Unit 3 AOS2 VCE Economics

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Material living standards

Access to goods and services

Non-Material living standards

Quality of life factors

Factors of Non-Material living standards

• Crime rates

• Pollution

• Climate

Australias goal for GDP growth

3% per annum

Australias goal for inflation

2-3% over a medium term (5-7 years)

Australias goal for unemployment

4-4.5% unemployment

Peak

When GDP growth is above 3%

Trough

Low GDP

Expansion

When GDP is growing

Contraction

Decrease in GDP

Boom

Extreme GDP growth

Recession

When there is two consecutive quarters of negative GDP growth

Business cycle

Shows the ups and downs of GDP over time

Aggregate demand

The total demand of a nation

Aggregate demand factors

• Consumer confidence

• Business confidence

• Disposable income

• Discretionary income

• Interest rates

• Overseas economic activity

• Exchange rates

Consumer confidence

How consumers feel about the state of the economy

Business confidence

How businesses feel about the state of the economy

Disposable income

Income-Tax

Discretionary income

Income-Tax and necessities

Interest rates

Cost of borrowing

Overseas economic activity

GDP growth/decrease overseas

Exchange rates

The value of one currency expressed in terms of another

GDP

Gross Domestic Product

Inflation

increase in the general price of a good or service

GDP per capita

Average income per person in a country

Aggregate supply

Both the willingness and ability of a nation to supply goods and services

Aggregate supply factors

• Production costs

• Climatic conditions

• Exchange rates

• Productivity

• Supply chain

Supply chain

All of the parts that come together from to produced and distribute items

Climatic conditions

How the weather affects production

Economic growth

An increase in the volume of goods and services that an economy produces over a period of time.

Real GDP

GDP after taking into account inflation

Economic activity

The production of goods and services within an economy over a period of time

How is aggregate demand calculated

CIGX-M

What does ‘C’ stand for on the 5 sector circular flow diagram

Consumption

What does ‘S’ stand for on the 5 sector circular flow diagram

Savings

What does ‘T’ stand for on the 5 sector circular flow diagram

Tax

What does ‘I’ stand for on the 5 sector circular flow diagram

Investments

What does ‘G’ stand for on the 5 sector circular flow diagram

Government spending

What does ‘X’ stand for on the 5 sector circular flow diagram

Exports

Demand inflation

When spending in the economy grows faster than production, prices rise

Cost inflation

When businesses face higher costs, they raise prices

Inflation

General increase in the price of G+S over time

Deflation

Price of G+S is decreasing

Disinflation

The price of G+S is still rising but at a slower rate

How to measure inflation

CPI: consumer price index

What does ABS stand for?

Australian Bureau of Statistics

Headline inflation

All 100,000 products

Underlying inflation (trimmed mean)

Trimmed mean (removes top 15% and bottom 15%)

Purchasing power

How far my $1 goes

Wage price spiral

The differnce of your wage compared to inflation

Consequences if inflation is too high

• Changed distribution of income

• Reduced purchasing power

Consequences if inflation is too low

• Higher unemployment

• Deferred consumption

Who measures GDP growth

ABS (Australian Bureau of Statistics)

How does the ABS calculate GDP growth

Dollar value of produced goods and services

Consequences if GDP growth is too high

• Enviromental degradation

• Higher inflation rates

Consequences if GDP growth is too low

• Higher unemployment

• Decrease in living standards

NAIRU

Non-accelerating inflationary rate of unemployment. It is when the unemployment rate doesn’t cause inflation or deflation

Employed person

Working 1 or more hours a week, over 15 years old

Unemployed person

Actively looking for a job, able and willing, over 15 years old

Unemployment rate %

Total people unemployed x 100 / total number in labour force

Participation rate %

Number of people in the labour force x 100 / number of people 15 or older

Under employment

Not working enough hours

Hidden unemployment

People who want work but are discouraged from finding work

Long term unemployment

When you have been unable to get a job for 52 weeks or more

Cyclical unemployment

caused by weaker aggregate demand factors

Seasonal unemployment

when your job is out of season (ski resort worker in summer)

Structural unemployment

Use of new technology, mismatch of skills, business closures

Frictional unemployment

When workers finish one job and are waiting for the next one to start (builders)

Hardcore unemployment

Unemployed due to appearance, criminal records or disabilities

Full employment

4-4.5% unemployment. This is recognised as the NAIRU rate. There would also be no cyclical unemployment

Labor force

15+, willing and able to work, either employed or unemployed

Under utilised rate

Underemployment + unemployment

How does the CPI measure inflation

Surveys 100k different items in 11 different categories

Chain volume GDP

Shows the value of goods and services produced in an economy after removing the effects of inflation.

Price stability

When the general price level rises slowly and predictably

Consequences if Unemployment is too high

• Low output

• Lower income

• Reduced MLS

Consequences if Unemployment is too low

• Reduced international competitiveness

• Increased inflation