Economics Practice Test 1

Economic Growth

Economic Growth

Refers to the increase in the production of goods and services in an economy over a period of time.

GDP

Gross Domestic Product is the total value of all goods and services produced within a country in a specific time period.

GDP Formula

GDP = C + I + G + (X - M), where C is Consumption, I is Investment, G is Government Spending, X is Exports, and M is Imports.

Target GDP Growth Rate

Varies by country, typically around 2-3% for developed economies.

Limitations of GDP

Does not account for income distribution, ignores non-market transactions, does not consider environmental degradation, and excludes the shadow economy.

Inflation

The rate at which the general level of prices for goods and services is rising, leading to a decrease in purchasing power.

CPI

Consumer Price Index measures changes in the price level of a market basket of consumer goods and services purchased by households.

Causes of Inflation

Demand-Pull Inflation and Cost-Push Inflation.

Target Inflation Rate

Often around 2% for many developed economies.

Unemployment

The state of being jobless and actively looking for work.

Labor Force

The total number of people employed or actively seeking employment.

3 Main Types of Unemployment

Frictional, Cyclical, and Structural Unemployment.

Target Unemployment Rate

Often around 4-5% for many developed economies.

Effects of Unemployment

Loss of income, increased government spending, potential for increased crime rates, and loss of skills over time.

Imports abbreviation

I

Exports abbreviation

X

Savings abbreviation

S

Taxation abbreviation

T

Imports Abbreviation

M

Government spending abbreviation

G

Define economic growth

An increase in an economy’s possible final production of goods and services over a period of time

Leakages > Injections

Economic contraction

Injections > Leakages

More money in the economy results in economic growth

Investment abbreviation

I

Consumption Expenditure abbreviation

C

Equilibrium

Total leakages = total injections; S+T+M=I+G+X

Cost push inflation

Cost push inflation occurs when prices rise due to an increase in production costs, such as wages or raw materials, leading to a decrease in aggregate supply.

Demand pull inflation

Demand pull inflation occurs when aggregate demand exceeds aggregate supply, leading to increased prices due to high demand for goods and services

Aggregate demand formula

C+I+G+X–M

Need

Something that is necessary for human survival such as; food, water, shelter, clothing

Want

Something that is desirable but not necessary for human survival such as; smart phones, video games, television

Scarcity

The situation in which unlimited needs and wants exceed the limited resources available to fulfill those needs and wants

Economics

The study of the choices consumers, firms and governments make to attain their unlimited wants given their scarce resources

Opportunity cost

The highest value (or next best) alternative forgone

Economic problem

The economy’s finite resources are insufficient to satisfy society’s infinite wants and needs. Therefore, on one hand it is a problem of scarcity and on the other hand, it is a problem of choice

Land

Any natural resource used to produce goods and services (wood, minerals, water)

Labour

The effort people contribute to the production of goods and services (personnel, time)

Capital

All human made aids to production (machinery, equipment, buildings)

Enterprise

Labour input that involves the management and organisation of the other factors of production (business managers, directors, entrepreneurs)

Consumer goods

Goods that have no future productive use. E.g. Food, clothing, televisions

Capital goods

Any good that may be used to help increase future production. Eg) Machinery, equipment, buildings.

Explain the trade off between capital and consumer goods

To achieve long run growth, it is necessary for the economy to produce more capital goods than consumer goods. However, this comes at a cost.

By diverting resources away consumer goods, economic growth in the short-run declines but in the long-run it increases.

This is because, investment in capital goods enables more output of consumer goods to be produced. Therefore, economic growth can increase by a greater amount than it would have it would have if the economy had not made the short-term sacrifice.

Employed person

A person who works at least 1 hour per week

Underemployment

A person is employed but is not working as many hours as the would like and / or need

Labour force

The total number of people over the age of 15, currently employed plus the total number of people over the age of 15, currently unemployed but actively engaged in seeking a job, also known as ‘working population’

Participation rate

The percentage of the population over the age of 15 that is in the labour force

Why is unemployment significant?

• Major indicator of economic performance

• Major influence on a government’s economic policy

• High levels of unemployment mean the government pays out more taxes as revenue payments, so has less money to spend on other activities in the economy

Unemployment

The proportion of the labour force that is currently unemployed

Unemployment rate calculation

Number of people unemployed/number of people in the labour force x100

Recommended amount of unemployment

3.5-4.5%

Frictional unemployment

This occurs when people change jobs so for a short period of time they will be unemployed whilst they search for a new job

Structural unemployment

This occurs when there are structural barriers to workers finding new jobs – mainly not have the skills needed for the jobs available

Cyclical unemployement

This occurs when there is a downturn in the economy – it reflects the fact the during a down turn there are a lot of unused resources which include labour

Costs of unemployment

• Waste of scarce resources

• Gov must pay more welfare payments

• Permanent unemployment

• Skills mismatch gets bigger

• Less equitable society

Define GDP

The market value of all final goods & services produced in a country during a period of time. 

Ideal rate of economic growth

3.5%

Economic growth formula

(GDP2-GDP1/GDP1)*100

Limitations of GDP

• Does not include non-market production

• Does not provide info about the distribution of production

• Does not consider environmental impact

• Involves estimates of production

Demand side causes of economic growth

Improved spending in the economy

Supply side causes of economic growth

Increasing quantity and quality of resources

Australia’s GDP growth rate

4.3% (2022)

Australia’s current unemployment rate

4.10 (June)

Australia’s current inflation rate

3.8% (June)