unit 3 aos 2 key terms Flashcards
living standards
material: economic wellbeing, measures the quantity of g&s consumed
non-material: quality of life, not directly related to consumption of g&s
factors affecting LS
- access to goods and services
- environmental quality
- physical and mental health
- crime rates
- literacy rates
the business cycle
shows the changes in the level of economic activity over a period of time
4 phases:
- peak/ boom: high, possibly unstable inflation, GDP and EA, low unemployment
- expansion/ recovery: growing GDP/ EA, rising inflation
- contraction/ downturn: falling inflation, GDP and EA, rise in unemployment
- trough/ recession: low or negative GDP growth, slow EA and high rate of unemployment
aggregate demand & AD factors (6)
the total level of spending on australian g & s by households, businesses and governments over a period of time.
AD factors:
- disposable income
- consumer confidence
- business confidence
- interest rates
- exchange rate (higher = reduced demand for exports, lower= increased demand for exports)
- rate of economic growth overseas
- changes in the terms of trade (not in SD)
aggregate supply & AS factors (8)
the total level of production of goods and services by a nation over a period of time
AS factors:
- costs of production
- technological changes
- quantity and quality of the factors of production
- productivity growth
- exchange rate
- climatic conditions
- government regulations
- disruptions to international supply chains
the domestic macroeconomic goal of strong and sustainable economic growth
economic growth = increase in production of goods and services from one period to the next
- the target rate of economic growth is ~ 3-3.5%, the fastest rate of GDP growth that is consistent with low inflation and other goals
- measured using changes in the chain volume real GDP
> annual % change in real GDP
> real GDP = rate of GDP after removing effects of inflation
> GDP = total value of production of g & s over a period of time
> GDP can be calculated by summing the total value of production, total value of incomes, or total expenditure by consumers
- chain volume GDP increased by 1.5% over 2023, an increase since 2022, but still not at the target rate.
causes of economic growth
- short term- AD factors (cyclical), affect the extent to which the economy’s available productive capacity is actually used
> stronger AD factors cause an increase in spending, causing firms to lift output & therefore increase EG - long term- AS factors (structural), measure the potential rate of economic growth, govern the economy’s productive capacity that is made available
> costs of production such as wages, productivity such as hours worked, exchange rate affecting price of imported resources
> stronger AS factors mean firms are more willing and able to expand, and vice versa
SSEG results in
- lowers unemployment rate
- raises incomes & purchasing power
- bolsters gov financial position, reducing deficits & debt
consequences of not achieving SSEG - growth is too high
inflation pressures:
- demand inflation, as AD rises faster than AS as a result of widespread shortages
- cost inflation, firms need to employ and pay more workers, meaning they also need to boost their prices to remain profitable, undermining purchasing power of incomes & reducing competitiveness
> reduce MLS
- external pressures
> fast spending causes rise in inflation, causing less exports and more imports - weaker trade balance & falling exchange rate
- environmental degradation
> increased negative externalities
> destruction of ecosystems
> depletion of non-renewable resources
–> results in a decrease in NMLS
consequences of not achieving SSEG - growth is too low
high unemployment:
- if GDP rises too slowly, or falls, there will be an increase in the rate of unemployment due to businesses slowing their operations or even closing, resulting in loss of incomes
> this will result in a decline in consumer confidence, leading to lower levels of spending and production, lowering MLS, and NMLS due to financial stress and poor mental health
the domestic macroeconomic goal of full employment
- the lowest possible rate of unemployment that can be sustained before inflation starts to accelerate (NAIRU)
- target 4.5%
> was 3.7% in feb 2024 - means economy is operating close to productive capacity
- strengthen LS
- higher distribution of income
- strengthens gov financial position
classification of the labour force
- employed: aged over 15, working full or part time
- unemployed: over 15, looking for work but can’t find
- hidden employed: not counted as unemployed because they are not actively seeking employment, but they would look for work if they thought they could gain employment
- long term unemployed: unable to find a job for a year or more
- underemployed: when people are employed but would like more hours
- frictional unemployment: temporarily unemployed between leaving one job and starting another
measurement of the labour force
- unemployment rate: (people employed/ people in labour force) x 100
- participation rate: the proportion of people aged over 15 who are in the labour force, (labour force/ working age pop) x 100
- labour force underutilisation rate: the extent to which the available supply of labour is not working at full capacity = unemployment % + underemployment %
cyclical unemployment vs structural unemployment
cyclical:
- occurs with changes in economic activity over the business cycle
> due to changes in AD conditions
structural:
- when there is a mismatch between jobs available and people looking for work
> brought on by changes in technology, mismatch of skills, business closures, gov policies such as liberalisation
> longer lasting than cyclical
consequences of not achieving full employment
unemployment too high:
- lower output & GDP as firms are less productive
- lower incomes, meaning less consumption, which lowers material living standards, as well as financial stress and worsening mental wb.
- lower incomes weakens gov financial position, as they collect less tax & have to pay more in outlays, making them less able to provide services
unemployment too low:
- upward pressure on inflation as EG occurs too fast, firms up their prices to afford to pay for resources due to shortages, reducing the purchasing power of incomes (lower MLS), lower NMLS due to increased cost of living
> this undermines int. competitiveness & trade balance
