Unit 3 AOS2 Flashcards
Define Economic Activity
The actions of individuals, firms and governments that help to generate the production of goods and services, employment and incomes.
Define level of economic activity
General pace which productive activity is occuring nationally.
Two main reasons economic activity impacts our living standards
Society can only satisfy growing wants and needs through an increased level of production.
Higher levels of economic activity aren’t sustainable due to limited non renewable resources.
Factors influencing material living standards
- Growing national production and income per person
- Even + Uneven Distribution of goods, services and income
- Rate of inflation
- Jobless/unemployment rate
- Interest rates
- Taxes
Factors influencing non material living standards
- Education
- Health care
- Leisure time
-Environmental conditions
Define the business cycle
The wave-like ups and downs in a nation’s level of production or economic activity.
List conflicting relationship of MLS and NMLS
- Environmental trade off
- Health and Social trade off
- Material trade off
Recession definition
A recession occurs if national output falls over two quarters.
4 parts of business cycle
Expansion
Contraction
Peak (Boom)
Trough
Define domestic economic stability
Desirable or ideal of economic activity where, simultaneously, there is low inflation, a solid and sustainable rate of GDP and low unemployment.
Define productive capacity
The potential level of national production of goods and services dictated by the quantity and efficiency of a nation’s resources.
This determines the sustainable rate of economic growth in the long term.
5 sectors of 5 sector flow model
- Household
- Business
- Financial
- Government
- Overseas
4 flows between household and businesses
- Factors of production from households to businesses
- Businesses provide incomes to those who provide factors of production
- Demand for goods and services
- Production of goods and services (Real GDP)
3 Leakages
- Savings
- Taxes
- Imports
3 Injections
- Business investment
- Government expenditure
- Exports
Explain how “insert AD factor” impacts on Aggregate demand/domestic goal template to answer
- Describe the changing factor
- Outline how it impacts a component of AD (C, I, G, X or M)
- State how it then impacts AD overall.
Aggregate demand definition
Aggregate demand (AD) refers to the combined or total annual value of spending by households, governments and net overseas transactions on Australian-made goods and services.
Aggregate demand equation
AD = C + I + G + (X-M)
Factors that influence AD
*Changes in the general level of prices
*Disposable income
*Interest rates
*Consumer confidence
*Business confidence
*The exchange rate
*Rates of economic growth overseas
3 reasons for a negative slope on AD curve
*Purchasing power effect. Generally higher prices throughout the economy eat into the purchasing power of people’s nominal level of incomes, contracting how much they can afford to buy.
Import substitution effect. Domestic inflation encourages Australians to buy cheaper or more competitive imports of goods and services, contracting spending on domestically produced goods and services.
Interest rate effect. When average prices or inflation are higher, interest rates also rise. This makes borrowing money from banks more expensive, contracting spending levels
Define Aggregate supply
Aggregate supply (AS) is the overall level of production of all types of goods and services (including consumer, capital and public goods) that are collectively produced or supplied by the nation’s businesses over a period of time.
Factors affecting AS
- Changes in the general level of prices (inflation)
- Quantity of the factors of production (land, labour, capital)
- Quality of the factors of production (land, labour, capital)
- Cost of production
- Technological change
- Productivity growth
- Exchange rates
- Climatic conditions
The goal of strong and sustainable economic growth definition
An increase in the real value of final goods and services produced in Australia over time (real GDP) that does not cause inflationary, external or environmental pressure. 3-3.5% per annum
Chain Volume measure of GDP
Quarterly Growth (Dec 2021) = (GDP Dec –GDP Sep)/GDP Sep
Annualized rate of economic growth
Multiplying quarterly rate by 4
Annual rate of economic growth
Annual growth (year on year) = (GDP Dec 21 –GDP Dec 20) / GDP Dec 20
Total real value of production
GDP Mar 21 + GDP Jun 21 + GDP Sep 21 + GDP Dec 21
Benefits of strong and sustainable economic growth
- Higher living standards
- Lower unemployment
- Increased government revenue
- Business confidence and investment
- Improved international competitiveness
- Non inflationary growth
Consequences of being below strong and sustainable economic growth
Unemployment is likely to be higher as businesses lay off excess workers to protect profit margins.
Living standards are likely to be lower due to lower average incomes and less choice.
Consequences of having too strong economic growth
Demand inflation is likely to occur as widespread shortages occurs putting upward pressure on prices.
The environment is likely to be damaged rapidly as resources are depleted and higher rates of pollution occur.
External pressures can occur if our inflation rates rise faster than our trading partners. This means that our exports become more expensive and therefore less attractive.
Goal of full employment
Lowest rate of unemployment without creating inflationary or external pressures (NAIRU). Usually about 4.25%.
Employed definition
Someone over 15 that works
Unemployed definition
Someone over 15 without a job but actively seeking work
Underemployed definition
Someone who is working less hours than they prefer
Hidden unemployment definition
Someone who isn’t actively seeking work but would accept work if offered
Long term unemployment
Unemployed person who has been actively seeking work for over 52 weeks
Frictional unemployment
People moving in between jobs and in and out of the labour force
Labour force
All employed and unemployed people within an economy.
Participation rate
The participation rate is the percentage of the working-age population (people aged 15 and over) who are either employed or actively looking for work.
Labour force/working population age x100
Unemployment rate equation
Unemployed/labour force x100
Underutilisation rate equation
1) (Unemployed+Underemployed)/Labour force x100
2) Unemployment rate + Underemployment rate
Cyclical unemployment
Refers to unemployment caused by shifts in aggregate demand
Structural unemployment
When there is a mismatch between the skills that workers have and the skills that employers need.
This can be caused by technological advancements, changes in consumer demand, or shifts in industries.
Consequence of unemployment too high
MLS will worsen as average incomes fall.
NMLS will worsen due to stress.
Productive capacity and overall production is likely to lower decreasing economic growth.
Government spending affected as they collect less tax and give more unemployment benefits.
Consequence of unemployment too low
MLS may lower as high AD creates inflationary pressure making incomes worth less.
NMLS may worsen due to stress of increased cost of living.
Production may increase at an unsustainable rate leading to inflationary pressures.
Demand inflationary pressures
Depletion of natural resources
Goal of low and sustainable inflation (Price stability)
Refers to the level of prices increasing by 2-3% overtime
Disinflation
Prices still increasing but at a reduced rate (Inflation was 4%, now 3%)
Deflation
Prices decreasing over time, a negative rate of inflation
CPI equation
(Price2-Price1)/Price1 x100
Annual rate of Inflation
(Price2-Price1)/Price1 x100
Annualised rate of inflation
When you have the price of 1 quarter but you add it up to make the equivalent of one year
Headline inflation
The raw inflation rate created by measuring changes in CPI
Underlying inflation
Removes the impact of volatile price changes to gain a more accurate indication of how inflation would be impacting the average person.
E.g. in 2022 inflation rates were largely comprised of the increases in house prices, fuel prices and commodity prices..
Demand inflation
When excessive levels of aggregate demand creates widespread shortages and puts upward pressure on prices.
AD>AS=Demand inflation
Cost inflation
When businesses pass on increases in cost of production to consumers through higher prices. This is usually done to protect profit margins
Consequence of high inflation
Reduces purchasing power for households
Businesses may face a higher cost of production and therefore lay off workers.
Value of assets for wealthy individuals may rise
Consequence of low inflation
Businesses see weak inflation as slow growth in profits and are less incentivised to produce.
Therefore it’s likely to lead to higher unemployment, lower production and worsened living standards.
CPI trimmed mean
Average rate of inflation after ‘trimming’ away items with largest price changes, positive or negative, leaving the middle 70%.
CPI weighted mean
Inflation of the item at the middle of the price changes in the CPI basket (50th percentile)
