due to increase prices, decrease savings)
  • low distribution of Y
57
Q

negative effects of inflation on government

A
  • weaker fiscal position (increase welfare payments)
  • may implement contractionary macroeconomic reform
58
Q

positive rationale for inflation

A
  • stimulates wage growth hence consumer confidence
  • better than deflation
  • increases asset price growth and interest rates increase profit
  • signal that economy is strong
  • real value of debt decreases overtime
59
Q

sources of economic growth (IGA)

A
  • international competitiveness (high human capital, improved FOP efficiency)
  • government policies (favourable institutional features)
  • AD components (increase 5 components e.g X, I)
60
Q

consumption factor of AD in EG

A
  • as national Y increases, consumption increases
  • consumption function: CT=C0+mpcY
  • as interest rates increase, consumption decreases, increase savings
61
Q

investment factor of AD in EG

A
  • taking advantage of efficiencies and technology
62
Q

gov. spending factor of AD in EG

A
  • usually counter-cyclical to maintain AD
  • spending via discretionary fiscal policies & non-discretionary automatic stabilisers
63
Q

exports/imports factor of AD in EG

A
  • increase exports from strong global economy
  • int. comp. story through fx rates
  • increase imports from strong Australian economy
64
Q

key factors of international competitiveness

A

P = productivity (economies of scale) and capital deepening)(workers can ask for wage rises without inflation)
Q = quality
R = retail price (fx rate, interest rates, COP)
S = services

65
Q

overall government policies

A
  • macroeconomic (fiscal, monetary)
  • microeconomic
  • government (institutional) options (e.g protection, infrastructure, labour, - national competition reforms)
  • structural focus areas (capacity
    constraints, skill shortages, bottlenecks in production)
  • institutional policy changes (privatisation, nationalisation)
66
Q

economic growth positive “big picture impacts”

A
  • nations (environment, exports, poverty)
  • governments (taxation, spending)
  • firms (investment, productivity growth=labour, technological process=capital)
  • households (leisure, savings, consumption, income)
67
Q

economic growth negative “big picture impacts”

A
  • external stability (increase imports and CAD, higher borrowing costs, int. comp. hurt if inflation)
  • environmental sustainability (pollutes ecosystems, depletes resources, externalities)
  • price stability/inflation (demand pull from AD increase, cost push from U/E decrease, inflationary expectations from EG increase, import inflation from increase in imports)
  • employment (structural U/E, capital investment, declining industries)
  • equitable dist. of income (widens inequality gap)
68
Q

conflicts between eco growth indicators

A
  1. inflation and EG
  2. inflation and full employment (cost push inflation)
  3. external stability and EG (import and AUD value increase) (CAD management is key)
  4. environmental stability and EG (increase consumption of resources)
  5. equitable dist. of income and EG (skewed growth, wealth gap)
69
Q

future growth in aus

A

since resources boom is over, growth from:
- LNG resources goods (becoming largest exporter)
- beef agriculture goods (beef imports to China)
- tourism services (focus on Asian market)
- investment

70
Q

measures of external stability

A
  • the CA as a % of GDP (CAD or CAS)
  • net foreign debt as % of GDP
  • net foreign liabilities as % of GDP
  • stability of AUD Fx rate (countercyclical)
  • Int. comp.
  • TOT
  • IMF
71
Q

external stability definition:

A

occurs when an economy can meet its short term and long term financial obligations with the rest of the word without concerns

72
Q

long term government stabilisation policies:

A
  • structural = not relying on one export (widening export base)
73
Q

why is CAD bad?

A
  • high CAD = risky investment as country might not manage debt servicing ratio
  • to still attract FDI, countries pay ‘risk premuim’ = higher interest rates
74
Q

australia’s CAD is OK

A
  • has CAD for 40 years
  • btw -3 to -6% of GDP
  • -6.4% before GFC but rose because of GFC
  • CAD is ok (one of 10 countries with AAA average rating from S&P, moodys and fitch)
  • S&P downgraded to AA in 2020
  • pitchford thesis
  • low debt servicing ratio (temporarily high due to inflation)
  • 55% of imports are intermediate goods to grow aus economy
75
Q

net foreign debt as % of GDP

A

two key measurements:
1. net foreign debt as % of GDP
2. debt servicing ratio (interest payments as proportion of export revenue)

76
Q

debt v liabilities

A
  • government bonds (dont come with ownership right but increase investment) are debt instruments
  • FDI of shares and stocks (have ownership rights) are equities (equity asset = shares we hold, equity liability = shares foreigners hold)
  • net foreign liabilities are (foreign debt + foreign equity)
77
Q

stability of fx rate –> depreciaiton

A
  • increase import prices (intermediate goods), increase COP
  • capital outflows “hot money” –> seek more stable economies –> creates swings
  • short run worsens BOGS (imports expensive, exports cheaper)
  • long run improves BOGS (decrease M C and increase X demand)
  • valuation effect = increase debt servicing ratio and worsens NPY
78
Q

TOT

A

export price index/import price index

79
Q

AUS TOT

A
  • post-mining boom increase in export to asia = e.g china, india, japan growing economies
  • asian nations comparative advantage in labour = manufactured goods remain same price
80
Q

int. comp.

A

PQRS (productivity, quality, retail price, service)
- as int. comp. increases = bogs and cad improves

81
Q

why does aus have high cad/debts

A
  • MAIN STORY: NET IMPORTER OF CAPITAL due to low savings, small population and favourable EG
  • globalisation
  • low savings gap/small population
  • mining boom
  • depreciation of AUD
82
Q

why is aus moving toward cas

A
  • mining boom (2011-13) is over (no more investments as mines are made) –> now increase in exports
  • move toward CAS
83
Q

specific aus high cad reasons

A
  • NPY (high FDI)
  • BOGS: narrow export base, inability to compete with asian nations, agricultural exports struggle due to EU/US protections, increase imports spending (sustained EG), services suffered from narrow base and appreciating AUD
84
Q

CAD effects –> disadvantages

A
  • only problem if BOG or NPY become unsustainable (e.g greece 2008-15 250% of GDP in debt –> gov only focused on ext. stab)
  • higher liabilities
  • higher capita outflow (hot money to invest in more stable country)
  • depreciation (capital outflows and low consumer confidence)
  • increased foreign debt (servicing ratio/debt trap) –> (valuation effect from depreciation) –> worsens CAD (NPY)
  • downgrading credit rating (AUS to AA from S&P) –> harder to attract capital inflow
  • higher interest rates (e.g george soros)
  • high interest rates or risk premium –> attract FDI
  • vulnerable to financial contagion (IMF assistance–> austerity)
  • policy restraints on countries GOV e.g high cash rate
85
Q

debt cycle

A

increase borrowing = increase debits in CA (NPY worsens) = high CAD = increase K inflows = increase CAD

86
Q

pitchford thesis

A

CAD is not a problem in australia due to attractiveness of australia for foreign savings
- net importer of capital for productive use to grow economy
- private company borrowing has nothing to do with government –> doesn’t affect

87
Q

neutral effect of CAD

A
  • CAD is not a risk (not worthy of gov policy changes –> should focus on internal)
  • pitchford thesis
  • AAA rating
88
Q

positive effect of CAD

A
  • help industries grow and invest in capital to increase productivity –> generate EG
  • beneficial as long as return on investment is higher than cost of borrowing
  • pitchford thesis
89
Q

working age population def

A

those 15 years and older in the population

90
Q

labour force def (hidden u/e)

A

those 15 and over who are working or actively seeking work
- not in labour force (retirees, given up, stay at home parents, rich, children)

91
Q

employed def

A

those 15 and over working at least one hour a week paid or unpaid in a family business or are on unpaid leave

92
Q

unemployed def

A

those 15 and older out of work who are willing, able and actively seeking work

93
Q

u/e rate calculation x100

A

total unemployment / labour force (unemployed + employed + underemployed)

94
Q

labour force participation rate calculation x100

A

labour force (unemployed + employed + underemployed) / working age population

95
Q

types of U/E

A
  • cyclical: caused by AD contraction < O = EG decrease = less labour derived demand
  • structural: mismatch of skills of u/e vs those needed in economy
  • long term: unemployed for more than 12months (out of touch with job)
  • hard core: those people incapable of performing well
  • hidden: are a part of the ‘not in labour force’ that can be tempted to join labour force (through policies higher min wage, increase EG, etc.)
  • youth: those part of labour force and under 25 who are unemployed (lost opportunity to build human capital)
96
Q

3 types of full employment

A
  • only structural u/e
  • NAIRU
  • no cyclical u/e (only structural, frictional and seasonal)
97
Q

types of productivity

A
  • single factor productivity: output per single input
  • multifactor productivity: output per all input
98
Q

okun’s law

A

the rate of EG must exceed the contribution of productivity growth and workforce growth for u/e rate to fall

99
Q

keynesian function

A
  • gaps: difference between full employment level of output and actual output
  • deflationary gap: (spending in economy < all output produced under Yfull) (AS>AD) (Yfull > Ye) = cyclical U/E
  • inflationary gap: spending in economy > all output produced under Yfull (AS<AD) (Yfull<Ye) = hiring structurally u/e = inflation
100
Q

drawing keynesian function

A
  • expenditure (AD) on y-axis
  • national income on x-axis
  • AS=Y line at gradient 45
  • draw Ye and Yfull
  • draw line through Ye as AD
  • draw line through Yfull as where it should AD should be
101
Q

how do unions cause structural u/e

A

create wage floors = labour surplus = firms layoff workers = not accurate due to workers inelasticity

102
Q

phillips curve def

A

shows the inverse relationship between u/e and inflation
- only one regression line hence strong relationship

103
Q

short run phillips curve drawing

A
  • y-axis is wage growth inflation
  • x-axis is unemployment
  • downward sloping curve
  • when curve touches y-axis = NAIRU point
  • left of curve hiring structural u/e increase inflation
  • right of curve cyclical u/e decreasing inflation
104
Q

stagflation def

A

when an economy experiences both high inflation and u/e (e.g oil shock of 1973)
- from supply side issues

105
Q

movement of/in phillips curve

A

moving along curve = expansion or contraction = from change in u/e
moving of curve = increase or decrease = from change in gov policy, etc.

106
Q

gov policy regarding short run phillips curve

A

try to move it outwards which sets inflationary expectations = ask for higher wages = high inflation = increase u/e from firms high costs
- cycle repeats
- get long run phillips curve representing NAIRU (vertical)

107
Q

NAIRU definition

A

unemployment rate which doesn’t affect inflation hence labour market contribution to inflation is 0%

108
Q

income def

A

a flow concept. the flow of funds or money from market and non-market sources.
- wages/salaries (55%) = earned
- rent, profit & interest/dividends - from land/entreprenuership/capital (28%) = unearned
- welfare payments (11%) = unearned
- other transfers (6%) = unearned

109
Q

wealth def

A

a stock concept. the value of real and financial assets owned by an individual at a particular point in time
- can be measured by reference to type of asset representing the stock (property, cash, shares, etc.)

110
Q

inequality in income distribution def

A

the unevenness in the way income is dispersed in the economy
- graphically represented through lorenz curve
- calculated through gini coeff (total equality = 0, total inequality = 1)

111
Q

lorenz curve def

A

a graphical representation of the level of inequality in the distribution in the economy
- take everyones income and rank from lowest to highest
- divide into 5 quintiles and calculate total incomes of each
- cumulative % of household income
- cumulative % of households

112
Q

gini coeff def

A

the proportion of the area taken by the lorenz curve in relation to the overall area under the line of equality

113
Q

net assets

A

real+financial assets - liabilities (debt)

114
Q

poverty cycle

A
  • those with low income = low wealth
  • wealth generates income = save more = accumulate assets
115
Q

causes on inequality

A
  • economic systems (free market)
  • wealth
  • life opportunites (human capital)
  • taxation and welfare (safety net)
  • demographics (proportion under 25)
  • institutional factors (gov corruption)
  • unearned income growth > earned income growth
116
Q

redistribution of income gov objective

A
  • progressive tax
  • means tested welfare payments to low income earners
  • social wage (public transport, health, education, etc.)
117
Q

poverty def

A

an enforced lack of socially perceived necessities to achieve an adequate SOL (absolute and relative)
- poverty line = 50% of median income

118
Q

taxation catergories

A
  • progressive tax: use of varying tax rates for taxing income whereby higher income earners pay progressively more tax than low income earners. This is achieved by dividing income into Tax brackets.
  • Proportional tax: fixed single tax rate applied to taxable income
  • regressive tax: low income earners pay a higher % of their income in tax than do high income earners –> increase inequality
119
Q

horizontal equity
vertical equity

A

everyone on same level of income pays the same tax
more tax brackets

120
Q

policy areas for wealth

A
  • inheritance/death/property taxes
  • education opportunties (student debt decrease)
  • universal healthcare
  • remove unfair concessions
121
Q

policy areas for income ineq

A
  • increase welfare payments
  • increase minimum wage
  • tax reform
122
Q

gender pay gap

A
  • Fewer opportunities for women to acquire education, skills and qualification
  • accumulate lower super balance –> paid lower, longer care breaks, maternity leave
123
Q

age wealth and income gap

A
  • older ppl are more wealthy than younger ppl
  • 45-54 = maximum income earning 15-19 = minimum income earning
124
Q

factors affects wealth and income

A
  • age (older = more wealth/middle age = more income)
  • gender (man = more)
  • ethnicity (english speaking/skilled migrant = more)
  • family structure (couple without children = more/single parent = less)
125
Q

economic costs of inequality

A
  • diminishing marginal utility (rich people get less utility from wage rises)
  • reduce EG (poor ppl have higher MPC –> consume more –> increase AD) (poor ppl have less education –> less human capital and EG)
  • creates poverty and social (poverty cycle = decrease labour force participation)
  • increases cost of welfare
126
Q

social costs of inequality

A
  • social class divisions = higher crime
  • poverty = suicide, disease, reduced life expectancy
127
Q

economic benefits of inequality

A
  • increased human capital
  • increased productivity
  • increased savings and capital formation

economics yr 12 (12 decks)

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