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Economics > U201 Economic Activity Study Questions > Flashcards

U201 Economic Activity Study Questions Flashcards

1
Q

how do you describe the overall effect on MLS & NMLS

A

IMPROVED LIVING STANDARDS NOT INCREASED LIVING STANDARDS YOU CAN’T HAVE MORE LIVING STNDS DUMMY

LOWER THE QUALITY OF LIVING STNDS NOT DECREASING!!!!!!!!!!!!!!!!!!!

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2
Q

What is Economic Activity?

A

∙Activity involved in the production, selling and buying of goods and services.

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3
Q

3 types of Economic Activity?

A

Primary: rural/farming and mining activity
∙Secondary: manufacturing activity
∙Tertiary: services activity

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4
Q

What is the key and the purpose of Economic Activity?

A

purpose of economic activity…
to use our scarce resources efficiently by producing and selling g&s (consumption) to fulfill the needs and wants of a society, which improve overall living standards.

key to economic activity….
CONSUMPTION
the more people spend, the more g&s bought to meet needs and wants and this improve overall living standards

the more that people spend the more g&s produced to meet demand resulting in increased economic activity

resulting in more resources req, increasing in incomes -> this continuing the cycle of spending -> production -> income - economic activity

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5
Q

What is Economic Growth?

A

increasing economic activity over time

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6
Q

What are the social, economic and environmental benefits of strong economic growth?

A

social
- increased wages
- more needs and wants fulfilled bc increased production to meet the demand for g&s
economic
- increased GDP
environmental
improved (productive and allocative) efficiency of existing resources available

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7
Q

What are the social, economic and environmental costs of strong economic growth?

A

economic
- higher rates of structural unemployment
- possible rise in inflation
- slower future of economic growth
social
- under parenting of children
- decreased leisure time
- economic growth w/o appropriate govt interventions = more social inequality
- increased stress and health related issues
environmental
- increased CO2 emissions + climate change
- increased noise and congestion
- depletion of renewable natural resources
- deterioration of common access resources

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8
Q

What are material and non-material living standards?

A

refers to the nations access to quantities of goods and services to satisfy needs and wants

Refers to the nation’s quality of life beyond their ability to access goods and services

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9
Q

How does increase in economic activity affect MLS and NMLS?

A

∙This tends to increase material living standards (due to more access to variety and quantity of goods/services to meet needs/wants)
∙
∙This tends to increase non-material living standards as it could improve mental health/wellbeing from being employed/purpose
∙
∙However, at the same time can also lower non-material living standards (e.g. pollution, impact on environment, low sustainability for future generations due to resource depletion).

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10
Q

How does decrease in economic activity affect MLS?

A

**∙This tends to lower material living standards because of lower employment, incomes, and consumption.
∙This tends to lower non-material living standards (eg social isolation, worsening mental and physical health, unhappiness, possibly higher crime rate, increased stress).
∙
∙However, at the same time can also increase non-material living standards (eg reduced pollution and reduced impact on the environment.)
**

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11
Q

How does decrease in economic activity affect NMLS?

A
  • tends to lower MLS bc of lower employment, incomes and consumption
  • lower NMLS (eg social isolation, worsening mental/physical health, unhappiness, possibly higher crime rates and increased stress)
  • BUT can increase NMLS bc of the decreased pollution and reduced impact on the environment
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12
Q

What is affluenza?

A

social condition that comes from an individuals obsession and single minded pursuit of wealth and mateial things (materialism)

  • focus on work and believe that their self worth/image is linked directly with their financial status and ability to display their success through their wealth.
  • leads to material values prevents them from gaining enjoyment from the broader NM aspects of life
  • try to buy happiness but can lead to destructive/risky behaviours like substance abuse
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13
Q

What is GDP?

A

measure of the total value of a nations output of goods and services from economic activity

measured quarterly or annually to show economic growth/decline over time

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14
Q

What is the difference between Real and Nominal GDP?

A

nominal - includes inflation due to looking at prices at X volume

real - excludes inflation by looking at volume only

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15
Q

How is GDP measured (3 ways)?

A

1 - GDP (P)
calculates value from “total value added” based on final goods produced

  1. total income method (I)
    add up the total value of all times of incomes
    recieved from selling different resources including wages, rent, investment returns, profits)

3 Aggregate Demand (GDP (E)

using the 5SCFM
calculating the nations total spending using

AD = (C+I+G + (X-M))

GENERALLY, economists focus on the average of the 3 methods (GDP (A)

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16
Q

What is excluded from GDP?

A

second hand products
illegal sales
undeclared work done for cash
charitable activities

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17
Q

What does “per capita” mean?

A

refers to the population ie per person

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18
Q

What are some limitations of using GDP to measure MLS?

A

does not consider
- distribution of g&s
- the value of all economic activity
THUS, gdp is an underestimation of the quantity of goods and services produced and available for consumption

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19
Q

What are some limitations of using GDP to measure NMLS?

A

doesn’t capture negative externalities
(ie imposed on third parties that result from growing the production and/or consumption of g&s

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20
Q

What are some alternative measures of living standards?

A

MAP - MEASURE OF AUS PROGRESS
HDI - HUMAN DEVELOPMENT INDEX
GREEN GDP
GNH - GROSS NATIONAL HAPPINESS

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21
Q

What question does MAP ask?

A

has life in australia been getting better

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22
Q

What are MAPs 4 domains?

A

society (dimensions: health, work circumstances, crime)
economy (dimensions: national income/productivity)
environment (dimensions: change in biodiversity and level of waste)
governance (dimensions: trust in political process)

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23
Q

What indicators does HDI use?

A

income, life expectancy, education levels

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24
Q

What does HDI not include?

A

environmental considerations

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25
Q

How does Green GDP work?

A

accounts for the environmental consequences of economic growth

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26
Q

What indicators does GNH use?

A

a composite statistic composed of 9 LS dimensions and 72 indicators like GDP per capita, social support, life expectancy, freedom of choice, generosity, level of trust

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27
Q

What are examples of lagging indicators?

A

Lagging: What happened some time ago (not right now), so slightly inaccurate
∙Eg;
∙GDP due to data being released at 3 months intervals
Changes to
∙employment rate,
∙inflation, and
average wage earnings as these take time

28
Q

What are examples of coincident indicators?

A

∙Coincident : Happening right now (or short-time intervals)
∙Space balls scene:
∙ Eg;
∙Share prices
∙Monthly retail sales figures
∙New car registrations.

29
Q

What are examples of leading indicators?

A

∙Leading : predicting the future, where its heading, inaccurate as it is prediction only. Examples are:
∙Consumer confidence index (measures how optimistic or pessimistic consumers are about economy eg their future employment, flow of
income, costs of living, do I spend or save?)
∙Business confidence (confidence to make sales and profits)
∙New housing approvals (ie intentions for building activity)
∙Yield curves or returns on bonds (returns on investments can predict a strengthening/weakening economy)

30
Q

What are the 4 patterns in indicators?

A

4 patterns:
∙Long term trends - (over long time, overall movement)
∙Short term cyclical swings - ∙(wave changes eg GDP, unemployment, inflation)
∙Seasonal patterns - (caused by spending behaviour during particular seasons eg Christmas, autumn)
∙Erratic behaviour - (reaction to one-off or sudden effects eg natural disasters, Olympics)

31
Q

What are the 3 main key indicators used to measure health of the economy?

A

economic activity (growth) - ∙Economic growth: Rate of economic activity change over time
i.e the continued change in the rate of production, expenditure and income
inflation - represents the rate at which the cost of goods and services increase over a period of time.
unemployment rate

32
Q

How is economic growth measured?

A

We use Real* GDP to measure economic activity
∙Economic Growth - positive trend
∙Stagnation – neither positive or negative trend
∙Negative growth, decline, recession or downturn - negative trend

33
Q

What is the target range for economic growth?

A

3-4%

34
Q

What are the three types of inflation?

A

Demand Pull - when demand for goods and services exceeds production capacity
Cost Push - when production costs increase prices
Built In - when prices rise, wages increase too, in order to maintain living costs.

35
Q

How is inflation measured?

A

CPI - consumer price index

36
Q

What is CPI and how is it calculated?

A

Consumer price index, measures the changes in the price of a typical basket of goods and services consumed by households

The inflation rate is the percentage change in the price of this basket over time. If the inflation rate is 3%, a ‘basket’ of goods and services that cost you $100 last year will cost you $103 this year

37
Q

What is the target range for inflation?

A

2-3%

38
Q

Why is some inflation good?

A

encourages economic growth
encourages spending

39
Q

What is the unemployment rate?

A

4-2%

40
Q

What is the target range for unemployment?

A

3.5-4.5%

41
Q

What is structural unemployment?

A

results from a mismatch between the jobs that are available and the people looking for work

42
Q

What is full employment?

A

∙‘Full employment’ is where there are enough jobs for everyone willing and able to work.

43
Q

Why is some unemployment desired?

A

∙Because more unemployed people means more people looking for work,
which loosens the tight labour market.
∙It also creates less purchasing power and demand.
This in theory thus reins in inflation to a sustainable enough level that still
encourages economic growth

44
Q

What is the business cycle?

A

a cycle of expansion and contraction that economies undergo over time

45
Q

What are the 4 phases?

A

P1 peak - low unemployment and wage increased
P2 slowdown - increased spending outstrips productive capacity = inflation
P3 trough - reduced spending due to inflation/less demand
P4 recovery - increased spending due to cheaper costs and/or government intervention (spending) = move to peak phase

46
Q

What 3 key indicators help identify the phases?

A

economic growth
inflation rate
unemployment rate

47
Q

What happens in a boom?

A

∙Due to a strong rise in spending and low stocks of unsold goods and services:
∙Economic Growth: Rises, eventually becomes unsustainably rapid (e.g. around 5% per year).
∙Inflation rate: There are widespread shortages of goods and services, so prices rise quickly (e.g. around 5% per year).
∙
∙Unemployment rate: Falls to very low levels causing labour shortages (e.g. around 3% unemployment).

48
Q

What happens in a slow down?

A

∙Economic Growth: Slows down, (e.g. around 1-2% growth per year).
∙Inflation rate: The gradual disappearance of shortages of goods and services, causes inflation to slow down (e.g. around 3-4% per year).
∙Unemployment rate: Starts to rise (e.g. around 5% unemployment).

49
Q

What happens in a recession?

A

∙Economic Growth: Output is cut and economic activity/GDP falls over at least 2 consecutive quarters (e.g. around -2% fall per year).
∙Inflation rate: Firms are forced to cut or discount their prices to clear rising stocks of unsold goods, causing inflation to slow down/deflate (e.g. around 1% or negative per year).
∙
∙Unemployment rate: rises quickly (e.g. around 7-8% unemployment).

50
Q

What happens in a recovery?

A

∙Economic Growth: Firms lift output and activity rises, (e.g. around 1-2% growth per year).
∙Inflation rate: strengthening levels of spending and falling stocks of unsold goods causes inflation to rise (e.g. around 2-3% per year).
∙
∙Unemployment rate: Starts to fall (e.g. around 5% unemployment).

51
Q

What is the 5SCFM?

A

see diagram on doc + try to redraw it

52
Q

What are injections (and examples)?

A

Injections is money entering the economy
∙Injections are like accelerators, they speed up economic activity
∙Injections (coming out from 3 sectors)
∙*Investment Spending (spending on capital) eg loans, investments
*Government Spending (including wages and investments) eg public services, infrastructure, welfare, education, health, defence
*Exports Spending (when foreigners spend money on Australian-made goods and services) eg coal, wheat, education

53
Q

What are leakages (and examples)?

A

Leakages is money leaving the economy
∙∙Leakages are like brakes, they slow the economic activity
Leakages (going into 3 sectors)
*Savings (money saved rather than spent) eg stored in the bank
*Taxes (money that is paid to the Government in the form of income tax and GST)
*Imports (money spent on goods and services produced outside of Australia) eg cars, phones

54
Q

What happens if injections>leakages?

A

AD goes up, meaning spending is up on goods and services
∙Businesses notice their stocks of g/s are reducing due to demand
∙This results in attempts in higher production
∙This results in more resources needed
∙This results in more incomes paid
∙Downside: could create shortages in g/s resulting in driving up prices (inflation)

55
Q

What happens if injections<leakages?

A

∙AD goes down, meaning spending is down on goods and services
∙Businesses notice their stocks of g/s are increasing due to less demand
∙This results in attempts in lower production
∙This results in less resources needed
∙This results in less/lower incomes paid
∙Upside: Could cause inflation to fall as lower prices are offered to clear surplus stock
∙This results in a cyclical pattern of ups and downs.

56
Q

What is Aggregate Demand?

A

Macroeconomic demand for a nation
The total expenditure on Australian-made goods and services over a period of time

57
Q

How is AD calculated?

A

Aggregate demand can be represented using the following formula:
AD = C + I + G + (X - M)
Whereby,
C = private consumption expenditure
G = government expenditure
I = private investment expenditure
X-M = net exports

58
Q

AD factors detailed

A

Private Consumption expenditure: includes durables, semi-durables, single-use goods and services

Private Investment Expenditure: expenditure on capital goods (equipment and shares by businesses & housing by households)

Government Expenditure: all demand for goods and services and infrastructure by Federal, State and Local Governments

Net Exports spending on exports (spending on Australian made goods and services) by overseas entities minus imported goods and services.

59
Q

What factors affect AD? + what thing they impact in particular

A

∙1 Disposable income (C)
∙2 Interest rates (C,I)
∙3 Population growth (All)
∙4 Consumer confidence (C)
∙5 Business confidence (I)
∙6 The exchange rate (X,M)
∙7 Strong rates of economic growth in other countries (X)
∙8 Government budgetary policy (C,G)

60
Q

What happens if AD weakens?

A

∙[Factor] affects [component]; Decreased spending/demand

∙[Factor] causes [component] to [increase/decrease], which weakens AD. This means an decrease in spending of goods and services demanded (flow 3)

∙Decreases prices (& thus demand Inflation)

∙Decreased demand can create surpluses, causing downward pressure on prices & decreasing demand inflation
Decreases economic activity & production

∙Lower prices disincentivizes businesses due to profit making opportunities making them less willing/able to produce (flow 4)

∙Increases unemployment and decreases incomes (& thus living standards)

∙Businesses will reduce production or close down, resulting in less resources required (flow 1) resulting in less labour demanded (higher unemployment) and lower average incomes (flow 2). This leads to lowered living standards and less disposable incomes further decreasing spending (and demand), and so on..

61
Q

What happens if AD strengthens?

A

∙[Factor] affects [component]; Increased spending/demand

∙[Factor] causes [component] to [increase/decrease], which strengthens AD. This means an increase in spending of goods and services demanded (flow 3)

∙Increases prices (& thus demand Inflation)

∙Higher demand can create shortages, causing upward pressure on prices & increasing demand inflation
Increases economic activity & production

∙Higher prices incentivizes businesses due to profit making opportunities making them more willing/able to produce (flow 4)

∙Lowers unemployment and increases incomes (& thus living standards)

∙Businesses will aim to lift production, resulting in more resources required (flow 1) resulting in more labour demanded (lower unemployment) and higher average incomes to retain skilled staff (flow 2). This leads to improved living standards and more disposable incomes further increasing spending (and demand), and so on..

62
Q

What is Aggregate Supply?

A

∙= total volume of goods and services suppliers are able/willing to supply to meet AD

Productive capacity (PC) (maximum amount able to be produced with available resources)

63
Q

How is AS connected to Productive Capacity?

A

∙As AS approaches PC, it pressures prices to go up (due to imminent shortage) and inflation occurs, resulting in limited economic growth (reduced spending) and negative impact on MLS (can’t afford goods/services)

∙Any improvements made to increase supply (eg more resources, productive efficiency = increasing PC), will allow economic growth to continue while alleviating inflation pressures.

64
Q

How is AS calculated?

A

AS = C + S
whereby,
C = consumption
S = spending

65
Q

What factors affect AS? + what thing they impact in particular

A

∙1 Change in quality and quantity of resources/factors of production
∙2 Change in costs of production (in)expensive resources)
∙3 Technological change (more efficient capital resources)
∙4 Change in Productivity (growth/decline)
∙5 Change in the Exchange rate
∙6 Change in climatic conditions (impact on resources)
∙7 Change in Government regulations and international supply chain disruptions

66
Q

What happens if AS is impacted by favourable factors?

A

∙Factor increases economic activity and production

∙[Factor] results in more resources, lower production costs and thus more opportunities to profit, which incentivizes businesses, making them more willing/able to produce

∙Decreases unemployment and increases incomes & living standards

∙Businesses will aim to improve productivity, resulting in more labour demanded (less unemployment) and higher average incomes offered to retain skilled staff, increasing living standards

∙Reduces (supply) Inflation

∙Lower production costs means goods can still be profitable at lower costs

67
Q

What happens if AS is impacted by unfavourable factors?

A

∙Factor decreases economic activity and production
∙[Factor] results in less access to resources, higher production costs and thus lower profits, which disincentivizes businesses, making them less willing/able to produce
∙Increases unemployment and decreases incomes & living standards
∙Businesses will reduce production or close down, resulting in more labour demanded (higher unemployment) and lower average incomes offered due to lower profit margins, reducing living standards
Increases (supply) Inflation
∙Higher production costs means businesses pass on their higher costs to the consumers to protect profit margins

Economics (6 decks)

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