Chapter 6

These vocabulary flashcards cover the key models, formulas, and economic indicators from the lecture notes, including CFIM, GDP measurement, AD/AS models, the multiplier effect, and global economic factors.

Circular Flow of Income Model (CFIM)

A model showing the income flows between economic sectors.

Equilibrium

A balanced situation with no tendency to change.

Income

Money entering a sector.

Expenditure

Money leaving a sector.

Injection

Money entering the economy.

Leakage

Money leaving the economy.

Output

Production of goods and services.

Paradox of saving

A concept where higher saving leads to lower AD, lower output, and ultimately lower total savings.

2 Sector Economy Equilibrium

Occurs when $C = Y = O$, consisting of households and firms only.

Financial Sector Equilibrium

Occurs when Savings ($S$), which are leakages, equal Investments ($I$), which are injections ($S = I$).

Government Sector Surplus

A condition where Taxes ($T$), which are leakages, are greater than Government spending ($G$), which are injections ($T > G$).

Trade Deficit

A condition in the foreign sector where exports ($X$) are less than imports ($M$) ($X < M$).

Complete Economy Equilibrium

Occurs when the sum of leakages equals the sum of injections: $S + T + M = I + G + X$.

Economic growth

A sustained increase in productive capacity.

Inflation

The sustained increase in the general price level.

Nominal GDP

The total value of final goods and services produced in an economy.

Real GDP

The total value of final goods and services, adjusted for inflation.

Value added

How much a business increases a product’s worth; used in the Production Approach to measure nominal GDP.

Double counting

A calculation error affecting a product’s value, avoided by using the value-added approach.

Informal economy

Economic activity that is not taxed and is excluded from GDP measurements.

Aggregate Demand (AD)

Total spending in the economy at different price levels, calculated as $AD = C + I + G + (X - M)$.

Autonomous Expenditure

Spending that does not depend on income, such as investment for technological change or government spending on education.

Marginal Propensity to Consume (MPC)

The proportion of extra income that is spent.

Marginal Propensity to Save (MPS)

The proportion of extra income that is saved.

Multiplier Effect

The process where an initial change in spending leads to a larger change in national income.

Multiplier Formula ($k$)

$k = \frac{\text{Real GDP}}{\text{Injections}}$ or $k = \frac{1}{1 - MPC}$ or $k = \frac{1}{MPS}$.

Marginal Propensity to Withdraw (MPW)

The sum of the proportion of income saved, taxed, and spent on imports ($MPW = MPS + MPT + MPM$).

Aggregate Supply (AS)

Total output firms are willing to supply at various price levels.

Frictional unemployment

Short-term joblessness caused by job switches, new workers, or people re-entering the workforce.

Structural unemployment

Long term joblessness caused by a skills mismatch.

Positive output gap

A situation where the economy is producing above full capacity; it is inflationary and unsustainable.

Negative output gap

A situation where the economy is producing below full capacity; it is deflationary and inefficient.

Classical Model (AS)

A model of a self-correcting economy focusing on long-run equilibrium where the LRAS is represented by the Production Possibility Frontier (PPF).

Keynesian Model (AS)

A model suggesting the economy may not self-correct and can remain below full employment.

Deflationary gap

The amount by which the equilibrium level of production and income falls short of the full employment level.

Inflationary gap

The amount by which the equilibrium level of production and income exceed the full employment level.

Capital inflows

Occur when Australia's interest rates are higher than world interest rates ($i_{AUS} > i_{world}$), leading foreigners to invest in Australia.

Protectionism

Economic policies like tariffs, quotas, and subsidies that reduce trade and efficiency, thereby slowing economic growth.