Economic Activity Revision

What is economic activity?

The actions performed by individuals, businesses, and suppliers to produce goods and services.

The purpose of economic activity?

To increase living standards and to satisfy human needs by producing goods and services while efficiently allocating scarce resources for a better quality of life.

Circular Flow Model?

Sector 1: Household Sector - Contributes to the economy by working (labour) and buying G&S.

Sector 2: Business Sector - Produces the goods and services to be consumed.

Sector 3: Financial Sector - Includes banks & institutions that provide cash flow via lending services.

Sector 4: Government Sector - Collect revenue through taxation (T); they use this money to pay for Government spending (G) & help provide public goods and services (hospitals, roads, schools).

Sector 5: Overseas Sector - Brings in cash from international buyers; imports & exports.

Flow 1: Flow of productive natural, capital, and labour resources supplied

Flow 2: Flow of incomes to owners selling resources

Flow 3: Flow of total spending on total Australian production = Aggregate Demand:

C + I + G + (X - M)

Flow 4: Flow of final goods and services supplied or produced (e.g. GDP)

• Three leakages from domestic spending = S + T + M (slows AD)

• Three injections from domestic spending = I + G + X (boosts AD)

The Business Cycle?

Refers to the periodic fluctuations that occur in the level of economic activity that arise from movements in aggregate demand. The 4 phases are:

1. Contraction - Follows a period of rapid expansion, GDP will fall, unemployment will increase

2. Trough - Inflation decreases and unemployment continues to increase

3. Expansion - Prices begin to rise and unemployment starts to decrease

4. Peak (Boom) - Growth reaches its highest point, unemployment reaches it lowest point, inflation is high

Definition & Components of Aggregate Demand (AD)?

The total demand for goods and services within the Australian economy. Aggregate Demand measures overall spending on goods and services.

Economics calculate Aggregate Demand using this formula: AD = C + I + G + (X - M)

Factors affecting Aggregate Demand (AD) & Level of Economic Activity?

Consumer Confidence: Describes the level of optimism and pessimism by consumers about future employment and income. This affects their level of savings/consumption. (Affects C, M)

Overseas Economic Growth Rates: Involves the general pace of activity in countries and whether these nations are experiencing a period of boom or recession. (Affects X, I)

Price Level: Used to indicate how the prices of a representative level of goods and services have changed over time. (Affects C, I, G (X - M))

Interest Rates: The cost of borrowing credit or the reward for saving money. (Affects C, I, X, M)

Exchange Rate: The price at which one currency (AUD) is swapped for other currencies to permit international transactions. (Affects X, M)

Disposable Income: The money available for spending by individuals after receiving government welfare transfers and following payment of personal tax. (Affects C, M)

Business Confidence: Whether firms are optimistic or pessimistic about their future sales and profits. (Affects M, I)

What does ‘ACE” stand for?

• Availability of Resources

• Cost of Production

• Efficiency of Resource Use

Factors affecting Aggregate Supply (AS) & Level of Economic Activity?

Cost of Production: Heavily influences a firm’s profitability and hence their willingness and ability to supply.

Technological Change: Affects the quality of resources available, productivity growth, and the cost of production.

Productivity Growth: The amount of output per unit of input.

Exchange Rates: The price at which one currency (AUD) is swapped for other currencies to permit international transactions.

Climatic Conditions: Favourable weather conditions help firms to increase the supply of a wide range of g/s.

Interest Rates:

Measuring Economic Growth from Real GDP?

Real GDP: The total value of all final goods and services produced within a country’s borders over a specific time period, adjusted for inflation.

Economic growth is measured by the change in GDP over time and real GDP indicates how much the economy has grown over time.

What is Economic Growth?

The rate at which economic activity grows over time and an increase in the production of goods and services in an economy over time.

Benefits of Economic Growth?

• Growth in material living standards

• Improved non-material living standards

• Employment opportunities

• Economic development

Costs of Economic Growth?

• Boom (very high rates of economic growth) & bust (very low rates of economic growth)

• Congestion & Pollution

• Environmental damage

• Potentially widening inequality & affluenza (when people are too rich or consume too much goods or services)