Economics HH Definitions

Material living standards* - blue

Material living standards are living standards as measured by access to goods and services.  [They are commonly measured for a nation by looking at GDP per capita.]

Non-material living standards* - blue

Non-material living standards are living standards unrelated to access to goods and service and include factors such as leisure, happiness and life expectancy. 

Purchasing power* - blue

A household's purchasing power is its ability to turn its income and savings into goods and services.  [Inflation reduces a household's purchasing power.]

Real GDP - blue

Real GDP is GDP that has been adjusted to remove the impact of inflation. [It allows for comparisons of a country's production from one year to another.]

GDP per capita - blue

A country's GDP per capita is its GDP divided by its population.  [It is effectively the mean or average income of the country.]

Financial sector

The financial sector sits between savers and investors and distributes funds between the two.  It includes banks and stockbrokers.

Government sector

The government sector includes the Commonwealth, State and local governments.

External sector

The external sector refers to people and countries outside Australia.

Peak - blue

The peak of the business cycle occurs after a solid period of growth and just before a downturn.  Consumer and business confidence are high, consumption, investment and asset prices are high and unemployment and savings are low.  If the peak occurs after a boom, the economy is reaching its capacity causing inflation to rise.

Trough - blue

The trough of the business cycle occurs after a period of very slow or negative growth and just before a recovery.  Consumer and business confidence are low, consumption, investment and asset prices are low and unemployment and savings are high.  The economy has spare capacity causing inflation to be low.

Contraction /downturn - blue

A contraction or downturn is a period of negative or falling growth in real GDP often triggered by an unexpected event that negatively impacts on aggregate demand.  Consumer and business confidence can drop resulting in greater savings and less investment and so causing a further decrease in aggregate demand.

Expansion /recovery - blue

An expansion or recovery is a period of increasing growth in real GDP which follows a trough.  The economy has plenty of capacity and consumer and business confidence are beginning to rise and unemployment to fall as spare capacity and low asset prices mean there are many opportunities for investment.

Recession* - blue

A recession is defined as two consecutive quarters of negative growth.

Stagflation

Stagflation refers to a period of both high inflation and high unemployment [such as in the late 1970s and early 1980s.]

Injections

Injections are moneys that are flow into the circular flow model (through investment, government spending or exports).

Leakages

Leakages are moneys that are diverted away from consumption in the circular flow model (to savings, taxes or imports).

Savings

Savings are disposable income not used for consumption.  Savings are usually invested either directly or through the financial sector.

Business cycle* - yellow

The business cycle is the cyclical pattern of growth in the economy over time with periods of above average growth and periods of below average and negative growth.

Aggregate demand - yellow

Aggregate demand is about the ability and willingness of purchasers to buy goods and services produced in the economy.  [Technical definition: ​Aggregate demand is the total value of all spending on final goods and services produced by a nation over a period of time.]

Disposable income* - blue

Disposable income is income available to households for spending after the receipt of welfare benefits and deduction of direct (income) taxes.

Economic activity

Economic activity is the activity of individuals, firms and government in the production and consumption of goods and services in society.  [it is the top part of the circular flow diagram showing the relationship between the business sector and the household sector.]

Aggregate supply - yellow

Aggregate supply is about the ability and willingness of firms in the economy to produce goods and services. [Technical definition: Aggregate supply is the total value of all goods and services produced by a nation over a period of time.]

Inflation*

Inflation is an increase in the general level of prices in the economy (as measured by the consumer price index).

Deflation*

Deflation is a decrease in the general level of prices in the economy (as measured by the consumer price index).

Consumer price index* - blue

The consumer price index measures the change in the general level of prices for households of goods and services by looking at changes in prices of a representative basket of products.

Consumption expenditure

Consumption expenditure (C in the AD formula) is total spending by households (and non-profits) on goods and services.

Private Investment expenditure / Investment

Private investment expenditure or investments (I in the AD formula) are funds applied towards increasing productive capacity including spending on plant and equipment, new housing, buildings and addition to inventories.

Government expenditure (G1 and G2)

Government expenditure (G in the AD formula) includes G1 which is government current spending on goods and services that are not capital in nature (not investments) such as employee salaries, stationary, rent and G2 which is government investment spending on capital goods such as new buildings, roads and ports (things that increase the productive capacity).

Net exports

Net exports (X-M in the AD formula) are the value of our exports minus the value of our imports.

Discretionary income* - blue

Discretionary income is disposable income after payment of non-avoidable expenses such as for food, shelter and interest on loans.  [It is the income that households may use either for saving or consumption.]

Marginal propensity to consume

The marginal propensity to consume (a number between zero and one) measures the change in consumption from $1 of additional income.  [The higher the MPC the greater the consumption rather than saving resulting from additional income.  MPC trends to be higher when consumer confidence is higher.]

Productive capacity - blue

An economy reaches its productive capacity when it is efficiently utilising all its resources and GDP cannot be increased under current conditions.

Productivity* - blue

Productivity measures the output that can be obtained from a given number of inputs.  [For instance, an economy that increases its productivity can produce a higher real GDP with the same resources.]

Labour productivity*

Labour productivity is a measure of how productive the workforce is - obtained by dividing total output by the number of hours worked.

International competitiveness

International competitiveness is one reason why an increase in the general level of prices reduces aggregate demand.  When prices increase (more than prices in other countries that we trade with) the international competitiveness of our economy will decrease.  Our exports will be more expensive to purchasers overseas and the imports we buy will be less expensive to us so net exports will decrease.

General level of prices

The general level of prices is a measure of the prices of a representative basket of goods and services sold in the economy.

Strong and sustainable economic growth* - yellow

The goal of strong and sustainable economic growth is to achieve the highest rate of growth in real GDP possible consistent with strong employment growth but without causing unacceptable inflationary, external or environmental pressures.

Inflationary pressures - blue

Economic growth will not be sustainable if it causes a build up of inflationary pressures such that inflation exceeds the Reserve Bank's target range of 2-3% over time.

External pressures - blue

Economic growth will not be sustainable if it causes a build up in external pressures such as a significant increase in the current account deficit or net foreign debt.

Environmental pressures - blue

Economic growth will not be sustainable if it is causing excessive damage to the environment or it involves using natural resources in a way that unfairly impacts on future generations.

Seasonally adjusted GDP

Seasonally adjusted GDP is GDP adjusted to take out the impacts of seasonal factors (for instance increased consumption in the Christmas period).

Annualised growth rate

Quarterly increases in GDP can be annualised by mutliplying them by 4.  An annualised figure is not an actual change in GDP but rather what the annual growth would be if growth stayed consistent at the quarterly rate.

Jobless growth

Growth does not necessarily increase employment.  If growth is coming entirely from productivity gains, achieving more output from the same resources, then there can be "jobless growth" where growth does not reduce unemployment. 

Essential services

One advantage of economic growth is that it enables governments to raise more taxes and so spend more money on providing essential services such as hospitals, schools and infrastructure which in turn can increase material and non-material living standards.

Goal of full employment* - yellow

The goal of full employment is to reach the highest level of employment consistent with the achievement of non-inflationary sustainable growth.  [It can also include inclusive full employment which means a reduction of barriers to work and structural unemployment so as to maximise the overall level of employment.]

Non accelerating inflation rate of unemployment (NAIRU) /

Natural rate of unemployment / Full employment - blue

The non-accelerating inflation rate of unemployment is the lowest rate of unemployment achievable before inflation begins to accelerate.  [It is also known as the natural rate of unemployment or full employment.  It is when cyclical unemployment has been reduced to zero.  NAIRU is considered to be around 4.5% in Australia but may be as low as 4%.]

Employed* - yellow

A person is considered to be "employed" if they are over the age of 15 years and working more than one hour a week for a wage.

Unemployed* - yellow

A person is considered to be "unemployed" if they are over 15 years, not working more than 1 hour a week for a wage and are actively looking for work.

Structural unemployment* - yellow

Structural unemployment occurs when people are unable to find employment due to the changing nature of production in the economy often resulting in a mismatch between the skills of workers and those required by firms.  [This is often because of a changing composition of industry due to technological change, reduction of tariffs or a change in consumer preferences.  For instance, the advent of driverless trucks (if it occurs) is likely to cause some structural unemployment for people working in the transport industry.]

Frictional unemployment - yellow

Frictional unemployment refers to the unemployment of people who are temporarily between jobs.

Cyclical unemployment - yellow

Cyclical unemployment is unemployment that occurs because the economy is not operating at full capacity due to insufficient aggregate demand.

Labour force - yellow

The labour force includes all those people over 15 years old willing and able to work (both the employed and the unemployed).

Unemployment rate - blue

The unemployment rate is the percentage of the labour force that is unemployed.

Participation rate - yellow

The participation rate is the percentage of people over 15 years old who are in the labour force.

Hidden unemployment - yellow

Hidden unemployment occurs when people become discouraged from not finding a job and give up seeking employment.  Such people will not be included in the unemployment rate as they are not actively seeking employment.

Underemployment / disguised unemployment - yellow

Underemployment, or disguised unemployment, refers to those people who are employed but who would prefer to be working more hours.  They are, in a sense, partly unemployed but they are not included in the unemployment rate.

Underutilisation rate - yellow

The underutilisation rate is the percentage of the labour force that is either unemployed or underemployed.

Casualisation - blue

Casualisation refers to the increasing number of casual and part-time jobs in the workforce as a proportion of the total number of jobs in recent years.  This is one of the reasons that underemployment has increased.

RULC / Real unit labour costs

Real unit labour costs are the average wages paid per worker divided by the average out produced per worker (adjusted for inflation).   [If RULC increases aggregate supply will decrease.]