UNIT 2 AOS 1 PART 1 Flashcards
Define Aggregate demand
the total expenditure, consumption and investment on g/s produced in the economy and overtime will equal production
Aggregate demand equation
AD = C + I + G + (X-M)
Aggregate Supply def
Total volume of g/s that producers are prepared to supply for the market
related to PRODUCTIVE CAPACITY (how much we can produce)
define: business cycle
-
movement in economic activity is an aggregate
- summarises the movement of economy activity overtime
- has 4 phases
Characteristics of boom/peek
- Excessive spending, Consumption, expenditure
- Low unemployment
- - High inflation, excessive use of resources
- Not good, achieve intertemporal efficiency
- High economy growth
Characteristics of contraction
- dropping economy growth
- rising unemployment
- e.g., private school tax increasing (which is bad)
- consumption slow
inflation may fall
Characteristics of a Trough
- Low inflation
- High unemployment
- Low economy growth
People not spending money
Characteristics of a Expansion
- Increase production
- Increase income
**- High unemployment - inflation may rise**
- Increase consumption
- Rise in economy growth
Circular flow def
- detailed map of interrelationships between economic agents
- how they impact economic activity
Economic growth
- the def
is the rate at which economy activity has grown over time and is most commonly determined by changes in the real value of production from one period to another.
Increase in eco growth
benefits of increase in eco growth
- Increases opportunity for jobs
- Improve MLS (greater access to G&S)
- Lower crime rates
Increase in eco growth
costs of increase in eco growth
- Over use of finite resources
- Less leisure time and work life balance
- Increase environmental pollution = decreasing NMLS
Limitations of econoimc growth
as a measuring tool
-
it excludes non-marketed G&S
○ e.g., baby sitting, tutor- Fails to capture purchasing power of incomes
○ does not measure income directly
○ income does not match inflation -
Doesn’t measure NMLS factors
wellbeing could be shit but GDP can be high
- Fails to capture purchasing power of incomes
Interest rates
What? Type of indicator? Componets impcated?
- Cost of borrowing money
- Lagging indicator (ppl do not respond fast enough)
- C + I
- for C impacts lower discretionary income
Consumer confidence
What? Type of indicator? Componets impcated?
- confidence for the future econoimcally
- Lagging
- C + I
Domino’s for AD
C + I + G(G1 + G2) + XM
= AD
= PRODUCTION
= real GDP
= Economic growth
Circular flow model
- Name the 4 flows
flow 1: Home -> Business | factors of production
Flow2: Business -> home | Income
Flow 3: Home -> business | total spending of production
Flow 4: bus -> home | production of final G+S (real gdp)
Define Household spending (c)
Def and factors that influence
- Total value spent on g/s in household sector
- Food, education, utilities, entertainment, transport
- around 60% of AD
Factors that influence:
- Income
- Inflation
- Interest rates
- Consumer confidence
- Trends
Business spending (I)
def and factors
The purchase of new goods and services for businesses as well as addition to inventories (or stock)
- Reinvest back in business
- Mostly money spent in the business sector
- vehicles, Inventory, facilities (new)
PLUS NEW HOUSE BUILDS (creating economic benefit - buying does not include to GDP) - Inflation
- Gov policies
- Interest rates
- Trends
Government spending
def(G1 and G2) and factors
G1 - day to day spending
(salaries, coffee/biscuits, paper, etc.) - keep current government department running
G2 - Investment spending
(roads, ports, railways, public transport, education, etc.) - something large that adds to the economy (like investment spending)
Factors:
- Economic growth and EA
Net exports (XM)
def and factors
“international trade on the overall demand for a country’s goods and services.”
+X = Exports (selling Australian goods and services - can’t touch and see (eg education) overseas)
- exports of Australian g/s
- spending by foreign households, businesses and governments
-M = Imports (eg tech, cars)
Spending on imports
Factors:
- War
- Exchange rate
- Other countries do bad things can also be good for us
Leakages in circular flow model
- savings
- Taxes
- Import spending*
*Import spending spending money outside of Australia (not going into our economy - NOTE it is going to AD)
Injections in circular flow model
- Investment spending
- Government spending
- Export spending
*export spending is where people spend money into Australia (not going into our economy - NOTE it is going to AD)
Unemployment rate
What? Type of indicator?
- People who are willing and able to work (within a week) but don’t have a job’
- LAGGING
- business cycle
Disposable income
What? Type of indicator? Componets impcated?
- income after everything (including day to day pay and mortage)
- Coincident (instant) -> once have money spend
- C + I
real GDP
Real GDP is the total volume of goods and services produced that are adjusted for inflation
real GDP per capita
def + diff (when compared to real GDP)
- [the diff] GDP per capita tries to be more specific on how much the country benefits
- how much is spread per person (GDP/population)
- real GDP: the final value of g&s produced in an economy over a period of time that does not consider inflation
Inflation
What? Type of indicator?
- Measured by real GDP
- the average increase in the price of goods and services overtime.
- lagging
- Business cycle
Exhange rates
What? Components impacted? AUD apreciates then what?
- Coincident (instant)
- X and M
- value of export g/s
- if AUD is high (appreciates)
= :( exports - selling g/s
= exports now expensive
= :) imports (cheaper imports) - getting g/s
= increase demand
= overall decreases XM (AUS is mainly gets money from imports)
E.g., transfer AUD to USD: AUD is now worth mor
= ☹ exports (selling) - “appear more expensive”
= ↓exports relative to imports
= ↓XM (exports relative to imports)
= ↓AD
= ↓ production
= ↓ growth through particular industries
