Topic 3 Economic issues Flashcards
1
Q
What is economic growth
A
Refers to increase in volume of goods and services over a period of time
2
Q
How to calculate economic growth
A
Use the percentage change between the GDP from present to previous - > GDP (current) - GDP (previous) / GDP (previous)
3
Q
What was Keyne’s belief?
A
Keyne’s theorey stated the most important influence on economic growth was expenditure (demand) or “aggregate demand”
4
Q
What does AD mean?
A
AD refers to total expenditure of the economy over period of time
5
Q
What about Y mean?
A
Y refers to total national income of the economy iver a period of time
6
Q
Show both AD and Y Equations
A
AD = C+ I + G + (X-M) Y = C + S + T
7
Q
When is equilbrium in an economy?
A
When both AD = Y —> When leakages = injections
8
Q
Does AD influence short-medium eco growth?
A
Yes it can affect in short-medium term and AD can affect eco growth and policy makers
9
Q
Talk about the factors within consumption
A
- High income earners = Higher consumption 2. Consumer expecatations 3. Level of interest 4. Distribution of Income
10
Q
Talk about the factors with investement
A
- Cost of capital equipment 2, Business expectations
11
Q
Talk about factors with government spending
A
To maintain stable economic growth and AD —> Fiscal policy
12
Q
Talk about factors within exports and imports
A
- Levels overseas income and domestic income –> Exchange rate
13
Q
What is the multiplier process
A
Increase in spending produces an increase in national income
14
Q
What does “marginal” mean
A
Proportion of each extra dollar of income that is either spent or saved
15
Q
Talk about the multiplier trend?
A
The multiplier process always rises more than the initial increase and it will continue
16
Q
How to calculate the multiplier
A
K = 1/MPS or 1/1-MPC
17
Q
What is the role of Y on the economy
A
The shift in AD plays the main role in determining the level of eco growth, but Y plays a important role in the long-run determining the capacity
18
Q
What is Y determined by?
A
Determined by quantity and quality of FOP ( Represents capacity of the economy)
19
Q
What can improve the Y
A
Increases when quality improves or quantity increases –> Improvements in technology, higher skilled labour, discovery of new resource and etc
20
Q
But for Australia, what causes the capacity constraints (hint: micro)
A
Due to infrastructure bottle neck and lack of skills –> Resulting in implementation of micro eco –> to increase productivity in certain industries with strong demand
21
Q
What is a recession
A
Economic constratint for two consecutive business quareters
22
Q
How is Australia in the global economy
A
Australia has been favourable since early 1990s with US-AU trade relationship and developing to China to sustain Australia’s economy
23
Q
What is the most recent eco growth of Australia
A
It is currently experiencing a negative growth of -0.4%
24
Q
Current situation of Australia
A
Currently, Australia’s economic condition is very poor due to decrease in economic acitivities such as decrease consumption, business investment and spending as a result of COVID-19
25
Use of macroeconomic policies
Macroeconomic policies are short-medium term, by influencing the AD, with smoothing fluctuations and achieving economic goals
26
Use of fiscal policies
Use of government budget to achieve economic goals by influencing the expenditure and revenue --> Adjusting the level of AD
27
Use of monetary policies
Cash rate adjustments ---> Expenditure levels and ultimately the eco growth
28
Use of micro-economic policies
Structural adjustments ---> Increase productive capcaity/ aggregate supply (long term)
29
Define the "labour force"
Is the population that is over the age of 15 that is either working or actively seeking for work
30
Who does it include:
Person wokring a 1hr week for paid work or self employed, person over aged 15 and actively seeking employment
31
What is the labourn force participation rate
Is defined as the percentage of working age population who is in the labour force
32
How to calculate it
Labour Force/ Total Working Population (15+) x 100%
33
What does unemployment mean
Individual that iis not working but actively seeking for work
34
How to calculate it
Unemployed/ Total labour force x 100%
35
Talk about Australia's unemployment trend
Australia as of now has high unemployment rate of around 5% which is over the targeted unemployment rate
36
What is Okun's Law
Oken's law illustrates the relationship between eco growth and unemployment. In order to reduce unemployment the annual eco growth needs to be >sum of percentage growth in productivity + increase in size of labour in 1 year
37
Define cyclical
Caused by contraction in economic acitvity or aggregate demand
38
Define structural
Caused by changing work patterns of technology or demand for certain goods and services
39
Define frictional
Unemployment arising from new entrants into labour market and workers waiting to start a new job
40
Define seasonal
Occurs in industries or regions where the demand for labour is lower at certain times of the year
41
Define hidden unemployment
Hidden unemployment refers to individuals that are not actively seeking and is not used for ABS
42
Define long-term unemployment
Refers to people who have been unemployed for 12 months or more
43
Define underemployment
Employed people who are both willing and able to work more hours than they are currently working
44
What is NAIRU
A rate of unemployment that is consistent with a constant inflation rate or no change in the inflation rate --> Lowest employment rate sustained without an increase in inflation
45
What happens when unemployment rate is below or on par with NAIRU
When unemployment is below the NAIRU, there is upward pressure on wage growth and inflation
46
What happens when unemployment rate is above NAIRU
Inflationary pressures will fall so the inflation decreases
47
Define "unemployment gap"
Is the gap between NAIRU and unemployment rate important to determine the wage growth and inflation
48
How to influence the NAIRU
Through long term policies that improve the skill of unemployed or address other hurdles in regards to employment. E.g. Labour market policies or other microeconomic policies improving productivity
49
What factor does NAIRU not take account?
It removes cyclical influences despite unemployment being caused by cyclical factors
50
How is level of economic growth causing unemployment
Labour is considered to be "derived demand" based on the production of goods and services therefore any fucatuations within the AD or economic growth will affect the demand for employment
51
How about stance of macroeconomic plicies
It can influence the level of cyclical unemployment through the influence on the economic cycle
52
Constraint on economic growth?
Severe constraints on eco growth ---> Less job opportunities available --> Increase in unemployment
53
Why is there rising particpation rates?
Unemployment in the short term due to entrance of new entrants seeking jobs
54
Structural changes?
As a result of the rellocation of labour from inefficient industries to more efficient industries (short-term unemployment)
55
Technological changes?
New and improved products can result in subsitution of capital for labour and change in work skills for employees
56
Productivity levels?
High productivity tends to increase unemployment because less employees are required. Long-run contributes to economic growth and have lower unemployment rate in the short term
57
Level of training and skills
Structural Unemployment is related with mismatch of skills of the unemployed and the skills demanded by the employer
58
Increased labour costs?
Caused by excessive wage demands, shortage of labour and government decisions and policies
59
Inflexibility in the labour markets? (Expense)
High minimum wages rates make it less attractive for employers to hire skilled workers
60
What are the economic costs of unemployment (5)
Opportunity costs, lower living standard, decline in labour market skills, costs of governments and lower wage growth
61
What are the social costs of unemployment (2)
Increased inequaltity (division) and other social costs (poverty)
62
Name and describe 4 groups affected by unemployment
Foreginers - Slightly higher due to natural barriers, indengious - Many regions are high unemployment, Youth unemployment - Lack of skills and experiences needed in the workforce, Specific Regions - Different areas suffer high unemployment
63
Explain policies used to decrease unemployment
Labour market policies -> Provide individuals with employment opportunties, macroeconomic
64
Define "inflation"
Is the increase in general level of price over a period of time
65
How is it measured and define "CPI"
Looks at the price movements of basket of goods and services, weighted according to their significance for the average Australian household
66
How to calculate the inflation rate
CPI (Current) - CPI (Previous) / CPI (previous year)
67
What is the "headline" inflation rate
Using the CPI can be misleading indicator of ongoing price pressures in economy because there are good and services whose prices may be highly volatile or one off factors
68
What is "underlying inflation"
Removing the volatile/one-off price movements in the CPI
69
What was inflation like before 1990s
Australia was experiencning high inflation rates
70
How did the recession help Australia (inflation)
It allowed Australia to drop its inflation rate and to form new inflation rate targets
71
Name most recent inflation rate
As of of 2018, December the inflation rate is was at 1.8%
72
How will corona impact the inflation rate
As a result of COVID-19 --> Inflation rate has soared due to increase in demand for certain groceries for the short term --> Will fall --> Due to low income and weak wage growth
73
What is demand pulled inflation
Is caused by the AD which can exceed the supply therefore rising the price of the good and service
74
What is cost pushed inflation
Is related to the costs of production, which businesses must apply if it goes up to the customers and therefore increase the price --> Cause inflation
75
What is imported inflation
Caused by the increase in price of imported goods --> Increased FOP ---> Higher prices for domestic goods --> Depreciation in Exchange rate will result in increase the imported price
76
What is inflationary expectations
Speculation for inflation ---> Price increase/Firm increase in AD --> short term purchases and employees expecting inflation --> wage growth --> improve in purchasing power
77
Do governments look for low inflation or high
Generally, economies seek aim and sustainable inflation to avoid high inflationary issues which brings about its own set of consequences
78
Discuss the effect on eco growth (llow inflation)
Sustained low inflation will provide moderate sustainable economic growth without need to adjust cash rate -> Low inflation reduces distortionto investment and saving
79
Discuss the effect on wages
Forms "wage-inflationary spiral" where higher incomes --> higher prices --> high wage demands and the cycle
80
Discuss the effect on income distribution
High inflation --> Will create further income inequality as a result of low income earners not experiencing chnage in price and face more challenges in borrowing
81
Discuss the effect on unemployment
Increase in inflation --> Government to utilise contractionary policies --> Increasing unemployment in short-medium term. Along with high unemployment leads to high inflation pressures (stagflation) --> Talk about NAIRU explanation of inverse relationship between inflation and unemployment
82
Discuss effect on international competition
High inflation will increase the price of exports which in turn makes imports more competitive
83
Discuss effect on exchange rate
High inflation in short term will appreciate AUD since RBA would increase cash rate attracting foregin investors and increasing financial flow. However, low inflation may strengthen international confidences in the AU economy and strengthen the AUD
84
Disucss the effect on interest rate
High inflation will increase cash rates. Low inflation will be reduced in nominal interest rates based on real rate of return +inflation
85
What are the benefits of inflation?
It prevents the possibility of deflation which has more consequences - such as economic downturn or fall in consumption
86
Whatt is "external stability"
Is an aim of government policy that seeks to promote sustainability on the external accounts so that Australia can services its foregin liabilities in the medium-long term and avoid currency volatility
87
Name the external issues Australia experiences
Persistant history of CAD, rising terms of trade, lack of international competiveness, growth of foregin debt , rising foreign ownership, volatility of AUD
88
What is the argument against Australia's external instability?
Argument against, Australia is experiencing sustainable economic growth, low inflation and rising employment and has maintained the confidence of foregin investors
89
Name the measurements of external stability
Australia's CAD as perecentage of GDP, exchange rate, Australia's foregin liabilities, terms of trade, international competiveness, net foregin debt and net foregin liabilities as percentage of GDP
90
Explain the (2) factors that lead to Australia's persistent CAD
Trade deficit and savings-investment gap
91
Explain the Pitchford Theory and mention (2) assumptions made
Private secotrs make safe " risky" evaluations and private and public debts are separate
92
Define "net foreign liabilities"
Refers to ttotal financial obligations Australia needs to pay back to the world
93
What does it comprise of ?
Comprises of net foregin debt and equity
94
How does overseas borrowing contribute to net foregin liabilities
Adds direcly to Australia's debt as the initial sum has to repayed through regular interest repyaments
95
Explain the "debt trap" (mention Aus being in high cad)
Long term excessive growth in Australia may result in increase in foregin debt --> ongoing strain on external accounts ---> More depednet on foregin infllows to fund servicings costs ---> Further deterioation of CAD
96
What does persistent negative CAD reflect?
Reflects upon the high level of external imbalance --> increasing vulnerability of the economy to adverse economic developments
97
Importance of exchange rate?
Provides link for Australia in the integerated world since all financial and trade flows are carried through ES
98
Negative of rising terms of trade
Exports become more expensive and imports become cheaper --> deterioation in terms of trade and competiveness
99
How has floating exchange rate helped Australia
The floating exchange Australia has helped Australia overcome the global conditions for certain crisis. However, if it is volatile it may pose issues for Australia
100
Explain the negatives of volatility of exchange rates
Change in ES---> change international competiveness and size of foreign debt ---> creates unceratnity in the markets ---> Vicious cycle downwards
101
What policies are used to address external stability (long-run)
Name 4
102
Impacts of the (4) policies on the external stability (*compulsory superannuation)
Monetary (Trade), Fiscal (Savings and investing), Superannuation ( Savings) and Micro (Structural --> International Comeptiveness)
103
Define "income inequality"
Refers to the degree to which income is unevenly distribution among individuals in the economy
104
How does Lorenz Curve display income inequality
Is a graphical way to interpret the income inequality by plotting cumulative percentage of total income against the cumulative percentage of income receipients
105
What is the line of equality? Importance?
Is a diagonal line running through the origin y=x. further away --> Greater degree of income inequality
106
Define "gini coefficient"
Is a single statistic that measures it from 0-1 summarising the distribution of income
107
How is it calculated?
Area of A /Area of A+ Area B x 100%
108
What is the range and meaning?
0 - Refers to when all income are equal, 1- refers to unequal - when single household receives all income
109
What are the sources of income(5)
1. Wages 2. Rent 3. Earnings from capital 4. Profit from entrepreneurial skills 5. Transfer Payments
110
What are the sources of wealth (4)
1. Property 2. Superannuation 3.savings and ownership of business assets 4.loans 5.credit debits
111
Define "net worth"
Value of household assets - Value of liabilities
112
List some trends of income inequality in Australia
In 2017/18 - Australia richest 20% of households owned 62% of the net worth
113
What are groups affected by it (5)
1. Age 2. Gender 3. Cultural Background 4. Family Structure 5. Region
114
Describe all of them briefly ?
1. Income varies over the course of person's lifetime 2. Gender discrimination in the workplace 3. Income distribution depends on how long they speak and if they were from English-speaking country 4. Couples enjoy higher income than single 5. Different regions have high income inequalities
115
Name (3) and describe the economic benefits of income inequality
1. Inequality encourages labour force to increase education and skill levels 2. Inequality encourages labour to work harder and longer (productive capacity 3. Labour mobility 4. Encourages entrepreneurs to accept risks more readily 5. Encourages saving and capital formation
116
Name (3) and describe the economic costs of income inequality
1. Inequality reduces overall utility 2. Inequality reduces economic growth 3. Inequality creates conspicous consumption 4. Forms more povery and social problems 5. Inequality increases the cost of welfare support
117
Name the limited social benefits and why there isn't much?
Well, unequal distribution of income in the first place limits the social benefits because other than making people work harder, they are essentially stuck in an endless cycle of poverty due to reduced opportunities
118
Name and describe social costs of income inequality
Social Costs: 1. Division -Formed through income distinctions - Due to difference in incomes it can often categorise people 2. Poverty: Reduced opportunities ---> Creating cycle of poverty
119
How does "environment" add another dimension to achieving economic goals?
Overuse of exploitation of resources lead to depletion of resources and environmental damaage leading to welbeing issues and fall in potential resources
120
Define "ecological sustainable development" (*quality of life)
Conserving and enchancing the community's resources so that ecological processes and quality of life are maintained
121
What is the (2) important aims of eco growth and environment protection
Preserving the ecological processes and provide higher standard of life
122
Define "intergerational equity"
The concept states resources should be preserved for the improvement of quality of life in the future generation
123
Define the "price mechnism"
Is the interaction of the market forces between demand and supply to reach an equilbrium price and quantity of production
124
Define "market failure"
Occurs when the price mechanisms takes account private benefits and cost of production to consumers and producers but does not take account of wider social costs and benefits borne by the society.
125
What are "negative externalities"
Are negative spill-over effects of production on the environment and society
126
What is the big obstacle preventing environment protection? (Tragedy of the commons)
Since eco-system is based on private ownership and the resources don't have property rights --> Easily be exploited and overused -> "Tragedy of the commons"
127
Another bad feature of price mechanism for environment (allocation)
Cannot allocate environmental resources to what is free
128
What are "positve externalities"
Are positive spill-effects of production that are beneficial to society "merit goods"
129
Explain negative externalities during production
If producers were to borne the price of social costs it would rise in price and cost thus demerit goods are seen to be overproduced in society
130
Explain positive externalities during production
Positive externalities are underproduced since the benefits of production are not enjoyed by consumers. It would shift to right and the space indicates the positive externality (theoretically)
131
What are (2) characterisitcs of "public goods"
It is non-excludable and non-rival
132
What is the issue of free riding
Where group/individuals enjoy the benefits of the good or service without contributing to the cost of supplying of the good or service
133
Explain why firms tend to not to produce public goods
Firms tend to underproduce or not produce due to free riding issue and the costs of producing since no revneue is made . contradicting the business goals
134
Discuss the issue of "preserving natural environments" (3 costs), (ways)
1. Reduction in economic growth 2. Higher costs due to new restrictions 3. Costs of repairing -> Firm damage borne by taxpayers
135
Discuss the issue of pollution and strategies to prevent it
Is created through production ---> which can damage the nautrla environment and the government has set out certain policies and projects
136
Discuss the issue of climate change and impacts
Generated through the emission of greenhouse causing depletion of natural resources ---> using more renewable energy to generate energy
137
Discuss the issue of "depletion of natural resources' (Both economical and environmental, welbeing)
If the natural resources we use deplete ---> the supply will run out which will damage our productive capacity ---> harming the global economy and the environment
