economics - economic activity

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economic activity

Refers to the production, expenditure, and consumption that takes place across the whole economy.

Purpose of economic activity:

to use our available resources as efficiently as possible to produce and sell goods and services that help to maximise wellbeing/ satisfaction of society

What does Australia use?

 australians market capitalist society leads to us relying on the price system to direct resources to where they are most valued

Material living standards

the level of access to good and services usually measured by GDP per capita -> increase ability to consume while having some + and some- impacts to non-material living standards

Non-material living standards

quality of life aspects that are not related to our access to goods and services eg. happiness, health, crime rates,

Examples of economic activity:

• Teacher taking a class 

• Farmer producing wheat 

Non-economic activity:

this is activity done out of generosity or concern for others, and are classified this way as they are not designed to earn money:

examples of non-economic actiivty

• Chores at home 

• Volunteering 

• Helping friend with homework

Production

total value of g/s produced in economy

Income

total income that has been earned by those who have contributed to the production of goods and services

Expenditure

the total spending undertaken on aussie g/s 

GDP

the final market value of all g/s produced within australia over a period of time

Final market value:

the final or end price which g/s are sold in the competitive market 

The formula for AD is

 AD = C + I + G1 + G2 + X – M

Real GDP:

the increase in economic growth after removing effects of inflation 

Nominal GDP:

GDP that is not adjusted for inflation

Chain volume gdp:

used by ABS to provide estimate of real gdp in economy

If growth in real gdp is above zero, it means the economy has grown.

• inflation > growth in nominal -> real is falling 

• Inflation = growth in nominal -> real is same 

• Inflation < growth in nominal -> real is rising

Benefits of eco growth:

• New employment opportunities 

  • More g/s demanded therefore firms need more ppl to work for them 

• Increase in disposable income, purchasing power, material living standards 

  • Increased production therefore firms need to employ more resources therefore more wages 

  • Wages higher so more ppl likely to work 

• Improves gov finances bc more tax

  • Raises incomes of ppl and businesses therefore more tax revenue therefore boosts gov surplus 

• Boosts non-material living standards 

  • More money to do hobbies etcetc

Eco Costs of eco growth:

• Unsustainable and can limit future eco growth 

• Rise in inflation -> 

• Depletion of non-renewable natural resources -> scarcity of fossil fuels

enviro costs:

• Pollution released in the air can create negative externalities

  • Rising reas levels, destruction of island and coastal communities, loss of life and severe weather events 

    • Over time reduces eco prosperity  

• Acceleration of climate change 

  • Severe climatic events and rising sea levels 

  • Is very costly for the economy

• Food insecurity

  • Food and water insecurity can lead to wars and conflict 

• Loss of biodiversity

Social costs:

• Reduced leisure time 

• Poor health outcomes -> more stress and also more consumption of unhealthy fast food bc too busy to cook healthy nutritious food 

• Increase in inequality b/t rich and poor 

• Affluenza -> materialistic and consumerism, not being happy with what u have and wanting more

Resource market:

• where factors of production are traded

• Consumers 

  • Supply or sell resources in exchange for income

  • Aim to generate as much income as possible  

• Businesses 

  • They purchase and acquire resources from consumers 

  • Aim to acquire most quality resources for cheapest price 

Product market:

where g/s are traded 

• Consumers 

  • Use income to purchase g/s 

  • Aim to get best quality g/s for cheapest price 

• Businesses 

  • Sell g/s to consumers in exchange for money 

  • Aim to maximise profits by selling g/s  

Gov sector:

• Collect tax 

• Stabilise eco activity 

• Use tax to allow gov spending to help fuel economy

Financial sector:

• Safe palace of individuals to save money 

• Provide access to funds for productive investment

overseas sector

• Allow aussies to access more g/d from overseas 

• Provides large markets for exporting industries to grow

Stronger AD:

• Peak -> more eco activity 

• Higher consumer confidence, weaker A$, lower interest rates, tax cuts, etc 

• Rises in the total value of components making up AD

• Increased inflation as stocks fall 

• Businesses try to expand to replace the falling stocks however there is no unused capacity meaning that there will only be inflation 

• Instead try to lift production -> more resources leading to unemployment falling and total incomes to rise

Weaker AD:

• Trough -> less eco activity 

• Lower consumer confidence, Falling overseas activity, Rising A$, Rises in taxes 

• Calls in the total value of the components making up AD

• Sales and new orders drop therefore more stocks of unsold goods and services rise therefore firms often cut or discount their prices slowing inflation

• Businesses reduce output to avoid excess stock levels therefore GDP falls slowing rate of eco growth

  • If gdp calls over six or more consecutive months this is a recession

• To reduce production, firms employ fewer resources including labour, unemployment also rises and so total incomes fall

Causes and effect of higher eco activity:

• Businesses employ more resources to increase output 

• Rise in total value of incomes paid for rescues 

• Higher spending or AD caused by increased injections relative to leakages leading to shortages and lower levels of unsold stuff 

• Producers try to life national production so total value of eco activity rises

Causes and effect of lower eco activity:

• Business employ fewer resources 

• Drop in total values of incomes 

• Lower spending or AD caused by increased leakages relative to injections leading to surplus of unsold stuff 

• Prosecutors cut national production do the total value of eco activity falls

Expansion characteristics:

• Increase in sales for businesses therefore businesses produce more g/s to meet this increase in demand 

• Businesses need to produce more to meet demand so therefore hire more workers therefore level of unemployment declines 

• They need to attract more workers so wages increase 

• Bc ppl earning higher wages, increased consumption therefore higher demand of g/s

Contraction characteristics:

• Decrease in demand therefore businesses produce less

• Bc dont needa produce much, smaller workforce 

• Lower demand for labour therefore workers will accept lower wages and increase in unemployment means more competition for jobs 

• Ppl earn lower wages, consume less, likely to save rather than spend therefore AD decreases

Economic Indicator:

piece of eco data that is used to interpret health of the economy

Leading indicators:

used to predict the future movements of the economy -> data on these financial guideposts will move or change before the economy.

• Consumer confidence index -> indication of future spending of consumers 

• Business sentiment index -> spring intentions of economic agents like hiring intentions of businesses 

• Share prices

Coincident indicators:

 seen with the occurrence of specific economic activities. This shows the activity of a particular area or region. Many economists follow this real time data as it provides most insight into what is currently happening.

Eg. 

• Exchange rate

• Sales volumes 

• Hours worked 

• GDP 

• Employment levels

Lagging indicators:

only seen after a specific economic activity occurs -> shows info after events have happened.

One drawback is that it is slightly outdated [data]

Eg.

• Inflation CPI 

• Interest rates 

• Unemployment rates 

Limitations of GDP:

• It fails to take into consideration the value of ‘leisure time’ that is lost when gdp increases 

• Does not distinguish b/w transactions that improve our welfare and harmful foods [such as tobacco and junk foods]

• Real gdp figures are largely based on estimates

GPI:

• Genuine progress indicator 

• Enviro impact and social costs of eco production are negative or posoitve for health and well being

GNH 

• Gross national happiness 

• Made up of several indicators 

  • Gdp 

  • Social support 

  • Life expectance 

  • Health 

  • Trust 

  • Generosity

HDI

• Most widely used 

• Eco + socio but no enviro

Economic prosperity:

focuses on nations overall health w/ particular emphasis on material factors such as incomes, production levels, expenditure ect

Environmental sustainability:

looks to the preservation of natural resources and environment into the future by ensuring current practises do not contribute to environmental harm or erosion in future 

Sustainable development:

development that meets the needs of the present without compromising the ability of future generations to meet their own needs

1st view of eco vs bio

conflicting view b/w evo growth and enviro 

2nd view of eco vs bio

trade off b/w ideas but can be deferred for some time -> dont suddenly feel impacts of eco growth -> over time resources become even more scarce and price increases therefore demand will fall 

3rd view of eco vs bio

both can work -> changing our thinking and not overconsuming g/s -> recycle resources and use renewable energy + gov policies to prevent negative externalities

Structural unemployment:

advances in technology and investments in capital leading to people being replaced and fired 

aggregate demand

the total demand for finished goods and services produced in an economy -> expressed as total amount of money exchanged for those goods and services at a specific price level and point in time

Consumer spending factors (C)

• Household disposable incomes 

• Consumer confidence 

• Interest rates 

• Rate of population growth 

• Gov budgetary policies 

Private investment spending factors (I)

• Business confidence 

• Interest rates 

• Company tax

Government spending factors (G)

• Level of unemployment 

• Economic growth 

• Level of inflation

• Speed of population growth 

• Level of gov debt

export spending factors (X)

• Exchange rate 

• Inflation

• Overseas  eco activity levels

import spending factors (M)

• Exchange rate 

• Our levels of inflation

• Consumer and business confidence

aggregate supply

total volume of goods and services that producers in an economy are willing to produce over a period of time 

short run aggregate supply

producers change production levels without a change in long term capacity -> lower wages, subsidies from gov affecting production costs in short term, price of raw materials, natural disasters, geopolitical tensions 

long run aggregate supply

PPF -> increasing efficiency of resources, increasing quantity of resources, international trade removing tariffs

Productivity:

otal volume of production compared to the total inputs used to achieve that production level = output over input or total output per unit of input

• How efficiency our inputs are being used to produce g/s

Exchange rates:

• Higher A$ will improve supply side conditions for businesses relying on imported products in their production process 

• Firms relying on imported machinery from Germany will find that higher aussie dollar will reduce production costs 

Short run aggregate supply gov policies

• Reduction in taxes: lower taxes can reduce costs for businesses leading to higher levels of investment 

• Increased subsidies: reduce cost of production for business allowing them to produce more at a given price level -> shift curve to the right in the short run as firms can increase output due to lower production costs

Long run aggregate supply gov policies

• Reduction in taxes: when it is aimed at incentivising investment in r&d, capital etc, it can lead to increase in PPF over time shifting curve to the right 

• Increased subsidies: if subsidies aimed at long-term investments in tech, infrastructure, education, enhance productivity and efficiency in the economy. Increasing the LRAS

Price Stability:

To achieve an inflation rate of 2-3% on average, over time, as measured by growth in the CPI

Strong and Sustainable Economic Growth:

To achieve the strongest rate of economic growth consistent with full employment (the absence of cyclical unemployment) without causing excessive inflationary pressures, environmental degradation, or external instability, currently around 3 - 3.5% annual growth in Real GDP.

Full employment:

To achieve the lowest rate of unemployment consistent with economic growth but without causing excessive inflationary pressure or external instability, around 4-4.5% unemployment. 

Expansionary policy -> increase eco growth 

• Budgetary policy: 2 examples of expansionary fiscal policy are tax cuts and increased gov spending. Both are intended to increase AD while contributing to deficits or drawing down of budget surpluses 

• Monetary policy: central banks can also decrease interest rates to encourage consumer spending and business investment 

Contractionary policy -> decrease eco growth 

• Budgetary policy: 2 main examples of contractionary fiscal policy are increases in tax collection and reduced gov spending. Intended to decrease AD while contributing to surpluses. 

• Monetary policy: central banks can also increase interest rates to discourage consumer spending and business investment

what do govs control interest rates through

• cash rates

• open market operations

Cash rate:

interest rate that the RBA charges commercial banks for overnight loans 

Higher interest rates discourage household consumption and business investment, reducing AD while lower interest rates encourage borrowing and spending therefore increasing AD

Changes in interest rates can affect exchange rates -> higher interest rates tend to increase value of Aussie dollar, reducing net exports and AD and vice versa

Overall the cash rate is used to manage AD so that inflation remains within the target range while supporting sustainable economic growth and low unemployment