Unit 3 - AOS2 Flashcards
Gross Domestic Product (GDP)
The market value of all final goods and services (i.e. not used in further processing) produced in an economy over a period of time.
Real GDP
The value of all final goods/services produced in an economy, adjusted for inflation.
Real GDP per Capital
The measure of an economy’s total economic output per person, calculated by dividing real GDP by population.
Material Living Standards
The ability of households to access goods/services, measured by real GDP.
Non-Material Living Standards
Non-material factors that affect an individual’s quality of life, such as social networks, freedom of speech, and a healthy environment.
Factors Affecting Living Standards (6)
- access to goods and services
- environmental quality
- physical and mental health
- life expectancy
- crime rates
- literacy rates
Circular Flow Model of Income
A model that shows the four flows - factors of production, income, demand, and production - of money, resources and goods/services between households and businesses in an economy.
Leakages
Income that is diverted away from the economy, decreasing economic activity. Either savings (S), taxes (T) or imports (M).
Injections
Funds that flow back into the economy, increasing economic activity. Either investment (I), government spending (G) or exports (X).
Financial Sector
Institutions that provide financial services, such as banks and insurance companies.
Government Sector
Government-controlled entities, such as government departments and state-owned corporations (e.g. VicRoads).
External Sector
Foreign economies overseas.
Aggregate Demand
The total expenditure on new final Australian-made goods/services.
Business Cycle
The fluctuations of economic expansion followed by contraction in an economy over time.
Peak
A point where the economy is experiencing strong rates of economic growth. Characterised by:
- high inflation
- high growth
- low unemployment
- high consumer confidence & spendings
- low savings
- more injections and less leakages
Trough
A point where the economy is experiencing low rates of economic growth. Characterised by:
- low inflation
- low growth
- high unemployment
- low consumer confidence & spendings
- high savings
- less injections and more leakages
Contraction
A decrease in economic activity following a peak, as interest rates increase and households chose to save more of their money.
- inflation decreasing
- growth decreasing
- unemployment increasing
- low consumer confidence
- less injections and more leakages
Expansion
An increase in economic activity following a trough.
- inflation increasing
- growth increasing
- unemployment decreasing
- high consumer confidence & spendings
- low savings
- more injections and less leakages
Technical Recession
Two consecutive quarters of negative economic growth.
Stagflation
A period of low economic growth, high inflation and high unemployment. E.g. 2020.
Stabalisation Policies
Government strategies, such as monetary policy, used to keep economic growth steady.
Asset Bubble
When the price of a product rises rapidly and significantly above its value, usually during a peak.
Private Consumption Expenditure (C)
The total value of all spending by households for immediate utility, including durables (cars, furniture), semi-durables (clothes), single-use goods (food) and services of all kinds (hairdressing). Comprises 60% of AD.
AD Equation
AD = C + I + G + X - M
Private Investment Expenditure (I)
The total value of all spending by businesses on capital goods (equipment, buildings and vehicles) to increase future production. Comprise 15 - 20% of AD.
Government Current Expenditure (G1)
Government spending on goods/services that are not capital, such as government salaries, stationary and provision of government services like healthcare.
Government Investment Expenditure (G2)
Government spending on goods that are capital to improve future production. (e.g. construction of a new school).
Net Exports (X - M)
Also ‘balance on goods and services’. The value of all Australian-made goods/services purchased overseas (exports) subtracted by the value of all foreign-made goods/services bought by Australian households (imports). Comprise 20 - 24% of AD.
Factors Influencing Aggregate Demand (6)
- disposable income
- interest rates
- consumer confidence
- business confidence
- the exchange rate (depreciation = increased AD)
- rates of economic growth overseas
Aggregate Supply
The total volume of goods and services produced over a period of time.
Factors Influencing Aggregate Supply (8)
- quantity of factors of production (e.g. labour force)
- quality of factors of production (e.g. skills of workers)
- costs of production
- technological change
- productivity growth
- the exchange rate (appreciation = more AS)
- government regulation (e.g. carbon tax)
- climatic conditions
Government Macroeconomic Goals
- strong and sustainable growth (3 - 3.5%)
- full employment (4.25%)
- stable inflation (2 - 3%)
Nominal GDP
The value of all final goods/services produced in an economy, not adjusted for inflation.
Quarterly Growth
The percentage change in GDP over a period of 3 months. Calculated by: (GDPJun - GDPMar) / GDPMar x 100
Annual Growth (Year-on-Year Growth)
The percentage change in GDP over a period of 12 months. Calculated by:
(GDPJun24 - GDPJun23) / GDPJun23 x 100
Annualised Growth
An approximate annual growth rate obtained by multiplying the quarterly rate by 4.
Jobless Growth
When higher output is achieved through higher productivity rather than the hiring of additional labour.
Employed
An individual over the age of 15 working for more than one hour per week.
Unemployed
An individual over the age of 15 not working or working less than one hour per week, who is actively looking for work.
Full Employment
The lowest level of unemployment before inflationary pressures occur, where cyclical unemployment is non-existent.
Structural Unemployment (‘Natural’ Unemployment)
When the skills of the unemployed do not match the skills of the industry (e.g. farmer can’t work in hospital).
Caused by:
- new technology replacing jobs
- changes in tastes
- outsourcing resources
- business restructuring (e.g. downsizing)
- government microeconomic reform policies (e.g. priviatisation of energy)
Seasonal Unemployment
When skills are only demanded during certain times of the year (e.g. fruit picker, ski instructor).
Frictional Unemployment
When an unemployed person is between jobs.
Hard Core Unemployment
When a person has characteristics (e.g. disability) that prevents them from being hired.
Non Accelerating Inflation Rate of Unemployment (NAIRU)
Also ‘natural rate of unemployment’. The lowest employment rate possible before inflation begins to accelerate (4.25%).
Labour Force
All people aged 15 and over who are willing and able to work. (i.e. employed + unemployed)
Hidden Unemployment
When an individual has been discouraged from searching for a job and stops looking. (excluded from unemployment statistics).
Participation Rate
The percentage of the working age population who are members of the labour force. Calculated by dividing the labour force by the working population.
Unemployment Rate
The percentage of the labour force that is unemployed, calculated by dividing the number of unemployed by the total labour force.
Underemployment
Individuals who are classified as employed but want to work more hours.
Underutilisation Rate
The percentage of labour unused in the labour force, calculated by dividing the number of unemployed and underutilised people by the labour force.
Cyclical Unemployment
Unemployment that occurs during the downturns and toughs of the business cycle, when demand for labour is low.
Depression
A prolonged recession.
Consequences of Unemployment (4)
- reduced GDP
- reduced government tax revenue
- reduction in living standards
- greater income inequality
Consequences of Too High or Too Low Economic Growth (3,2)
Too High:
- depletion of natural resources
- inflation
- government debt
Too Low:
- unemployment
- decreased material living standards
Boom
A peak where economic growth is too high (>3%), resulting in inflationary pressures.
Productivity
The measure of output per unit of input.
Inflation
A sustained increase in the general price level over time.
Consumer Price Index (CPI)
The value of a weighted basket of goods over time, used to measure inflation.
Deflation
A sustained decrease in the general price level over time.
Disinflation
A fall in the rate of inflation. (e.g. decrease from 7% to 4%).
Quarterly Inflation Rate
The percentage change in CPI over a period of 3 months, calculated by:
(CPIJun - CPIMar) / CPIMar x 100
Annual Inflation Rate
The percentage change in CPI over a period of 12 months, calculated by:
(CPIJun24 - CPIJun23) / CPIJun23 x 100
Annualised Inflation Rate
An approximate annual inflation rate obtained by multiplying the quarterly rate by 4.
Positive Output Gap
When an economy’s actual output exceeds its productive capacity, leading to inflationary pressures.
Headline Inflation
The price movements of all goods and services in the CPI.
Underlying Inflation (Core Rate of Inflation)
The exclusion of various prices from the CPI to remove the impact of outliers. For example, the trimmed mean averages the middle 70% of prices, and the weighted median measures the middle value.
Demand Inflation
When there are excess levels of AD in the economy, pulling prices up.
Cost Inflation
When there are inadequate levels of AS in the economy, pushing prices up.
Consequences of High Inflation (11!)
- erosion of purchasing power
- loss of efficiency (price mechanism distorted)
- excess spending (to avoid losing value of money sitting in bank)
- investment in the wrong products (e.g. art rather than capital goods) to preserve wealth
- increased interest rates
- loss of international competitiveness
- damaged business confidence
- wage price spiral (workers demand higher wages, increasing cost of production, increasing inflation, repeat)
- inequitable income distribution
- low economic growth & high unemployment
- increased net foreign debt
Phillips Curve
An economic model that shows the inverse relationship between unemployment and inflation.
Spare Capacity (in Labour Market)
The gap between NAIRU and the actual rate of unemployment.
Goal of Strong and Sustainable Growth
To achieve the highest growth rate possible, consistent with strong employment growth, but without running into unacceptable inflationary, external or environmental pressures.
Consumer Confidence
The level of optimism that households have about their future financial situation.
Economic Shock
Random or unpredictable events that cause significant damage to economies, such as geopolitical instability or the COVID-19 pandemic.
