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Unit 3/4 - Economics > Unit 3, Area of Study 2 Domestic Stability > Flashcards

Unit 3, Area of Study 2 Domestic Stability Flashcards

1
Q

Aggregate demand

A

The total expenditure on the goods and services produced in the economy over a period of time.

(C + I) + (G1 + G2) + (X - M)

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2
Q

Aggregate Supply

A

Aggregate Supply: represents the total volume of goods and services that all suppliers have produced and supplied over a period of time.

Aggregate Supply is influenced by the willingness and ability of producers to produce.

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3
Q

Business Cycle

A

Business Cycle: the cyclical movement of economic activity over time.

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4
Q

Causes of a contractionary phase (Business Cycle)

A
  • Due to high inflation, capacity constraints, higher interest rates the market will correct itself (meaning consumers will increase savings to decrease their debt)
  • Increasing volume of production becomes difficult = reduced derived demand for labour = increased unemployment rate.
  • Increasing inflation
  • Peak that results in a “correction”
    Consumer and business confidence declinesFall in private consumption and investment with households saving more and de-leveraging due to uncertainty Rate of economic growth slows à Increased unemployment, confidence drops, inflation comes down due to reduced demand inflationary pressures
  • Circular flow = leakages will start to rise and injections fall
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5
Q

Causes of a Peak (Business Cycle)

A
  • Increased (high) consumer sentiment (confidence)
  • Increased (high) business confidence (sentiment)
  • Greater propensity to spend / take on new debt / interest rates
  • Household savings ratio may fallHigh levels of global economic growth
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6
Q

Causes of a trough (Business Cycle)

A
  • Reduced levels of spending due to low consumer confidence
  • Higher levels of household savings due to low consumer confidence
  • Reduced levels of investment due to low business confidence
  • Low levels of disposable income
  • Slow rates of global economic growth
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7
Q

Causes of an expansionary phase (Business Cycle)

A

In trough:

  • Relatively low inflation rate
  • Lower labour costs
  • Lower interest rates

Causes of an expansion

  • Increasing consumer sentiment (confidence)
  • Increased consumption
  • Increasing business confidence
  • Increased investment
  • Increased government spending through budgetary policy
  • Low interest rates
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8
Q

Consequences of high inflation

A

Erodes purchasing power - A greater proportion of disposable income is required to purchase the same basket of goods and services.

Resource misallocation - Inflation undermines efficiency in allocation of resources / distorts the allocation of resources - With prices rising, this can send false price signals to producers that there are profit making opportunities

Reduces international competitiveness, i.e. local producers are at a competitive disadvantage

Redistributive effects - low income earners hit with rising prices eroding their purchasing power, whilst high income earners are more able to take advantage of rising asset prices through investing any savings (e.g., investment houses, shares, term deposits etc.)

Savings and investment - Distorts savings and investment decisions as households have less incentive to save, given that inflation erodes the value of future consumption (i.e. savings today) and businesses will therefore have less access to relatively cheap savings for investment - leads to lower living standards in the future as they have less savings.

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9
Q

Consequences of not achieving the goal of Strong and Sustainable Economic Growth (if growth is below 3%)

A
  • *If growth is below 3%**
  • *Growth in real income** – if growth is too low, then this won’t happen.

Lowering in the unemployment rate – if growth is too low, then this won’t happen.

Increased ability of government to provide essential services and avoid rising levels of debt - if growth is too low, then the government will need to run a budget deficit in order to provide essential services, and without tax revenue to pay for this, they’ll have to borrow increasing levels of government debt.

Negative overall impact on material and non-material living standards.

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10
Q

Consequences of not achieving the goal of Strong and Sustainable Economic Growth (if growth is above 3.5%)

A
  • *If growth is above 3.5%**
  • *Growth in real income**

lowers unemployment rate

improves ability of government to provide essential services and avoid rising levels of debt

However:
Sustainable?
Can create inflationary pressures which could impact negatively on real income growth.Can create external pressuresCan create environmental pressures through depletion of natural resources and degradation of the environment.Negative impact on material and non-material living standards.

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11
Q

Consequences of unemployment

A

Loss of gross domestic product (GDP).Loss of tax revenue.Greater income inequality.Reduction in living standards.

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12
Q

Consumer Price Index

A

Collects prices of over 100,000 goods and services that are purchased by average metropolitan Australian households in the eight capital cities.

This is called a ‘basket’.

Each of these goods is then categorised in 11 groups and sub-divided again into sub-groups.Weights are then attached to each group to reflect their relative importance to the typical household.

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13
Q

Cost inflation

A

Inflation caused by changes in factors that impact on aggregate supply or supply side pressures or capacity constraints.

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14
Q

Cyclical unemployment

A

Unemployment that occurs when the economy is not operating at its full capacity due to AD deficiencies.

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15
Q

Demand inflation

A

Inflation caused by changes factors that increase or decrease Aggregate Demand (important to note, mainly occurs when economy close to or approaching productive capacity)

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16
Q

Disguised unemployment or Under-employment

A

Underemployed are individuals who have a job however, they would prefer to be working more hours and therefore are unemployed to an extent.

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17
Q

Employed

A

When someone is 15 years of age and over and working more than 1 hour a week in return for some form of remuneration (such as wages).

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18
Q

Factors that influence AD

A
  1. Changes in the general level of prices (inflation)
  2. Disposable income (Gross Income – Income tax)
  3. Interest rates → cost of borrowing and incentive to save
  4. Consumer confidence → General optimism or pessimism about the future state of the economy and job prospects – from a consumer’s perspective
  5. Business confidence → General optimism or pessimism about the future state of the economy and ability to generate a profit – from a firm’s perspective.
  6. Exchange rates
  7. Levels of economics growth overseas
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19
Q

Factors that influence Aggregate Supply

A
  1. Changes in the general level of prices (inflation)
  2. The quantity of the factors of production (labour, capital and natural)
  3. The quality of the factors of production (labour, capital and natural)
  4. Costs of Production – e.g. wages
  5. Technological change
  6. Productivity growth
  7. Exchange rates
  8. Climatic conditions
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20
Q

Factors that influence both material and non-material living standards (PEACLL)

A
  1. Physical and mental health
  2. Environmental quality
  3. Access to goods and services
  4. Crime rates
  5. Literacy rates
  6. Life expectancy
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21
Q

Frictional unemployment

A

Where a person is unemployed for the period of time while they are moving from one job to another.

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22
Q

Goal of Full Employment

A

The level of unemployment that exists when the government’s economic growth goal is achieved and where cyclical unemployment is non-existent, generally accepted to be 4 to 4.5% (NAIRU)

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23
Q

Goal of Low Inflation (Price Stability)

A

Goal of low inflation is to achieve a sustained increase in the general level of prices of between 2 – 3% on average over the medium term.

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24
Q

Goal of strong and sustainable economic growth

A

The Government’s goal for strong and sustainable economic growth is to achieve the highest growth rate possible (real GDP of 3 to 3.5%), consistent with strong employment growth but without running into unacceptable inflationary, external and/or environmental pressures.

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25
Q

Government Expenditure (G1 and G2)

A

Includes expenditure by all levels of government (federal, state and local).

  • G1 → Current expenditure on goods or services not capital in nature (i.e., will provide no on-going benefit)
    Health, education, defence, office stationary, salaries
  • Relatively stable component of AD
  • G2 → Capital expenditure Investment expenditure on goods of a capital nature (i.e., will provide an ongoing benefit)
    Physical hospitals, schools, roads (infrastructure)
  • 20% of Aggregate demand
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26
Q

Gross Domestic Product (GDP)

A

Gross Domestic Product = total market value of all goods and services produced in the Australian economy over a given period of time.

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27
Q

Hardcore unemployment

A

Where a person is unemployed due to mental, physical or other characteristics that prevent them from receiving a job offer.

28
Q

Headline Inflation / Consumer Price Inflation

A

captures price movements of all goods and services contained in the CPI (normal) à referred to as “headline rate of inflation” or “headline inflation”.

29
Q

Hidden Unemployment

A

Unemployed not included in the calculation of unemployment as they have given up looking for work (i.e. not actively seeking work).

30
Q

How do changes in costs of production – e.g. wages impact AS?

A

An example: Increase in wage growth, a significant cost of production for labour intensive industries, will lead to an increase in the cost each unit of output as producers will be paying their workers more, reducing the ability to produce and decreasing the total volume of goods and services that all suppliers will produce and supply in the Australian economy over a period of time due to a decrease the productive capacity of the nation.

31
Q

How do changes in business confidence impact AD?

A

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 Private Investment Expenditure (I)
  • Decrease in business confidence = decrease in Private Investment Expenditure (I)
  • Sometimes referred to as Business Sentiment.
32
Q

How do changes in consumer confidence impact AD?

A

General optimism or pessimism about the future state of the economy and job prospects – from a consumer’s perspective

  • Increase in consumer confidence = increase in Private consumption expenditure (C)
  • Decrease in consumer confidence = decrease in Private consumption expenditure (C)
  • Sometimes referred to as Consumer Sentiment
33
Q

How do changes in exchange rates impact AD?

A

Impacts international competitiveness:

  • a depreciation of the AUD → increase in international competitive = increase X and decrease in M - net exports
  • a appreciation of the AUD → decrease in international competitive = decrease X and increase in M
34
Q

How do changes in general level of prices impact AS?

A

In a period of rising prices (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
35
Q

How do changes in interest rates impact AD?

A

Cost of borrowing and incentive to save)

Impacts portion of 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 Private Consumption Expenditure (C)

Impacts the cash available to a business – cash flow effect (variable rate loans) → more cash available for ILow interest rates → more attractive to borrow cash / less incentive to save, instead to spend → increase in C and I

High interest rates → greater incentive to save and not spend / less attractive to borrow cash → decrease in C and I.

36
Q

How do changes in levels of global growth impact AD?

A
  • Increase in economic growth in the economies of our major trading partners → increase in spending on our X
  • Decrease in economic growth in the economies of our major trading partners → decrease in spending on our X
37
Q

How do changes in productivity growth impact AS?

A

Example: Low levels of labour productivity in the Australian economy, the level of outputs from a given level of inputs, i.e., hours worked, leads to restraint on the ability of producers to produce and persistently low levels of total volume of goods and services that all suppliers have produced and supplied in the Australian economy over a period of time due to a lack of growth in the productive capacity of the nation.

38
Q

How do changes in the disposable income impact AD?

A

Impacts purchasing power of consumers:

  • An increase in real disposable income → increase in purchasing power = increase in C
  • A decrease in real disposable income → decrease in purchasing power = decrease in C
39
Q

How do changes in the general level of prices impact AD?

A

Impacts purchasing power of economic agents of changes in prices (inflation):

  • higher prices → decrease or erodes of purchasing power → decrease in CLower prices → increase or improves of purchasing power → increase in C
  • Impacts international competitiveness of changes in prices (inflation):
    Increase in inflation → reduces Australia’s international competitiveness → decrease in X
  • Decrease in inflation (reduced inflationary pressures) → increases Australia’s international competitiveness → increase in X
40
Q

How do changes in the quality of factors of production impact AS?

A

An example: The improvement in retention rates of students in high school will lead to a labour force with the skills required by industry, increasing the quality of labour resources and boosting producers ability to increase the total volume of goods and services in the economy over a given period of time due to an increase the productive capacity of the economy.

41
Q

How do climatic conditions impact AS?

A

Climate change can lead to the degradation of natural resources, e.g., drought and the impact on farming land.
Climate change can lead to extreme weather events such as floods and cyclones that will lead to damage of infrastructure such as roads, rail and ports negatively impacting producers ability to increase the volume of production.

42
Q

How do exchange rates impact AS?

A

Depreciation of the AUD, increases cost of importsAppreciation of the AUD, decreases cost of imports

43
Q

How do Technological change impact AS?

A

Example: The roll out of the NBN, a significant change in technology available to producers, is likely to increase the general level of productivity for businesses through an improved telecommunications infrastructure, increasing their ability to produce and as a result increasing the total volume of goods and services that all suppliers produce and supply in the Australian economy over a period of time due to a increase the productive capacity of the nation.

44
Q

How do changes in the quantity of factors of production impact AS?

A

An example: An increase in the labour force participation rate will lead to an increase in the quantity of factors of production, as greater proportion of the working age population join the labour force increase labour resources available , boosting producers ability to increase the total volume of goods and services in the economy over a given period of time due to an increase the productive capacity of the economy.

45
Q

Inflation Formula

A
46
Q

Labour Force Participation Rate

A

The portion of the working age population that is participating in the labour force (i.e., either employed or actively seeking work, unemployed).

47
Q

Labour Force Underutilisation Rate

A

The proportion of the of the labour force that is ‘underutilised’, or the proportion of individuals not working the number of hours they would like to. This includes those who are unemployed and under-employed.

48
Q

Long term unemployed

A

Being unemployed for more than 12 months

49
Q

Material living standards

A

Refers to the level of economic wellbeing of individuals and the quantity of tangible or physical goods and services available for each person to consume.

50
Q

Nature of a contractionary phase (Business Cycle)

A
  • Slowing rates of economic growth
  • Decreasing levels of inflation / disinflation
  • Increasing levels of unemployment / fewer job vacancies
  • Increasing under-utilization rate (i.e., plenty of spare capacity in the economy available to increase volume of production), particularly in the labour market in the form of unemployment and under-employment.
51
Q

Nature of a Peak (Business Cycle)

A
  • Strong rates of economic growth / perhaps unsustainable growth?
  • High levels of inflation
  • Low levels of unemployment
  • Spending and confidence are high
  • Production is strong and capacity is heavily utilised.
52
Q

Nature of a trough (Business Cycle)

A
  • The minimum point of a cycle
  • Low levels of production (GDP / Economic growth) = high unemployment
  • Decreased inflation / deflation can occur
  • Under-utilisation of capacity
53
Q

Nature of an expansionary phase (Business Cycle)

A

In trough (prior to an expansion)

  • Relatively low inflation rate
  • Lower labour costs
  • Lower interest rates

Nature of an expansion

  • Increasing levels of production (GDP growth)
  • More job vacancies / falling unemployment
  • Inflationary pressures building in the economy
54
Q

Net Exports (X - M)

Also known as the Trade Balance

A

Also referred to as Net Exports (X – M) – also referred to as Trade Balance.

  • X is spending on exports by foreign households, businesses, governments or other institutions.
  • M is spending on imports by Australian households, businesses, governments or other institutions.
  • (note: 60% of imports are used in the production process)
  • Each about 20 to 24% of AD, but net effect about 4% (very volatile as subject to a variety of factors such as ER, global growth, levels of free trade etc.)
55
Q

Non material living standards

A

refer to quality aspects of a person’s daily existence.

56
Q

Private consumption expenditure (C)

A

Total value of all expenditure on goods incurred by households.
Includes:

  • Spending on durables (e.g. white goods, cars etc.)
  • Consumer semi-durables (e.g. clothing)
  • Non-durables (e.g. food)
  • Services (e.g., dry cleaning)

60% of AD

57
Q

Private Investment Expenditure (I)

A

Total value of expenditure with the purpose of expanding the productive capacity and productivity of firms:

  • Purchase of new equipment - Vehicles, Buildings (includes the construction of new homes), producers adding to inventories (includes a farmer buyer more cattle)
  • 15 to 20% of AD but is the most volative component of AD, as during periods of low economic activity, businesses put a stop on expenditure on new capital goods such as equipment. This occured during CoVid.
58
Q

Real vs Nominal GDP (and for other measures)

A
  • Nominal GDP – is the dollar value of the goods and services produced in a time period, which depends on the volume of what was produced and the price of what was produced.
  • Real GDP – captures on the volume that was produced.
  • Real GDP also referred to as “the chain volume measure of GDP”
  • Real removes the impact of inflation on the measures.
59
Q

Reasons for pursuring the goal of strong and sustainable economic growth

A

Growth in real income (helps raise real incomes)

  1. Growth in real income = greater access to goods and services = improved material living standards / greater happiness and reduced stress = improved non-material living standards.
  2. Lowering in the unemployment rate (economic growth creates jobs)üPositive relationship between growth and employment through “derived demand for labour” or DD4L
  3. Increased ability of government to provide essential services and avoid rising levels of debt.
  4. And the overall link that all of the above has to the economic prosperity of the nation in the form of improved living standards.
60
Q

Seasonal unemployment

A

Where a person is unemployed because their skills are only demanded during certain times of the year.
Examples include snow ski instructors and fruit pickers

61
Q

Structural unemployment

A

The skills of the unemployed do not match the skills required by the economy.
(in other words there is a mismatch between the skills of the unemployed and the skills that are needed for the jobs available).

An example is the recent shut down of car manufacturing in Australia.

62
Q

The circular flow model of an income

A

The model, shows the flows of production, income and consumption that occur as a result of transactions between the Business and Household sector.

  • Flow 1: Household sector provides resources (e.g. labour, capital and/or natural resources) to the business sector.
  • Flow 2: Business provide income (e.g, wages, dividends, interest, profits and rent) to the Household sector
  • Flow 3: Part of this income is then consumed via the purchase of goods and services from the business sector.
  • Flow 4: Total real value of production in the economy, i.e. real GDP.
  • Leakages: part of income earned by households is not immediately spent on Australian goods and services, instead is diverted through the Financial Sector, Government Sector and External Sector.
  • Financial Sector: savings (Leakage) and investment (injection) - money used in C (Private consumption expenditure) or I (Private investment expenditure).
  • Government Sector: taxes (Leakage) & govt spending on infrastructure (injection) or via C (private consumption expenditure) once welfare transfers are spent.
  • External sector: spending on imports (leakage), which decreases AD and spending on exports (injection) which increases AD.
63
Q

Under employed

A

Individuals that are employed but would prefer to be working more hours than they are currently working. (Also referred to as disguised unemployment)

64
Q

Underlying inflation rate

A

Excludes the “volatile items” of fruit, vegetables and fuel à “CPI all groups excluding volatile items”.

65
Q

Unemployed

A

When someone is over 15, without work or working for less than one hour per week, and actively looking for (more) work.

66
Q

Gross National Expenditure

A

Total expenditure by Australians on goods and services produced in Australia and the rest of the world

GNE = C + I + G

67
Q
A

Unit 3/4 - Economics (10 decks)

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