Week 1 Flashcards
why is the PPF bow shaped?
illustrates the concept of increasing marginal opportunity costs.
-Increasing marginal opportunity costs demonstrate an important economic concept:
The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity
how can economic growth lead to shift in the PPF?
the resources available to an economy may increase.
For example, both the labour force and the capital stock—the amount of physical capital available in the country—may increase. The increase in the available labour force and the capital stock shifts the production possibility frontier outwards for the Australian economy and makes it possible to produce both more wheat and more wool.
how do outward shifts of PPF represent economic growth?
because they allow the economy to increase the production of goods and services, which ultimately raises the standard of living
as more economic resources become available and technological change occurs, the economy can move from point A to point B, producing more wool and more wheat.
show how technological change in one industry can lead to shift in ppf
shows the results of technological advance in the wheat industry that increases the quantity of wheat that workers can produce per year, while leaving the maximum quantity of wool that can be produced unchanged. Shifts in the production possibility frontier represent economic growth.
what is expansion
The period of a business cycle during which total production and total employment are increasing above trend growth
what is contraction
The period of a business cycle during which total production and total employment are falling below the trend rate of economic growth
what is recession
two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP)
inflation rate
The percentage increase in the general price level in the economy
what is GDP
market value of all final goods and services produced in a country over a particular period of time
GDP = C + I + G + Xn
what is an intermediate good or service
A good or service that is an input into another good or service.
describe the value added method
§An alternative way to calculate GDP is the value-added method.
Value added: The market value a firm adds to a product.
§GDP can be calculated by adding up the value added by every firm involved in the production process of goods and services.
what is net gdp
§Calculated by measuring GDP and subtracting the value of depreciation on capital equipment.
what is GNI
Australia’s GDP plus income generated overseas by Australian residents and firms, minus the income generated in Australia by non-residents and foreign firms.
what 3 alternative methods are used by ABS to measure GDP
- Production method
- Expenditure method
- Income Method
what is the production method
The sum of the value of all goods and services produced by industries in the economy in a year minus the cost of goods and services used in the production process, leaving the value added by the industries.
what is the expenditure method
The sum of the total expenditure on goods and services by households, investors, government and net exports (the value of exports minus the value of imports
what is the income method
The sum of the income generated in the production of goods and services, which includes profits, wages and other employee payments, income from rent and interest earned
features of circular flow diagram
-The circular-flow diagram shows the flow of spending and money in the economy.
-It illustrates the equality between GDP measured using the income and expenditure methods.
the income generated in the production of goods and services is equal to the value of expenditure on these goods and services.
are transfer payments included in GDP
no
describe the circular flow diagram
The circular-flow diagram illustrates the flow of spending and money in the economy. Firms sell goods and services to three groups: domestic households, foreign firms and households, and the government. To produce goods and services, firms use factors of production: labour, capital, natural resources and entrepreneurship. Households supply the factors of production to firms in exchange for income in the form of wages, interest, profit and rent. Firms make payments of wages and interest to households in exchange for hiring workers and other factors of production.
The sum of wages, interest, rent and profit is total income in the economy. We can measure GDP as the total income received by households. The diagram also shows that households use their income to purchase goods and services, pay taxes and save. Firms and the government borrow the funds that flow from households into the financial system. We can measure GDP either by calculating the total value of expenditures on final goods and services or by calculating the value of total income.
§ABS divides GDP into four major categories of expenditures.
these include
- Consumption
- Invesment
- Government expenditure
- Net exports (value of exports - value of imports)
Y = C + I + G + NX
shortcomings of GDP as a measure of total production (it is a good measure but not flawless)
GDP does not include:
Household production: Goods and services people produce for themselves.
–Examples: home cooking, cleaning, childcare, gardening, home maintenance.
The underground economy: Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.
how the underground economy is hurting developing countries
Trade taking place in the underground economy reduces tax receipts for the government, thereby reducing the services they are able to provide.
shortcomings of GDP as a measure of wellbeing i.e. economic development
- The distribution of GDP is not captured in GDP measures.
- The value of leisure is not included in GDP.
- The level, quality of, and access to health care and education is not measured in GDP.
- GDP is not adjusted for pollution or other negative effects of production.
- GDP is not adjusted for changes in crime and other social problems.
difference between real and nominal GDP
§Nominal GDP can change over time due to changes in price and/or output.
§Real GDP shows changes in output only.
what does ABS use to measure real GDP?
§The ABS uses chain volume measures to estimate real GDP.
–Prices in each year are ‘chained’ to prices from the previous year to minimise the distortion from changes in relative prices.
economic growth formula
what is the GDP deflator
also allows us to calculate changes in the price level (A measure of the average prices of goods and services in the economy)
over time.
GDP deflator formula
what is long run economic growth
§The process by which rising productivity increases the average standard of living.
what does the real GDP per capita measure?
describe the rule of 70
what are average annual growth rates used for?
for calculating growth rates in longer periods
i.e. find the average of 3 economic growth rates
What determines the rate of long-run economic growth?
increases in real GDP depend on labour productivity
the 2 factors that determine labour productivity include
- increases in capital per hour worked
- technological change
describe increases in capital per hour worked as a determinate of labour productivity
§Capital: Manufactured goods that are used to produce other goods and services; examples include computers, factory buildings and machines
.
§Human capital: The accumulated knowledge and skills that workers acquire from education and training, or from their life experiences.
what is potential GDP
§The level of GDP attained when all firms are producing at capacity.
The concept of potential GDP is useful when
§taking a long-run perspective of economic growth.
Growth in potential GDP is estimated to be
§approximately 3.5% per year.
Actual real GDP fluctuates around
the long-run potential due to the business cycle
describe financial system
§financial markets and financial intermediaries through which firms acquire funds from households.
§The financial system channels funds from savers to borrowers and channels returns on borrowed funds back to savers.
§Financial markets include the share market and the bond market.
Private saving =
public saving=
net tax revenue – government spending
or, Spublic = T - G
how does S = I?
market for loanable funds
what is the demand for loanable funds determined by?
by the willingness of firms to borrow funds to engage in new investment projects.
The supply of loanable funds is determined by
by the willingness of households to save, and by the extent of government saving or dissaving
Equilibrium in the market for loanable funds determines
the real interest rate and the quantity of loanable funds exchanged.
When deciding whether to borrow funds, firms
§compare the expected rate of return on their investment with the interest rate (the cost of borrowing).
The willingness of households to save rather than consume will depend in part on
§the interest rate they receive.
draw the market for loanable funds
what happens when investments become more profitable?
§If investment becomes more profitable, e.g. due to new technology, there will be an increase in demand for loanable funds.
–The demand curve for loanable funds will shift to the right
how does an increase in investment help increase economic growth?
–increases the capital stock and the quantity of capital worked per hour, helping to increase economic growth.
describe this diagram
An increase in demand for loanable funds increases the equilibrium interest rate from i1 to i2, and it increases the equilibrium quantity of loanable funds from L1 to L2. As a result, saving and investment both increase.
if gov runs budget deficit,
§this reduces the amount of saving in the economy.
describe the following diagram
When the government begins running a budget deficit the supply of loanable funds shifts to the left. The equilibrium interest rate increases from i1 to i2, and the equilibrium quantity of loanable funds falls from L1 to L2. As a result, savings and investment both decline.
what is the crowing out effect
when higher interest rate reduces private expenditure
distinguish the expansion and contraction phase
§production, employment and income are increasing above trend growth.
vice versa
what is expansion phase typically associated with
rising interest rates and rising wages, and profits begin to fall.
A contraction often begins with
decreased spending by firms on capital goods, and/or decreased spending by households on new houses and consumer durables.
what is more affected by the business cycle?
§Consumer durables are affected by the business cycle more than non-durables.
§People postpone buying durables, particularly expensive items such as new cars, during a contraction or recession.
during economic expansions the inflation rate usually increases.
Exception to this
If the expansion is due to rising productivity levels and an expansion of potential GDP
§During contractions the inflation rate usually decreases.
Exception to this
–If the recession is caused by a supply shock.
The rate of unemployment continues to rise after a recession is over, because
–discouraged workers re-enter the labour force.(in labour force and actively seeking for work)
-firms continue to operate below capacity after the recession is over and may not re-hire workers for some time
Why are business cycles fluctuations less severe?
The increasing importance of services and the declining importance of goods.
§The establishment of unemployment benefits and other government transfer programs that provide funds to the unemployed.
§Active federal government and central bank policies to stabilise the economy.
§The stability of the financial system in Australia.
what is excluded from GDP
- intermediate goods e.g. goods involved in production of final goods radio installed in car
- non production transactions e.g. used goods, ownership of houses, stocks
- non market activities e.g. selling buying drugs, household product e.g. cooking, gardening, plumbing
nominal and real GDP are
always equal in the base yr
Counted towards GDP?
- Used textbook
- rent from old building
- commission for stockbroker
- car produced in south korea
- not b/c it is not a final good. used goods counted in the yr they were made, not the yr they were sold later
- yes. rent is a final service provided. but if u were to sell the building, it would not be counted
- Yes. commission is fee/income for a service
- only goods and service produced in the country
what happens when there’s a double shift
indeterminate change in either price of qty
