Unit Two - AOS1 (Economic growth, long-term economic prosperity and environmental sustainability) Flashcards
Production
Total value of goods and services produced in an economy.
Income
Total income that have been earned by those whom have contributed in the production of those goods and services.
Expenditure
The total spending on goods and services being produced in an economy.
“Circular Flow Income”
Production Income
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INJECTIONS
Leakages
Where some of the income earned by economic agents are redirected away for expenditure of Australian production.
Injections
Contribution to spending on Australian products.
Leakages - examples
>Savings = money which is being saved, rather than being spent on the economy. >Taxes = money being paid to the government. >Imports= Money being spent on goods and services out of Australia.
Injections - examples
>Investment= spending on capital items (machinery, factories) >Government= money spent by the government of Australian goods and services. >Export= money spent by overseas residents on Australian goods and services.
If leakages exceed injections…
There will be a reduction in economic activity over a certain period of time.
If injections exceed leakages…
There will be a rise in economic activity over a certain period of time.
What is AD = C + I +G + (X-M) ?
AD = aggregate demand C = Consumption Demand/ Expenditure I = Private Investment Expenditure G = Government Expenditure (X-M) = Net Exports
Aggregate Demand (AD)
The total expenditure of goods and services produced in an economy over a period of time.
Consumption Demand/ Expenditure (C)
- Total value of all expenditure on individual and collective consumption by resident households and non-profit household serving institutions.
- includes durable items (e.g. cars), and semi-durable items (e.g. clothes, and food).
Private Investment Expenditure (I)
Purchase of new goods and services to increase the ability of firms to produce goods and services.
Government Expenditure (G)
All demand for goods and services VIA federal, state and local governments.
Net Exports (X-M)
X = exports (Australian made goods and services purchased by overseas residents) M = imports (Foreign made goods and services purchased by Australian residents)
If AD = C…what does it mean?
It means that it is an economy with no leakages or injections.
Saving and Investments
Increasing the rate of savings will reduce the growth of AD and economic activity, UNLESS, businesses are willing to increase investment spending by the same amount.
Government Spending and Taxes
Raising taxes without a corresponding increase in spending shouldn’t act as a constraint on the aggregate demand (The total expenditure of goods and services produced in an economy over a period of time).
Net Exports
Decrease in competitiveness between Australians exporters and importers. Competing producers should save to constrain AD as Australians will attempt to purchase more imports from Australian competitors. Foreigners will also purchase exports from Australian competitors.
Aggregate Supply
The total number of goods and services that producers are prepared to supply the market with.
Represents the ability of an economy to make available the goods and services to meet AD.
A nations AS is closely related to the productive capacity of the economy. . Any improvements to the potential of supply will boost productive capacity, and enable economic activity to occur without creating other economic problems (such as inflation).
Economic Growth
The rate at which economic activity grows over time and is most commonly determined by changes in the real value of production from one year to the next.
Real value’s (growth) of production means we ignore any growth that is consequence to rising prices.
GDP (Gross Domestic Product)
> Value of production estimated by the Australian Bureau of Statistics (ABS)
Reported Quarterly VIA GDP as the statistical measure of production.
Increased GDP over time increases the ‘final market value of goods and services’ produced over time. May be due to inflation rather than rise in volume of g+s produced.
How to calculate Real GDP?
1) “Chain Volume Measure of GDP” and economic growth is measured by change in real GDP over time
or by…
2) Adding the ‘total value adding’ in the economy.
What is real GDP?
GDP at constant prices.
GDP, but strip out the influence of inflation
Real GDP in economies - Key Terms
Total Value Of Production= the value generated by each producer at each stage of production.
Final Goods= A good or service that is consumed by the end user, and requires NO further processing.
Intermediate Goods= goods or services sold to other producers (as inputs that are converted into another product) prior to the final consumer.
Final Market Value= The value of the final product produced.
Economic Growth
Economic growth increases our access to goods and service that mostly improve our living standards. Living standards are dependent upon our material and non-material living standards.
Material Living Standards
Higher levels of production, income and expenditure help raise MLS
Higher levels of production, increases the amount of jobs available helping generate income and helping people buy goods and services
Living standards measured by access to g+s
Non-Material Living Standards
Aspects of a persons life quality that cannot be measured by monetary factors.
For example
a) Access to clean water, air, and other natural resources
b) Access to health care and education
c) stress levels
d) job satisfaction
e) pollution levels
economic growth is caused by increased material living standards, and increased non-material living standards.
Economic Development
Improvements in economic wellbeing of a nation (Includes MLS and N-MLS).
Economic Growth
Benefits of economic growth will always need to be weighted up with factors of negative influence to living standards.
Real GDP Limitations in Measuring Living Standards
Real GDP only provides an indicator of the production levels or income per person that occurs in our economy.
However, RGDP is unable to provide a totally accurate measure of changes to Material Living Standards over a period of time. This is due to;
a) RGDP excludes non-material g+s (black market or home-based production)
b) RGDP doesn’t accurately measure changes in quality of g+s from 1/4 to the next.
c) Some non-marketed goods have a value imported when calculating RGDP
d) Inaccuracies in conversion
e) RGDP largely based upon estimates.
RGDP Limitations and Non-Material Living Standards…
Indicator fails to capture all non-material factors that influence living standards.
1) Monetary Transaction that improve, or deteriorate Living Standards Distinctions
2) Cost of Negative Externalities - and the value associated with the depletion of the nations stock of natural capital.
3) Leisure time sacrificed (or gained) are not taken into account - when there are increases in GDP.
Economic Indicators of Living Standards
MAP = Measures of Australian Progress
GPI = Genuine Progress Indicator
HDI = Human Development Indicator
All of these seek to adopt a broader approach to measuring living standards.
Aggregate Demand Factors
Change in economic growth by influencing one or more AD components
Aggregate Supply Factors
Influence the supply decisions of producers &/or the productive capacity of the economy.
Consumer Confidence
The confidence of the consumer regarding their economic wellbeing in the future - (can be affected by world events such as terror attacks, or a global crisis)
Business Confidence
The perception of a business on their future levels of sales and profitability.
Interest Rates
Represent the costs of borrowing money, or alternatively the return of those lending money VIA a financial Institution (e.g. CBA, Westpac, ANZ…)
Changes in rates can have an impact of both AD and AS.
Low Interest Rates Benefit to AD Stimulation
- Businesses are more likely to save less and borrow more. Increasing the demand for goods and services.
- Lowers the cost to finance existing loans for household and businesses, which in turn increases discretionary income. Helps stimulate consumption and investment.
Discretionary Income
The available income after paying for essentials.
Strong Rates of Economic Growth By Australian Trading Partners.
Increased Economic Growth Overseas (VIA trading Partners - e.g. China and USA) makes it more likely to increase demand for Australian exportationof consumer items, capital, or raw material to fuel the economies growth.
Exchange Rate
The rate at which 1 nations currency is exchanged for that of another.
If there is an increased value, the demand for it is less.
Terms Of Trade (TOT)
Ratio of export prices to import prices
Productivity
Volume of Output produced from a given number of imputs.
AKA, how well do our factors of production combine to produce goods and services. (e.g. Aggregate Supply factors affecting economic growth)
Factors Affecting Future Rates Of Economic Growth
>Global Conflict >Environmental factors (e.g. Climate Change) >Financial Crisis >Gov Policy Change in Australia >Gov Policies changing overseas. >Economic Instability
Ageing Population
> Median Age increased from 35 yrs to 37 yrs
Neg implications of the ability of Australians to participate in the labor market, and contribute to national production - causes the labor force to fall.
Greater Government expenditure required to provide for health, aged pensions, aged care - in order to erode the budget surplus. Need to address the negative effects of the aging population(baby boomers).
Labor Force Participation
> Decreased. Decline is expected to accelerate from the year 2020. This will cause labor shortages, and upward labor cost pressure.
Monetary Policy
Created by the RBA (RESERVE BANK OF AUSTRALIA). The manipulation of interest rates to influence the total demand of goods and services (AD), and therefore the economies total output.
Long Term Goal: Increase interest rates to have a reduction of inflation OVER A PERIOD OF TIME
Short/Medium Term Goal: May hurt. Done to prevent businesses getting away with charging high prices
Budgetary (Fiscal) Policy
Involves any taxation or spending decisions by the federal government which impacts on budgetary outcome.
Can be a budget;
Surplus
Defecit
Balance
Uses budget to improve prosperity and welfar of Australians. major spending areas include social security, health care, and educations.
Gov. sometimes manipulate the budget for the benefit of Australians. Try to stimulate the economy when economic growth is too low, and requires government support.
Stabilization role for monetary and budgetary policies.
Involves monetary or budgetary policies being used…
Stimulate economy when low - Expansionary Manner
Decrease EXCESSIVE economic growth - Restrictive Manner
Aggregate Supply Policies
Boost supply potential of the economy.
Designed to improve supply conditions for Australian businesses by either;
a) Boosting Productivity
b) Boosting Efficiency
Aggregate Supply Policies - EXAMPLES
> Investment of infrastructure
Increased training and development funding
Boost Labor Force Participation
Tax concessions for investing in new technology
Intake of skilled migrants.
Environment Sustainability
The preservation of our natural resources for the future by ensuring safe practices.
Sustainable Development
Development of a nation at a pace which doesn’t erode the ability of future generations to enjoy the same life quality.
Trade Offs - ECONOMIC GROWTH VERSUS ENVIRONMENTAL SUSTAINABILITY
Trade Off=
More environmental concerns - causing more constraints upon businesses - causing a negative economic growth.
However, economic growth and environmental sustainability can be compatible.
Climate Change
Global warming of the Earth due to the burning of fossil fuels for the production of g+s.
Deterioration of Common Access Resources
Common Access Resources = Natural Resources which are likely to be exploited.
Without government regulation these resources would have a depletion in access.
Economic Cost of Economic Growth
The ability to sustain current rate of economic growth into future = sustainable development/ sustainable economic growth.
Emissions Trading Scheme (ETS)
A scheme to achieve the most efficient reduction in CO2 pollution by using market forces to place a price on pollution.
Carbon Tax
Tax on businesses emitting CO2 when producing g+s. Australia repealed the carbon tax in 2014.
Cap and trade System
effectively creates a market for pollution permits. Businesses will be better at reducing pollution levels and will be willing to supply permits to the less efficient (whom are to demand permits).
