ECO1/2 unit 2 AOS1 economic activity

define Economic activity

A term used to describe the process of making or selling goods and services.

Material and non material living standards

Material - the ability for households to access goods and services

non material - the factors that influence our wellbeing beyond our ability to purchase goods and services

the effect of increased economic activity on living standards

MATERIAL - higher production generally results in increased jobs and incomes, boosting consumption spending - however, if economic activity become too strong, it can cause inflation, reducing mat living standards.

NON - MATERIAL - most aspects of non - material welfare, also benefit from higher levels of economic activity. e.g. higher incomes and employments reduces stress and improves mental and physical health. - however, increased activity can harm environment and supply pollution - reducing nm living standards.

the effect of decreased economic activity on living standards

MATERIAL - when eco activity falls, this undermines mat living standards because of lower employment, incomes and employment

NON-MATERIAL - if activity is lower and more people are unemployed, this often leads to social isolation, reduced mental health and increased stress.

however a upside of low activity is less pollution and other environmental damage.

Circular flow model of income

income - expenditure - production - repeat

what are the leakages?

some of the income that is earned by economic agents is redirected away from expenditure on aus production.

These include:

1. Savings - money that is saved rather than spent on g and s

2. Taxes - money that is paid to govs in the form of tax

3. imports - money that is spent on goods and services that have been produced overseas.

what are the injections?

1. investment demand - spending on capital items like machinery and factories

2. government demand - spending by governments on goods and services

3. export demand - money that is spent on Aus goods and services by overseas residents.

Flow 3: expenditure

flow 3 represents aggregate demand which reflects the spending decisions made by households

leakages act as a brake and slow the economy, but injections work as an accelerator and speed up eco activity.

What is aggregate demand?

AD = C + I + G + X - M

Aggregate demand - for goods and services in the AUS economy represents the total expenditure of g and s produced in an economy over a period of time.

what are the factors of AD?

CONSUMPTION DEMAND - defined as the total value of all expenditures on individuals and collective consumption by resident households and non - profit organizations.

PRIVATE INVESTMENT DEMAND - defined as the purchase of new equipment and plant, buildings and vehicles. it also includes stock purchased by firms and new housing by households.

GOVERNMENT EXPENDITURE - includes all demand for goods and services by federal, state and local GOV's

NET EXPORTS - exports minus imports

impacts of leakages and injections on AD

SAVINGS

- increase in savings = reduced AD

- decrease in savings = growth in AD

INVESTMENT

- increase in investment (due to low interest rates) = growth in AD

- decrease in investment (due to high interest) = reduced AD

GOV SPENDING AND TAXES

- increase in taxes = reduce AD

- increase in gov spending = growth in AD

NET EXPORTS

- imports > exports = reduce AD

- exports > imports = growth in AD

Flow 4: total production

Flow 4 is the annual value ($) of a nations production or supply of finished g and s's.

This is measured with GDP - an increase in GDP = an increase final market value of g and s's produced over time.

nominal GDP = final market value of g and s's produced over time.

real GDP = final market value of g and s's produced over time adjusted for inflation

the business cycle (peak and trough)

IN A PEAK

- GDP growth is high

- unemployment rate is low

- inflation is high

TROUGH

- GDP growth is low

- unemployment rate is high

- inflation is low

what are the three goals for economic stability.

The ideal level of economic activity is in between a peak and a trough, called domestic economic stability.

1. strong and sustainable economic growth of around 3-3.5% per year

2. full employment - around 4-4.5% of the labour force

3. low and stable inflation - 2-3%

what are the 3 types of economic indicators?

lagging

leading

coincident

what is lagging indicators and its examples?

- lagging indicators of economic activity tell us the level of activity that occurred some time ago.

these might include:

1. GDP

2. The unemployment rate

3. the inflation rate

4. average weekly earnings

what is coincident indicators and its examples?

- Coincident indicators move very closely with actual changes in the level of economic activity. These allow us to locate our current position in the business cycle.

these include:

1. share prices

2. monthly retail sales

3. new car registrations

what is leading indicators and its examples?

- leading indicators can help to predict where the economy may be heading in the near future.

these may include:

1. consumer confidence index

2. business confidence

3. index of new housing approvals

What are the factors that may affect the level of AD and level of economic activity?.

AD factors - are those that change economic growth by influencing one or more of the components of aggregate demand.

These factors include:

1. levels of consumer and business confidence

2. interest rates

3. strong rates of eco growth experienced by aus trading partners

4. disposable income

5. the exchange rate

6. TOT

what is levels of consumer and business confidence?

Consumer confidence - refers to the perception of their economic wellbeing in the future

- confidence is high = more expensive = increase in AD = eco growth

Business confidence - refers to a business perception of their future levels of sales and profitability.

- biz confidence is high = growth in investment = increase in AD = economic growth

what is strong rates of economic growth experienced by Australias trading partners.

- An increase in economic growth overseas (such as China and the US) is likely to increase the demand for Aus exports of consumer items, capital or raw materials needed to fuel the growth in their economies.

what is disposable income?

- represents the income tax received by income earners less the amount paid to the gov in personal income tax.

what is the exchange rate?

- the exchange rate is the value of the AUD against another currency, such as USD.

- if the value of AUD increases, the demand side effects on economic activity are negative, as there will be less exports due to aus items being more costly to purchase.

what is the terms of trade?

- TOT is the average price received for aus exports relative to the average price paid for aus imports.

- a rise in TOT means that aus exporters are receiving higher incomes from sales of exports, and/or Australians are paying less for imports.

- this causes the value of AD to increase as exporting biz's will be earning greater profits.

what are the factors that may effect aggregate supply and the level of economic activity?

Aggregate supply factors - those influencing the supply decisions of producers and/or the productive capacity of the economy.

these include:

1. quantity and quality of the factors of production

2. cost of production

3. technological change

4. productivity growth

5. climatic conditions

6. exchange rate

what is quantity and quality of the factors of production?

- if the quantity of resources available to produce increases, then the productive capacity of the economy will increase, and thus the ability to supply will increase.

- if the quality of resources improves, then a greater output can be produced with the available input, thus the ability to supply increases.

what is cost of production?

- if the cost to produce a good/service increases, suppliers will be less able and willing to produce the good/service.

for example, if there is an increase in minimum wage, the cost to produce a good will increase.

what is productivity growth

- productivity is maximizing output with available input.

- a rise in productivity will increase growth because any volume of output is able to be produced with fewer resources.

what is the exchange rate?

- if the value of the AUD increases, supply conditions will improve for Australian businesses relying on imported products for their production process.

economic growth and employment opportunities: benefits

As shown in the circular flow model, an increase in production levels (real GDP), will lead to an increase in demand for labor from businesses to households, leading to greater employment opportunities.

economic growth and material living standards: benefits

- economic growth will lead to greater employment opportunities and income for Aus households.

- this enables households to purchase more goods and services, thus, increase MLS

- this is commonly measured by real GDP per capita

Economic growth and non-material living standards

- improves NMLS as it increases job opportunities, which reduces stress in that area.

economic growth and economic development: benefits

- stronger rates of economic growth result in more government revenue (tax receipts), which can be used to invest in projects that contribute to the wellbeing of the country.

the potential costs of economic growth and MLS

- inflation

- economic growth can result from high demand for goods and services, which can overtake the supply causing a shortage, meaning that prices will need to increase to balance it out, thus, creating inflation.

- This causes less purchasing power for households and less access to good and services.

what are the 4 potential costs of economic growth and NMLS?

- Boom and bust cycles

- congestion and pollution

- inequality

- affluenza

how are boom and bust cycles costly to NMLS?

Boom and bust cycles refer to the fluctuations in economic activity where periods of rapid growth (booms) are followed by sharp declines (busts)

- excessive growth can lead to asset price bubbles (e.g. excessive price of property and shares) which eventually lead to market corrections that create panic, instability and economic downturns.

how is inequality costly to NMLS?

- excessive growth can be associated with widening inequality if the growth is not matched by an effective GOV tax and transfer system that seeks to achieve a spreading of the benefits throughout the community.

- this can leave lower-income groups behind, especially if wage growth is slow in low paying jobs or access to education and opportunities remains unequal.

how is affluenza costly to NMLS?

- excessive growth can lead to excessive material consumption. this is known as affluenza.

- affluenza is the idea that pursuit of more goods and services results can become addictive and can impact the overall mental wellbeing of the individual.

What are the alternative measures of economic activity and living standards

- The genuine process indicator (GPI)

- Measures of Australias progress (MAP)

- the Human development index. (HDI)

what is the genuine process indicator?

- The GPI starts with a focus on expenditure on goods and services to provide an idea about how material living standards are likely to have changed over time.

- however, it also takes into account other factors such as social costs associated with unemployment, crime, problem gambling, excessive work, pollution and depletion of natural resources

what is measures of Australia's progress (MAP)?

- Maps focus on the question 'has life been getting better?'

- The ABS has formulated four 'key domains' that are used to summarise changes in our nations wealth over time:

1. society

2. economy

3. environment

4. governance

what is the human development index?

- The HDI is a commonly accepted measure by most countries for measuring economic development.

- the HDI measures performance in three key dimensions of development:

Living standards - measures a decent standard of living - measured by GNI

Health - measures a long and healthy life - measured by life expectancy

Education - measures access to education - measured by average years of schooling + expected years of schooling.

What are the limitations in using real GDP per capita to measure living standards?

- its inaccurate in a sense that it excludes some non-marketed goods and services where it is too difficult to accurate values, such as home-based products and black market goods

- Real GDP per capita dosent accurately measure changes in the quality of goods and services from one quarter to the next.

what are the limitations in using real GDP to measure living standards?

- does not distinguish between monetary transactions that improve welfare and those which isnt spent of welfare (tobacco)

- does not take into account the 'leisure time' that may be sacrified or gained.