Unit Two - AOS1 (Economic growth, long-term economic prosperity and environmental sustainability)

Question 1

Production

Answer 1

Total value of goods and services produced in an economy.

Question 2

Income

Answer 2

Total income that have been earned by those whom have contributed in the production of those goods and services.

Question 3

Expenditure

Answer 3

The total spending on goods and services being produced in an economy.

Question 4

“Circular Flow Income”

Answer 4

Production Income
| \ / |
| \ Expenditure/ |
| |
INJECTIONS

Question 5

Leakages

Answer 5

Where some of the income earned by economic agents are redirected away for expenditure of Australian production.

Question 6

Injections

Answer 6

Contribution to spending on Australian products.

Question 7

Leakages - examples

Answer 7

>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.

Question 8

Injections - examples

Answer 8

>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.

Question 9

If leakages exceed injections…

Answer 9

There will be a reduction in economic activity over a certain period of time.

Question 10

If injections exceed leakages…

Answer 10

There will be a rise in economic activity over a certain period of time.

Question 11

What is AD = C + I +G + (X-M) ?

Answer 11

AD = aggregate demand
C = Consumption Demand/ Expenditure 
I = Private Investment Expenditure
G = Government Expenditure
(X-M) = Net Exports

Question 12

Aggregate Demand (AD)

Answer 12

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

Question 13

Consumption Demand/ Expenditure (C)

Answer 13

• 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).

Question 14

Private Investment Expenditure (I)

Answer 14

Purchase of new goods and services to increase the ability of firms to produce goods and services.

Question 15

Government Expenditure (G)

Answer 15

All demand for goods and services VIA federal, state and local governments.

Question 16

Net Exports (X-M)

Answer 16

X = exports (Australian made goods and services purchased by overseas residents)
M = imports (Foreign made goods and services purchased by Australian residents)

Question 17

If AD = C…what does it mean?

Answer 17

It means that it is an economy with no leakages or injections.

Question 18

Saving and Investments

Answer 18

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.

Question 19

Government Spending and Taxes

Answer 19

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).

Question 20

Net Exports

Answer 20

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.

Question 21

Aggregate Supply

Answer 21

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).

Question 22

Economic Growth

Answer 22

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.

Question 23

GDP (Gross Domestic Product)

Answer 23

> 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.

Question 24

How to calculate Real GDP?

Answer 24

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.

Question 25

What is real GDP?

Answer 25

GDP at constant prices. | GDP, but strip out the influence of inflation

Question 26

Real GDP in economies - Key Terms

Answer 26

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.

Question 27

Economic Growth

Answer 27

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.

Question 28

Material Living Standards

Answer 28

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

Question 29

Non-Material Living Standards

Answer 29

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.

Question 30

Economic Development

Answer 30

Improvements in economic wellbeing of a nation (Includes MLS and N-MLS).

Question 31

Economic Growth

Answer 31

Benefits of economic growth will always need to be weighted up with factors of negative influence to living standards.

Question 32

Real GDP Limitations in Measuring Living Standards

Answer 32

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.

Question 33

RGDP Limitations and Non-Material Living Standards...

Answer 33

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.

Question 34

Economic Indicators of Living Standards

Answer 34

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.

Question 35

Aggregate Demand Factors

Answer 35

Change in economic growth by influencing one or more AD components

Question 36

Aggregate Supply Factors

Answer 36

Influence the supply decisions of producers &/or the productive capacity of the economy.

Question 37

Consumer Confidence

Answer 37

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)

Question 38

Business Confidence

Answer 38

The perception of a business on their future levels of sales and profitability.

Question 39

Interest Rates

Answer 39

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.

Question 40

Low Interest Rates Benefit to AD Stimulation

Answer 40

1. Businesses are more likely to save less and borrow more. Increasing the demand for goods and services. 2. Lowers the cost to finance existing loans for household and businesses, which in turn increases discretionary income. Helps stimulate consumption and investment.

Question 41

Discretionary Income

Answer 41

The available income after paying for essentials.

Question 42

Strong Rates of Economic Growth By Australian Trading Partners.

Answer 42

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.

Question 43

Exchange Rate

Answer 43

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.

Question 44

Terms Of Trade (TOT)

Answer 44

Ratio of export prices to import prices

Question 45

Productivity

Answer 45

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)

Question 46

Factors Affecting Future Rates Of Economic Growth

Answer 46

``` >Global Conflict >Environmental factors (e.g. Climate Change) >Financial Crisis >Gov Policy Change in Australia >Gov Policies changing overseas. >Economic Instability ```

Question 47

Ageing Population

Answer 47

> 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).

Question 48

Labor Force Participation

Answer 48

>Decreased. Decline is expected to accelerate from the year 2020. This will cause labor shortages, and upward labor cost pressure.

Question 49

Monetary Policy

Answer 49

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

Question 50

Budgetary (Fiscal) Policy

Answer 50

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.

Question 51

Stabilization role for monetary and budgetary policies.

Answer 51

Involves monetary or budgetary policies being used... Stimulate economy when low - Expansionary Manner Decrease EXCESSIVE economic growth - Restrictive Manner

Question 52

Aggregate Supply Policies

Answer 52

Boost supply potential of the economy. Designed to improve supply conditions for Australian businesses by either; a) Boosting Productivity b) Boosting Efficiency

Question 53

Aggregate Supply Policies - EXAMPLES

Answer 53

>Investment of infrastructure > Increased training and development funding >Boost Labor Force Participation > Tax concessions for investing in new technology >Intake of skilled migrants.

Question 54

Environment Sustainability

Answer 54

The preservation of our natural resources for the future by ensuring safe practices.

Question 55

Sustainable Development

Answer 55

Development of a nation at a pace which doesn't erode the ability of future generations to enjoy the same life quality.

Question 56

Trade Offs - ECONOMIC GROWTH VERSUS ENVIRONMENTAL SUSTAINABILITY

Answer 56

Trade Off= More environmental concerns - causing more constraints upon businesses - causing a negative economic growth. However, economic growth and environmental sustainability can be compatible.

Question 57

Climate Change

Answer 57

Global warming of the Earth due to the burning of fossil fuels for the production of g+s.

Question 58

Deterioration of Common Access Resources

Answer 58

Common Access Resources = Natural Resources which are likely to be exploited. Without government regulation these resources would have a depletion in access.

Question 59

Economic Cost of Economic Growth

Answer 59

The ability to sustain current rate of economic growth into future = sustainable development/ sustainable economic growth.

Question 60

Emissions Trading Scheme (ETS)

Answer 60

A scheme to achieve the most efficient reduction in CO2 pollution by using market forces to place a price on pollution.

Question 61

Carbon Tax

Answer 61

Tax on businesses emitting CO2 when producing g+s. Australia repealed the carbon tax in 2014.

Question 62

Cap and trade System

Answer 62

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).