unit 2 aos 1 economic activity Flashcards
economic activity
occurs when resources are used by an economy to produce goods and services. In the process, this also affects inflation and unemployment rates in an economy.
purpose of economic activity
is to use resources efficiently to produce and sell those goods and services that best help to maximise the general satisfaction of society wants and wellbeing. Consumption is the ultimate goal of economic activity.
affect of increased economic activity on material living standards
tend to lift material living standards. Due to higher production resulting in increase jobs and income, boosting consumption spending.
affect of decreased economic activity on material living standards
decrease access to goods and services due to lower production
affect of increase economic activity on non material living standard
increase employment and income reducing stress and social isolation
decrease in environmental outcomes due to increase pollution and increase depletion of non renewable resources.
affect of a decrease of economic activity on non material living standards
-increase unemployment and increase stress and homelessness. Undermining quality of life.
aggregate demand
total annual value of spending on Australian made goods and services measured over a period of time
3 of leakages examples
-taxes
-saving
-import spending
3 examples of injections
-investment spending
-government spending
-export spending
expenditure
Expenditure refers to payments made or liabilities incurred in exchange for goods or services.
affluenza
is a term used to describe a situation where making money and consuming goods and services is an obsession that hurts individuals and others around them.
aggregate demand factors
are the conditions affecting total spending or demand
material living standards
are affected by the annual average level of income and consumption per person per year.
non material living standards
reflect various elements that affect our quality of life.
the five-sector flow model
is a diagram that simplifies the operation of the economy. It shows how the main parts of an economy interact to produce and distribute goods, services, and incomes.
the five sector model has for main flowss…
-flow one is resources
-flow two is income
-flow three is spending
-flow four is production/GDP
economic costs
- reduced capacity of future generations to enjoy reasonable living standards due to resource depletion and environmental issues.
-an acceleration of the inflation rate where higher prices may erode the purchasing power on incomes
- higher levels of structural unemployment resulting from the use of technology like robotics in manufacturing and workers lacking the necessary skills to gain employment.
environmental costs
- the creation of negative externalities such as pollution, global warming and climate change, destruction of native habitats, loss of life in whether events, food insecurity, all of which lower our quality of life.
-degrading of the quality of common access resources on which we all depend.
social costs
- reduced leisure time as people work more and pursue material goals.
-reduced health due to increase stress and effects of pollution and climate change
-harm to families and society in general due to under-parenting caused by work
-increased inequality in the distribution of goods, services and income given some government measures that unfortunately make the tax system less progressive, and tax cuts have led to underfunding of welfare, educational health for those on lower incomes
-affluenza -obbsession with pursuit of material goals.
what are the limitations to real GDP and real GDP per head to measure living standards
A weakness of real GDP is it fails to allow for a country’s population size.
real GDP per head fails to account for quality of life or non-material living well-being.
why is real GDP per capita a poor measure of material living standards
it fails to consider how unevenly distributed goods and services are- it’s only an average.
doesn’t capture negative externalities such as climate change
limitations to real GDP
statistics do not show the value of all economic activity such as home production such as the cash economy, this means that the economy is an underestimation of the quantity of goods and services produced and available for consumption.
alternative measurements of economic growth
- green GDP
-Gross National Happiness
-Measures of Australias progress
-human development index
common access goods
things all members of society share and deepend on such as air
cyclical unemployment
individuals lose their jobs due to weak AD and a slowdown or recession
disposable income
is money available for households to spend after welfare and tax pay. It affects AD.
domestic economic stability
is the ideal economic position for an economy to be in. Conditions do not get better than this, where simultaneously there is a strong and sustainable economic growth rate. (around a 3 per cent rise in GDP per year) full employment, (around 4 -4.5 per cent unemployment rate) and low inflation ) and an annual rise in general prices averaging 2-3 per cent.)
Exchange rate of the A$
relates to the value of an $A when it is swapped for another currency in international transactions. Its level affects the value of exports and imports and hence AD
expansion
or the recovery phase of the business cycle is where the level of real GDP is rising and growth rates are increasing towards perhaps 3 per cent per year.
export spending (x)
represents overseas spending on Australian-made goods and services. This is an injection of the circular flow model that adds to AD
government spending (g)
represent public sector outlays that are designed to help satisfy the needs and wants of the community for goods and services. This is an injection and adds to the AD
green GDP
is a measure of a nation’s economic growth adjusted downwards for environmental impacts. Some believe this more accurately reflects society’s living standards than traditional GDP.
GDP
is a quarterly or annual measure of the value of finished goods and services produced by a nation. on the circular flow model, is also equal in value to AD and total income.
import spending (M)
is an expenditure by Australians on foreign made goods and services, which is designed to help satisfy needs and wants. It is a leakage on the circular flow model, slowing AD.
inflation
refers to a situation where most prices paid for a basket of consumer goods and services are rising over a period of time, causing a drop in purchasing power of money. May be the result of higher costs of production, or general shortages of goods and services due to too much spending.
injection
are elements in the circular flow model, government spending, and export spending, which act like an accelerator and add to the total value of spending on Australian-made goods and services.
increase in intrest rates
the incentive to save thus reducing spending and decreasing AD
lagging indicators
measurement of an economy that only tells us the level of activity that occurred some time ago.
GDP
leading indicator
measures that can help predict where the economy may be heading.e.g consumer confidence
coincident indicators
are measures of the economy that move very closely with the actual change in the level of economic activity. e.g. monthly retail sales.
leakages
are elements of the circular flow model (e.g. savings/ S, taxes/T, and spending on imports (M) that slow down the total value of spending in our economy.
negative externalities
costs transferred to a third party who was not directly involved in the economic activity as a result of the production and consumption of goods and services. e.g. global warming.
private consumption spending (C)
represents household expenditure that is designed to help satisfy people’s immediate wants and needs for goods and services. It is the biggest single component of AD
overseas economic activity
relates to whether globally, demand and economic conditions abroad are strong or weak. Its level affects the sales of Australian exports or injections and hence AD
private investment spending (I)
is outlays by businesses for the purchase of machinery, technology and buildings used to help make goods and services. It is designed to help grow efficiency and expand a firm’s productive capacity by growing its physical capital resources.
productivity
is an AS factor that is a measure of efficiency - that is how output is gained from a unit of resources or inputs used in production
structural unemployment
can occur when firms change their production methods and use new technology to become more efficient. It can also occur when firms relocate overseas, or there is a mismatch between the skills possessed by unemployed workers and the skill required for jobs that are currently available.
aggregate supply
can be defined as the total volume of goods and services that producers are able to supply or produce in an economy.
real GDP per capita
is the value of nation out put measured over a period of time, after statistically removing the effects of price changes to reveal actual changes in the volume of goods and services.
consumer price index
a family of indexes that measure price change experienced by urban consumers.
common indicators
-the growth rate in economic activity reflected in AD and GDP
-unemployment rates
-inflation rates
AD factors impacting consumption spending (C)
disposable income
-drop in disposable income slows private consumption, while higher disposable income increases consumption.
consumer confidence
-greater optimism leads to greater consumption spending and reduces saving. greater pessimism increases savings and slows consumption.
interest rates.
- higher interest rates encourage saving and discourage borrowing money to buy expensive consumer items such as housing. lower interest rates discourage saving and lift consumption spending.
rate of population
-a slower growth in population tends to slow consumption and AD
government budgetary policies
-cuts in personal income tac returns can help increase disposable income and increase consumption spending and AD
AD factors impacting investments (I)
business confidence
- business pessimism leads to reduced investments in new equipment. while optimism leads to increased investment spending and AD.
interest rates
- higher interest rates discourage investment spending while lower interest rates encourage investment spending
company tax
-low tax rates for businesses help to lift after tax profits and hence encourage new investments for businesses to expand their operations. whereas, higher interest rates have the opposite affect.
AD factors impacting government spending (G)
the level of unemployment
-G increases when the unemployment rate rises because through this the government can help lift AD and reduce the severity of a recession. in reverse, when inflation booms government may spend less money to help stabilise the economy
the level of inflation
- the level of g often decreases when inflation is rising to restrain AD
the speed of the population growth
-the level of G often rises when population growth is more rapid. this is because more community services are needed
concern about the level of government debt
- high debt levels will act to help slow down government spending.
AD factors impacting export spending (X)
the exchange rate or the value of the A$
- A rising A$ tends to slow our exports because they become dearer to people overseas, while a fall in the A$ makes exports cheaper, leading to an increase in sales hence AD.
Overseas economic conditions
-A recession abroad tends to slow down overseas spending on our exports, while a boom overseas tends to raise the value of foreign spending on Australian exports
natural disaster
-severe whether in Australia may alter the nation’s capacity to produce exports.
AD factors that impact imports (M)
the exchange rate or the value of the A$
-A fall in the exchange rate for the A$ tends to make imports dearer and less attractive for Australians to purchase, lifting AD while a rise in A$ tends to make imports cheaper and more attractive for local consumers, flowing AD.
local economic activity
- if there is stronger consumer and business confidence and high levels of economic activity locally, this tends to increase spending on imports where leakages slow AD. whereas weaker local economic conditions usually mean lower spending on imports.
consumer and business confidence
our inflation rate relative to that overseas.
how labour resources impact AS
demographics and the population’s age
-immigration can increase the number and skills of the labour force
-in contrast, Australia’s ageing population causing labour shortages that limit the expansion of our productive capacity and the level of AS
how capital resources can impact AS
investment levels
-The quantity and quality of capital resources are increased through high levels of private and government investments in new plants and equipment. Increase investments can come from foreign capital inflow used to set up or financial support new firms these grow productive capacity and AS
interest rates
-lower interest rates increase investments in new equipment increasing AS quality and quantity. while higher interest rates decrease growth in productive capacity and As.
technology and r and d
use of new technology can help increase the volume and efficiency of capital resources. adding to productive capacity and AS.
how natural resources can impact AS
mineral exploration
-help us to find new deposits of minerals. increasing the quantity of resources available, hence growing productive capacity, AS and potential level of GDP.
land management
-Increasing land management increases productive capacity and our potential level of GDP.
