U3aos2 Flashcards
Material living standards
refer to the level of economic wellbeing of individuals and their access to goods and services.
Non-material living standards
refer to quality aspects of a person’s daily existence.
Factors affecting living stndards
PEACL
-Access to goods and services
-Environmental quality
-Physical and mental health
-Crime rate
-Literacy rates
Gross Domestic Product
the final market value of all goods and services produced in the Australian economy over a given period of time.
The Chain Volume Measure of GDP (real GDP)
uses prices from previous period and applying them to current period volumes.
GDP =
C + I + G + (X – M)
Gross National Expenditure: (GNE)
total expenditure by Australians on goods and services produced anywhere.
GNE = C + I + G
Aggregate demand
the sum or total value of all expenditure on final (finished) goods and services demanded by a nation and measured over a period of time.
C = private consumption expenditure
total value of all expenditure on individual and collective goods incurred by resident households and non-profit institutions serving households.
Includes:
-Spending on durables (e.g. white goods, cars etc.)
-Consumer semi-durables (e.g. clothing)
-Non-durables (e.g. food)
-Services (e.g. dry cleaning)
60% of AD
I = private investment expenditure
Expenditure with the purpose of expanding the productive capacity and productivity of firms and the economy:
-Purchase of new equipment
-Vehicles
-Buildings (includes the construction of new homes)
-Addition to inventories (includes a farmer buyer more cattle)
15 – 20% of aggregate demand & most volatile
G = government spending
Includes expenditure by all levels of government (federal, state and local).
20% of Aggregate demand
G1
(Current expenditure)
on goods or services not capital in nature, therefore no on-going benefit created
-Health, education, defence, office stationery, government employees salaries
-Relatively stable component of AD
G2
(Capital expenditure)
Investment expenditure on goods of a capital nature, therefore an on-going benefit is created.
Physical hospitals and schools (e.g., the buildings), roads, rail and ports (infrastructure)
Balance of Trade
Net Exports (X – M)
X – Exports
spending on exports by foreign households, businesses, governments or other institutions. Very volatile
M - Imports
spending on imports by Australian households, businesses, governments or other institutions. (60% of imports are used in the production process)
Very Volatile
five-sector model
The Business sector
The Household sector
The Financial sector
The Government sector
The External sector
Flows of five-sector model
Flow 4- production (flow of final goods and services supplied (GDP))
Flow 2- income (total incomes or the demand for resources)
Flow 1- available supply of resources)
Flow 3-consumed (total expenditure of aggregate demand (AD))
Factors influencing AD (Disposable income)
What? Gross income – personal income tax
↑ disp. Y ↑ purchasing power ↑ C upward pres. AD
↓ disp. Y ↓ purchasing power ↓ C downward pres. AD
Factors influencing AD (consumer confidence)
What? General optimism or pessimism about the future state of the economy and job security – from a consumer’s perspective
↑ c’er confid = ↑ optimism & employment ↑ spending e.g. ↑ C upward pres. AD
↓ c’er confid = ↑ pessimism & employment ↓ spending e.g. ↓ C downward pres. AD
Factors influencing AD (Business confidence)
What? bus. level of optimism and pessimism in the future state of the economy and their profit-making potential
P’ers pessimistic↓spending ↓ spending ↓ I & AD
P’ers optimistic ↑ spending ↑ I ↑ AD
Factors influencing AD (Interest Rates)
Represent the cost of borrowing and incentive to save
IR↑ cost of borrowing↑ spending↓ C&I↓AD↓
Factors influencing AD (Exchange rates)
The value of one nations currency relative to another
AUD apprec. ↓International competitiveness↓X ↑ M ↓AD
Factors influencing AD (Global economic growth)
Levels of economic activity in the economies of major trading partners
Global Growth ↑ X↑ M↓ AD↑
Aggregate Supply
represents the total volume of goods and services that all suppliers have produced and supplied over a period of time.
Is influenced by the willingness and ability of producers to produce.
Production
the process of converting resources and input into goods and services or the total volume (or value) of goods and services produced over a given time period.
Productive Capacity
the point at which production (or GDP) is occurring at the maximum level possible in an economy.
Factors Influencing AD
Dis. Income
Cons. Confidence
Bus. Confidence
Interest rates
Exchange rates
Global Eco. Growth
Factors affecting AS
-quantity of the factors of production
-quality of the factors of production
-Costs of Production
-Technological change
-Productivity growth
-Exchange rates
-Climatic conditions
Business Cycle
refers to the pattern formed by the cyclical movement of economic activity (or GDP) over time, with four phases (Peak, contraction, trough and expansion).
Strong and sustainable economic growth
The Government’s goal for strong and sustainable economic growth is to achieve the highest growth rate possible (real GDP of 3 to 3.5%), consistent with strong employment growth but without running into unacceptable inflationary, external and/or environmental pressures.
How do we measure “economic growth”?
Total Value Added / Final Market Value
Gross Domestic Product = total market value of all goods and services produced in the Australian economy over a given period of time
Real vs Nominal GDP
Nominal GDP – is the dollar value of the goods and services produced
in a time period, which depends on the volume of what was produced
and the price of what was produced.
Real GDP – shows the total volume of goods and services that was
produced.
Consequences of economic growth that is too high - > 3.5%
—Environmental degradation (destruction, depletion, negative externalities)
—External pressures ( greater leakages, depreciation of AUD, greater C of M)
—High Inflation ($^, purchasing power lower, wage price spiral)
Consequences of economic growth that is too low - < 3%
—Higher levels of unemployment = lower levels of household
disposable income and lower living standard
—Negative impact on government’s ability to deliver essential
services.
Quarterly growth
GDPPeriod 2 – GDPPeriod 1/ GDPPeriod 1
X 100
Employed
when someone is 15 years of age and over and working
more than 1 hour a week in return for some form of remuneration
(such as wages).
Unemployed
when someone is over 15, without work or working for less than one hour per week, and actively looking for (more) work.
Disguised unemployment or Under-employment
underemployed are individuals who have a job however, they would prefer to be working more hours and therefore are unemployed to an extent.
Hidden Unemployment
unemployed not included in the calculation
of unemployment as they have given up looking for work (i.e. not
actively seeking work).
Long term unemployment
where individuals have been unable to get a job for 52 weeks or more
Goal of Full employment
The level of unemployment that exists when the government’s
economic growth goal is achieved and where cyclical unemployment
is non-existent, generally accepted to be 4 to 4.5% (NAIRU)
NAIRU
N.A.I.R.U
Non-Accelerating Inflationary Rate Of Unemployment → 4 to 4.5%
(Commonwealth Treasury determine this)
Labour Force Underutilisation rate
represents the proportion of the of
the labour force that is ‘underutilised’, or the extent to which the
labour force is not working to its capacity.
Labour Force Participation Rate (LFPR)
the proportion of all people aged 15
years and over who are in the labour force.
Participation rate and labour force formula
PR= labour force/ working age population x100
LF= employed+ unemployed
Frictional unemployment
when people are unemployed between
finishing one job and starting another.
Cyclical unemployment
unemployment that occurs when the
economy is not operating at its full capacity due to aggregate
demand deficiencies.
Structural Unemployment
The skills of the unemployed do not
match the skills required by the
economy.
Consequences of unemployment > 4.5%
—Loss of output (as measured by GDP) and income due to unemployment
—Loss of tax revenue for the government and impact on govt’s ability to provide essential services.
—Greater income inequality.
Consequences of unemployment < 4.0%
—Builds inflationary pressures in the economy (NAIRU)
—Reduces international competitiveness
Reduce living standards
Goal of low and stable inflation
to achieve a sustained increase in the
general level of prices of between 2 – 3% on average over the medium
term.
RBA’s goal is commonly referred to as “Price stability”
Inflation
a sustained increase in the general or average price level over
time.
Disinflation
a situation where there is a slowdown in the rate of inflation, and prices are rising more gently than previously
Deflation
a decrease in the average price level over time. This is a
negative inflation figure, for example−1.5%
Consumer Price Index (CPI)
is the most reliable indicator of
inflation and is an indicator of average changes in retail prices
for those 80,000 goods and services that represent a high
proportion of the expenditure for a typical Australian
metropolitan household
CPI formula
Cost of market basket in given year/ cost of market basket in base year x 100
Headline vs underlying inflation
CPI headline: capture price movements of all goods and services
contained in the CPI
CPI Underlying: all groups excluding volatile items”.
Demand Inflation
Inflation caused by changes factors
that increase or decrease Aggregate
Demand
Cost Inflation
Inflation caused by changes in factors
that impact on aggregate supply or
supply side pressures or capacity
constraints.
Consequences of inflation being above 3%
—Erodes purchasing power
—Development of a wage price spiral
—Distortion of spending and investment decisions
— Lower returns on investment
—Reduces international competitiveness, (i.e. local
producers are at a competitive disadvantage)
Consequences of inflation being below 2%
—Consumers delay purchases as they expect prices to fall (i.e. deflation),
=downward pressure on private consumption expenditure
—Businesses confidence declines
Leakages
savings
taxes
imports
Injections
investments
gov. spending
exports
economic growth, inflation and unemployment rate
China GDP growth
1.5%
4.1%
4.1%
5.2%
