ECONOMICS: Topic 3 > Economic Issues

revision for AT1 on content from topic 3

what is the main economic issue?

unlimited wants, limited resources

(land, labour, capital, enterprise)

what is economic growth?

the increase in the value of goods and services produced over time (measured by real GDP)

what is unemployment?

the proportion of the labour force that is willing and able to work but cannot find a job

what is inflation?

increase in the general price level of goods and services

what is the distribution of income & wealth?

how income and assets are shared across households

what is the law of demand?

states that as prices decrease, quantity demanded increases

what does aggregate demand refer to?

the total demand of goods & services within an economy at a certain price level

what does aggregate supply refer to?

the total amount of goods & services an economy can produce at a certain price level

what is the memory key for remembering the set up of an AD/AS graph?

Demand - to the dirt

Supply - to the sky

what does AD/AS diagram show?

how shifts in aggregate demand & aggregate supply may impact shifts in price (inflation) and economic output (growth)

what words describe movement along the demand & supply curves?

expansion & contraction

what words describe a shift of the demand & supply curves?

increase & decrease

what is GDP?

total value of goods & services produced in an economy over a year

what is nominal GDP growth?

where GDP increases due to a change in prices (inflation), NOT an increase in output

what is real GDP growth?

increases due to a change in the output of goods and services, adjusted for changes in inflation over time.

what is more accurate for measuring GDP & why? (real or nominal)

real GDP, because increasing the volume of output is what improves living standards

what is the economic growth formula?

what is the formula to convert nominal GDP into real GDP?

removes effects of inflation

what is the formula of aggregate demand (AD)?

C + I + G (X-M)

what type of growth does demand-side (AD) growth drive?

short-term growth

what type of growth does supply-side (AS) growth drive?

long-term growth

what is aggregate supply determined by?

the quantity & quality of factors of production (land, labour, capital, entreprenurship)

what does the simple multiplier calculate?

how much additional GDP results from an additional change in expenditure

when can increased economic growth result in inflation?

when AD (inflationary pressure) outpace AS

what are some consumption factors that may contribute to economic growth?

disposable incomes, interest rates & consumer expectations

what are some investment factors that may contribute to economic growth?

business profits, business expectations & interest rates

what is the natural rate of employment?

rate of employment with no cyclical unemployment

what is the NAIRU?

non-accelerating inflation rate of unemployment, which is the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise.

what are some examples of the main groups affected by unemployment?

1. Youth

2. Mature-age workers

3. Low-educated individuals

4. Low-skilled occupations

5. Industries facing structural change

6. First Nations Australians

7. Migrants

8. And, specific regions.

who makes up the labour force?

unemployed & employed

what is the definition of unemployment?

working age people who are actively looking for work but are currently without a job

what are two issues with the unemployment rate measurement?

excludes hidden unemployment & underemployment

what is hidden unemployment?

when people are not counted as unemployed or in labour force due to given up hope and stopped looking for work

what is underemployment?

when those who are technically employed, would like and are available to work more hours

what is an example of underemployment?

someone working part-time, but wants to work full-time

what is cyclical unemployment?

occurs with changes in the business cycle

what is structural unemployment?

occurs with a mismatch between the jobs that are available and the people looking for work

what is frictional unemployment?

occurs when people are moving between jobs in the labour market & moving in and out of labour force

what is seasonal unemployment?

occurs at different points in year because of seasonal patterns

what is hard-core unemployment?

out of work for so long that individuals are rarely employed due to personal circumstances

what is the formula for the participation rate?

% of working-age population (15+) that are in the labour force

what is the formula for the unemployment rate?

% of people in labour force who are unemployed

what does technical efficiency refer to?

producing the maximum level of output from a given quantity of inputs, shown as along the PPF

what does allocative efficiency refer to?

maximising total benefit from its scarce resources by producing a combination that best matches community preference

what does dynamic efficiency refer to?

how well resources are allocated over time to meet the preferences

what is the unemployment rate gap?

the difference between the NAIRU & the unemployment rate

when will inflation & wages growth exist in the NAIRU graph? and why?

when UE is at or below NAIRU, below there is limited spare capacity (no cyclical unemployment)

what types of policies can help reduce the NAIRU, by reducing structural unemployment?

• Subsidised Training

• Relocation Assistance

• Funding Employment Programs

> ALL reduce skill & location mismatch

what policies could increase the participation rate?

• Increasing the minimum wage

• Increasing childcare access to encourage parents to re-enter the workforce

• Expansionary monetary policy

• Reskilling for mature-aged workers to delay retirement

what is price stickiness?

describes wage growth & tendency to remain unchanged despite shifting market conditions

what is inflation?

a sustained increase in the general price level over time

what is headline inflation?

measures items in CPI basket, which are weighted based on percentage spent on groups

what is underlying inflation?

measures inflation excluding items that have large price changes (such as assets), or one-off price changes

what are two weaknesses of headline inflation?

• doesn’t include property

• doesn’t include ALL items consumed

what is the headline inflation target?

2-3%

what is deflation?

when the general price level decreases

what is stagflation?

stagnant or low economic growth, high unemployment, and rising inflation.

what is demand-pull inflation?

when increases in AD exceed increases in AS, through a shortage of goods & consumer competition

what are inflationary expectations?

when consumers expect higher prices therefore ‘panic buy’, which increases demand-pull inflation

what is cost-push inflation?

when production costs rise, foricing firms to increase their prices to maintain profit margins

what is imported inflation?

when AUD is weak OR inflation is high overseas, costs of imported materials rise, rising prices of final goods & services

what is the wage price spiral?

when inflation & wages push eachother higher, as consumers desire purchasing power and businesses aim to remain profitable

what is the difference between income and wealth?

income is the amount of money that flows to individuals WHEREAS wealth is the stock of assets individuals own at a particular point in time.

what are the three negative effects of inflation on the economy?

• reduced economic growth

• reduced international competitiveness

• reduced exchange rate

what is purchasing power?

the amount of goods or services a certain amount of money can buy

what are two groups who benefit from inflation?

1) owners of real assets - ie property & commodities

2) borrowers on fixed interest repayment plans

what are the four sources of income?

salaries, rent, interest, profit

what is the difference between gross income and disposable income?

gross is the sum of all income WHEREAS disposable is income individuals keep after tax

which type of income (nominal or real) is adjusted for inflation?

real income

what does the line of perfect equality in the lorenz curve represent?

a perfectly equal distribution of income

What represents a more unequal distribution of income? (high GINI or low GINI)

high GINI

who are the disadvantaged groups in the distribution of income in Australia?

• non-english speaking migrants

• youth

• women

what is the two main sources of income for Australian households?

wages/salary & transfer payments

what are the two largest sources of wealth?

owner-occupied property & superannuation

what is absolute poverty?

where people don't have enough money to meet basic needs and earn below the poverty line

what is relative poverty?

where individuals have an income that is less than 50% of the median income

what does utility refer to?

satisfaction OR happiness

what is an example of a progressive tax?

income tax, the more you earn, the more you are taxed

what is an example of regressive tax?

GST (Goods & Service Tax), affects low-income earners disproportionately

what are the economic costs of income inequality?

• Reduced overall utility (satisfaction).

• Reduced consumption and slow economic growth.

• Need for increased government expenditure. 

what is the single economic benefit of income inequality?

Can create incentives that lead to an increase in potential output, and therefore long term growth

what are the social benefits of income inequality?

• Sense of personal achievement

• Greater role for charity, fostering positive social connections.

what are the social costs of income inequality?

• Reduces social cohesion

• Increased poverty

what is non-discretionary government expenditure?

automatic adjustments in government spending

what is discretionary government expenditure?

deliberate changes in government spending

what is the point on the line in the PPF (production possibility frontier) called?

allocative efficiency