unit 2 macroeconmics Flashcards
micro vs macro examples
micro:
individual market
effect on price of a good
individual labour market
individual consumer behavior
supply of good
macro:
whole economy (GDP)
inflation
employment/unemployment
aggregate demand
productive capacity of economy
macroeconomics
considers the performance of the economy as a whole
examples of macroeconomics
economic growth
inflation
employment unemployment
trade performance with other countries
government economic polices
decisions made by RBA
economic activity
The production, income and expenditure that takes place across the whole country
income
total income that have been earned by those who have contributed to the production of the good and service produced
production
the total vale of goods and services that are produced in the economy
expenditure
the total spending undertaken on the good and services being produced
macro conflicts
unemployment and inflation
economic growth and inflation
economic growth and the balance between exports and imports
economic growth and inequality
circular flow
income–>expenditure/spending—>production–>income
leakage
the removal of money from the economy
leakage (taxes)
money that is paid to the government in the form of tax
leakage (savings)
money that is saved rather than spent on goods/services
leakage(imports)
money that is spent on goods/services that have been produced overseas
injections
the addition of money from the economy
injection (investment demanded)
spending on capital items like machinery and factories
injection (government spending)
spending by government on goods/service
injection (export demand)
money that is spent on Australian goods/services by overseas residents
Trade off
all possible things we give up when we make decision to use our scarce resources to gain something else
injection>leakages
economic activity rises because more money entering system than leaking out
leakage>injection
economic activity falls because more money leaving the system than leaking out ??????
aggregate demand (AD)
the total expenditure on the good and services produced in the economy over a period of time
AD equation
AD=C+I+G+ (X-M)
AD= (C+I):private + (G1+G2):public+ (X-M): net overseas
consumption (C) in AD
total value of all expenditure on individuals and collective consumption by resident households and non-profit institutions serving households
60% of AD
examples of consumption (C) in AD
expenditure on consumer durables
expenditure on food
expenditure on single use products
expenditure on services
factors impacting consumption (C)
disposable income
consumer confidence
interest rates
rate of population growth
budgetary policies affecting taxes and government spending
factors impacting investments (I)
business confidence
interest rates
company tax rates
global economic conditions
Investment (I) in AD
the purchase of new equipment and plant, building and vehicles to expand productive capacity
15-20% of AD
government (G) components of AD
government spending which includes all demand for goods and services by federal, state and local governments
G1 and G2
20% of AD
G2: government investment expenditure AD
spending on capital goods like infrastructure and buildings
G1: government current (consumption) expenditure AD
spending on civilian goods and services, military spending, health, education, defense, civil servant salaries
factors impacting exports (X)
exchange rates
overseas economic conditions
natural disasters and severe weather events
factors impacting government (G)
level of unemployment
level of inflation
speed of population growth
economic cycle
factors impacting imports (M)
exchange rates
trends in local economic conditions
consumers and business confidence levels
our inflation rate
Exports (X) in AD
expenditure on domestically produced goods by foreigners
20-24% of AD
Imports (M) in AD
expenditure on foreign produced goods by members of an economy
20-24% of AD
what affects the AD curve shift to the right (increase)
higher consumer sentiment
increased business confidence
rising overseas economic activity
weaker Australian dollar
lower interest rates
cuts in taxes
increases in government spending
what affects the AD curve shift to the left (decrease)
lower consumer sentiment
decreased business confidence
falling overseas economic activity
stronger Australian dollar
higher interest rates
rises in taxes
decrease in government spending
factors influencing AD
inflation
- Impacts purchasing power of economic agents - increase in inflation = higher
prices - decrease or erodes of purchasing power - decrease in C - Impacts international competitiveness = increase in inflation - reduces Australia’s international competitiveness > decrease in X
factors influencing AD
Disposable income (Gross Income - Income tax)
- Impacts purchasing power of consumers - an increase in real disposable income -> increase in purchasing power = increase in C
factors influencing AD
Interest rates
- Impacts portion ot disposable income available for consumption (variable rate loans) - lower interest rates -> lower repayments on existing loans ->
greater proportion of disposable income available for consumption = increase
In C - Impacts the cash available to a business - cash flow effect (variable rate loans) - more cash available for I
- Low interest rates > more attractive to borrow cash -> increase in C and I
factors influencing AD
Consumer confidence
General optimism or pessimism about the future state ot the economy and job prospects - from a consumers perspective
- Increase in consumer contidence = increase in C
factors influencing AD
business confidence
General optimism or pessimism about the future state of the economy and ability to generate a profit - from a firm’s perspective.
- Increase in business confidence = increase in I
.
factors influencing AD
Exchange rates
- Impacts international competitiveness - an depreciation of the AUD increase in international competitive = increase X and decrease in M
factors influencing AD
Levels of economics growth overseas
- Increase in economic growth in the economies of our major trading partners —->increase in spending on our X
aggregate supply
represents the total volume of goods and services that all suppliers are willing and able to produce
production AS
the process of converting resources and inputs into goods and services
or
the total volume (or value) of goods and services produced over a given time period
productivity AS
measured by the output per unit input
productive capacity AS
the point at which production is occurring at the maximum level possible in an economy
factors that affect AS- inflation
short term- increased margins/profit—–> increased willingness and ability to produce/supply
long term-increase in inflation feeds through to wages so no overall effect on AS
factors that affect AS -quantity
the quantity of the factors of production; labour, capital, and natural
factors that affect AS- quality
the quality of the factors of production; labour, capital, and natural
factors that affect AS
cost of production
technological changes
productivity growth
climatic conditions
factors that affect AS exchange rates
depreciation of the AUD , increases cost of imports and an appreciation of the AUD, decreases cost of imports
how is employment measured
unemployment rate (full employment)
how is level of economic growth measured
GDP growth
how is price levels measured
inflation rate
gross
total
economic growth
the rate at which economic activity grows over time
domestic
made in Australia
product
the value of good and services produced
GDP
the final value of the goods and services produced within a country during a specific period of time
GDP=C+I+G+(X-M)
Nominal GDP
measures the countries gross domestic product using current prices, without adjusting for inflation
GDP per capita
GDP divided by the size of the population
GDP per capita= real GDP/population
real GDP
measurement of economic output that accounts for the effects of inflation or deflation
what does a rise in GDP indicate
when GDP increases there has been an increase in the final market value of goods and services produced over time.
may have occurred because of a rise in prices rather than a rise in the volume of goods and services produced
material living standards
access to goods and services eg.) car, technology, house, health cover
non- material living standards
aspects of persons quality of life that cannot be measured by monetary value
eg.) environment, freedom of speech, crime rates, literacy rates, time off work
how economic growth impacts non material living standards
increased access to goods and services
*increased income to purchase
- increased productions means more goods and services
limitations of GDP
*ignores people quality of life. doesn’t measure stress levels and leisure
*doesn’t tell us how output is distributed- income inequality
*exclusion of non-market transactions- food grown in backyard
*doesn’t measure black market operations
*ignores negative externalities that lower non material living standards eg.) pollution, health
how economic growth impacts non-material living standards
*people have jobs so they are less stressed about money
*lower rates of crime
*access to health care and education improves
*quality of goods and services increases
alternative measures of national growth-
MAP (measure of Australia’s progress)
collection of measures published periodically by the Australian bureau of statics
focuses mainly on society, economy, governance and environment
alternative measures of national growth-
GPI (genuine progress indicator)
uses GDP data as the base and makes pos or neg adjustments to values to better reflect the good or bad effects of some type of eco activity on M/NM LS
e.g)
*estimated value of unpaid community work
*making deductions for environmental destruction+ other externalities-loss of leisure time from work
alternative measures of national growth-
HDI (human development index )
composite statistics of life expectancy, education, and per capita income indicators which are used to rank countries into four ties of human development
doesn’t incorporate environment
1=highest/0=lowest
alternative measures of national growth-
GNH (gross national happiness)
composite index made up of several objectives and subjective indicators including;
* GDP per capita
* social support
* health and life expectancy
* freedom to make life’s choices
* Generosity
* Trust
limitations of GDP-
excludes most non marketed production
g+s being produced but not included in the total volume of production
these are available for consumption by consumers improving their living standards- access to g+s and quality of life
e.g) cooking, cleaning, unpaid childcare, homegrown food
limitations of GDP-
doesn’t take into account negative externalities
social cost imposed on the 3rd party will reduce their quality of life due to the reduction in the quality of surrounding environment and air quality. this could manifest itself into health issues
limitations of GDP-
inaccurate guestestimation
true impact on access to G+S, and quality of life for consumers may not be indicated by the GDP figures issued by the ABS
limitations of GDP-
failing to take into account how G+S and income are distributed
GDP per capita= per person measure
X reflect whether all consumers in economy receive the same amount of G+S/ workers receive same amount of income
t/f not good reflection of every households access to G+S or quality of life
limitations of GDP-
not measuring change in quality of G+S from quatres
in the event that the quality of G+S deteriorate, e.g.) health services, —–> negatively impact consumers quality of life.
HDI (human development index)
material living standards
- GDP per capita
- However, this figure is adjusted to remove variations in the actual purchasing power of money in different countries (called purchasing power parity or PPP), as well as adjusted downwards for inequality in the distribution of goods and services.
HDI (human development index )
non material living standards
- Life expectancy (calculated at birth and expressed in years)
- Education standards (shown by adult literacy rates expressed as a percentage of those aged 15 years and over, and by the combined secondary and tertiary school enrolments).
economic growth rate
3-3.5%
inflation rate
2-3%
monetary policy
RBA decisions to change interest rates
high interest rates discourage expenditure (consumption and Investment) and reward saving
Low interest rates promote expenditure (consumption and Investment) and discourage saving To stimulate economic growth
governments can lower interest rates at a cost of rising prices
budgetary (fiscal) policy
government decisions on taxation and spending
Government can stimulate the economy by spending -› create jobs –> create incomes through wages -> shift AD right -> causes GDP to increase This comes at a cost of rising prices
aims to tackle inflation+employment
expansionary
to expand
increases rate of economic growth when it is too low
contractionary
to restrict
decrease rate of economic growth when it is excessive
expansion monetary policy
*Decrease interest rates-> Increased economic growth (expands)
contraction monetary policy
- Increase interest rates-> Decreased economics growth (contracts)
expansion budgetary (fiscal) policy
- Deficit (expenditure>receipts) -> Increased economic growth (expands)
deals with unemployment
contraction budgetary (fiscal) policy
- Surplus (expenditure<receipts) -> Decreased economic growth (contracts)
- Balance (expenditure=receipts)
deals with inflation
Aggregate supply policies
Policies implemented by the government aimed at boosting the productive capacity of the economy
Aggregate supply policies examples
- Infrastructure investment
- Trade liberalisation-> increased competitive pressure-> increased incentive to improve efficiency
- Funding for training
- Increased intake of skilled migrants
economic prosperity
- having high incomes per person and being able to consume or purchase more goods and services, now and into the future
- It could also mean having a job and avoiding inflation, since these affect our purchasing power and incomes.
*strong economic growth is usually seen as the main way of improving economic prosperity.
pros of economic prosperity
- Creates employment = households’ high levels of income
- Consumption increase
- Production increase
- Living standards and wellbeing increase
cons of economic prosperity
- Creates inflationary pressures = as moves closer to its productive capacity.
- Purchasing power of consumers decreases
- the nations international competitiveness decreases
- decrease natural resources and environment = as carbon emissions and other forms of pollution increase
issue of pursuing economic prosperity
A trade-off exists between economic prosperity and environmental sustainability
This is because using up natural and other resources (e.g., minerals, oil, water, oceans, climate and air) today to grow GDP and improve our immediate economic prosperity involves a longer-term opportunity cost or sacrifice.
environmental cost of economic growth
Economic growth can accelerate environmental problems including:
- climate change
- the depletion of natural resources
- the deterioration of common access goods (i.e., those things we all share and depend on, like air).
Economic growth causes a depletion of natural
resource
In Australia’s case, economic growth has depended on the exploitation of natural resources.
However, some of our natural resources like minerals are non-renewable.
Once used up they cannot be replenished, depriving their use by future generations.
The economic costs of economic growth-
Economic growth can add to structural unemployment.
- Usually, economic growth causes a fall in cyclical unemployment (i.e., unemployment due to a lack of spending or AD)
*eco growth—>structural change
* When firms change their production methods or make change around cost cutting due to competitiveness-then jobs can and will be lost
Sustainable economic growth
- a method of expanding the economy’s production levels to meet the needs for goods and services of the present population without undermining the ability of future generations to meet their own needs
long-term economic prosperity
all future generations are able to also enjoy high incomes and consumption levels).
Economic growth causes a deterioration of
common access resources
Common access resources are those that we all share and depend on like the air, climate, rivers and oceans and ecosystems.
Without proper safeguards imposed by nations, these resources are often exploited for personal gain.
Abuse by individuals can deprive others of consumption.
The economic costs of economic growth- Economic growth can accelerate inflation.
When economic growth is driven by strong rises in spending or AD, and the economy is close to its productive capacity, it is common to see a general rise in the prices paid for goods and services.
- This is due to widespread shortages.
Environmental sustainability
- Involves the preservation of our natural environment into the future
- By ensuring that current practices do not contribute to environmental harm and erosion of natural resources
The economic costs of economic growth- Economic growth now may limit future economic growth.
Additional natural and other resources that are used to produce goods and services are limited
As a consequence, we may be reducing the capacity of future generations and an ever-growing population to enjoy economic prosperity.
why do we need policies relating to the environmental impact of climate change
preserve the natural environment
achieve environmental sustainability
policy approaches by government
direct action
regulation and legislation
market based approach
Regulation and legislation involves:
- The use of the Environmental Protection and Biodiversity Conservation Act (1999)
- Laws to protect flora, fauna and the general environment
how does regulation and legislation reduce environmental impact
- It provides guidelines to assess the environmental impact of development
- If it is found that there could be an impact, then applications for approval must be made
- It must be proven that the benefits of the development outweigh the costs-> In response to this businesses are required to prepare an Environmental Impact Statement.
indirect effect of environmental regulations
*technical innovation—->
*product innovation
*technological innovation
t/f promote economic growth
direct effect of environmental regulations
*erode productive investment
*increase productive cost
t/f restrain economic growth
examples of regulation and legislation
Mining
Construction near great barrier reef
market based approaches involves:
- Governments providing businesses and consumers with financial incentives to produce/purchase goods and service which take into account the environmental impact
- Can involve subsidies /rebates to support environmental sustainability, or taxes/fines to penalise those actions that threaten environmental sustainability
how does market based approach reduce environmental impact
- Environmentally sustainable options get cheaper, while the unsustainable options get more expensive.
- Uses price mechanism and relative prices to encourage consumers and businesses to choose options which have better environmental outcomes.
examples of market based approach
- Carbon tax & emissions trading scheme
- Subsidised solar panels.
- Subsidies for wind farms
*cap and trade system- allowing permits for specific quantity of pollution to occur over a particular period eg.) emisson trading scheme
short term of ETC (emission trading scheme ) impacts on AS
*supply can be hard to change + takes time to develop +implement new technologies to deliver energy supply
*economy needs therefore an emission trading scheme.
*creating a carbon price tends to reduce the rate of economic growth in the short run due to increase in cost of production reducing AS and economic growth.
long term imapct on economic prosperity and liviing standrds of ETC (emission trading scheme ) impacts on AS
mitigating the negative effects of climate change will protect natural resources and infrastructure by:
- reducing the occurrence of extreme weather events that lead to destruction of vital infrastructure such as road, rail and ports
- reducing the occurrence of droughts that negatively impact the availability of farming land from effects of climate change
Therefore, maintaining aggregate supply and ensure that Australia is able to maintain strong and sustainable economic growth in the long run.
direct action involves:
- Governments investing directly in projects to achieve specific environmental outcomes
how does direct action reduce environmental impact
- Provides funding to speed up the development of environmentally friendly projects and sustainable production methods
examples of direct action
- $2.55 billion Emissions Reductions Fund
- $1 billion clean energy innovation fund
- $70 million for 20 million trees by 2020
Ultimate goal of ETC (emission trading scheme)
pricing carbon force firms and consumers to internalise the external costs stemming from burning fossil fuels for energy.
