Economics Chapter 6

What is expenditure (E)?

Total spending on goods and services produced in the economy.

What is output (O)?

The total market value of all final goods and services produced in the economy in a year (GDP)

What is income (Y)?

Total payments made to the factors of production generated from production over a year.

What are the components of expenditure?

Consumption (C), investment (I), government spending (G) and net exports (NX).

What is consumption (C)?

Spending by households on goods and services.

What is investment (I)?

Spending on capital goods that will be used for future production.

What is government spending (G)?

Expenditure by the government on goods and services.

What are net exports (NX)?

The value of exports minus the value of imports.

Expenditure =

C + I + G + NX = GDP

What are the primary components of income?

Wages and salaries, rent, interest, profits and dividends.

What are the 5 sectors in the circular flow model?

Households, business/firms, financial, government and overseas.

What does the household sector represent?

One or more people living in the same private dwelling.

What does the business sector represent?

The production side of the economy.

What do households provide to firms?

Consumption and factors of production

What do firms provide to households?

Goods and services and income.

What is the real flow?

The physical movement of goods and resources. This is goods and services and factors of production in the circular flow model.

What is the money flow?

The non-physical flow, income and consumption expenditure.

What are 4 assumptions of the the 2 sectors circular flow model?

There are only two sectors in the economy, firms and households, all output produced is sold to households, households spend all their income and there is no government or overseas sector.

What are leakages?

Withdrawals of money from the economy.

What are injections?

An increase of money into the economy.

What is the financial sector?

Banks and financial institutions.

What is the leakage in the financial sector?

Savings (S)

What are savings?

The proportion of household income not spent on goods and services for consumption.

What is the injection in the financial sector.

Investment (I)

What is investment?

The purchase or production of new capital goods such as machinery. The financial sector lends money for firms to invest in capital.

What is the leakage in the government sector?

Taxation (T)

What is taxation?

Taxes such as personal income tax, company tax, GST and excise duties on negative externalities.

What is the injection taxes are used to fund?

Government spending (G)

What is government spending?

Salaries for government employees, funding for government owned businesses and public investment/social overhead capital.

What is the leakage in the overseas sector?

Imports (M)

What are imports?

Goods and services purchased from other countries.

What is the injection in the overseas sector?

Exports

What are exports?

Goods and services produced in Australia and sold to consumers from other countries.

What happens when S+T+M=I+G+X

The economy is in macroeconomic equilibrium.

S+T+M

The economy is expanding.

S+T+M>I+G+X

The economy is contracting

What are inventories?

Goods that are unsold by a business.

The multiplier effect

An increase in spending produces an increase in income and consumption greater than the initial amount spent.

What goods are included in GDP?

Final goods

Intermediate good

A good that is used to produce another good. e.g. ingredients in food.

Why are intermediate goods not included in GDP?

To avoid double counting

What are the three ways GDP can be measured?

Production approach, income approach and expenditure approach.

Production approach

The value of all final goods and services is summed across all industries.

Income approach

All income paid to produce the goods and service is summed.

Expenditure approach

All types of spending on goods and services is summed.

How to calculate GDP in the expenditure approach.

GDP = C + I + G + (X-M)

Consumption expenditure

Spending on households by goods and services.

Three components of consumption expenditure

Expenditure on non-durable goods, durable goods and services.

Non-durable good

Consumed quickly after purchase (up to 3 years)

% of consumption that are non-durable goods

30%

Examples of non-durable goods

Food and clothing.

Durable good

Expected to be consumed over three or more years.

% of consumption that are durable goods.

10%

% of consumption that are services

60%

What factors affect consumption (DICH)?

Disposable income, consumer confidence, interest rates and household perceived stock of wealth.

What is disposable income?

Income after taxes. It affects how much people spend. An increase in disposable income will result in higher consumption.

How does consumer confidence affect consumption?

The optimism or pessimism of consumers about the state of the economy or personal financial situation can affect their willingness to spend.

How does interest rates affect consumption?

The cost of borrowing can affect consumers' decision to spend or save. When interest rates increase, consumption will decrease, when interest rates decrease, consumption increases.

How does household perceived stock of wealth affect consumption?

When assets increase in value, households feel wealthier and increase consumption.

What factors affect investment (BIT)?

Business confidence, interest rates and technological advancement

How does business confidence affect investment?

Positive expectations about future economic conditions can lead to increased business investment.

How do interest rates affect investment?

The cost of borrowing to finance investments is influenced by interest rates. Lower interest rates can encourage business investment, while high interest rates discourage business investment.

How does technological advancement affect investment?

Innovation and technological advancement can drive investment in new equipment and technology.

What factors affect government spending?

Government policy and political considerations.

How does government policy affect government spending?

Government decisions, such as changes to fiscal policy, can lead to change in government spending. In response to economic conditions, the government may increase or decrease their spending.

How do political considerations affect government spending?

Can influence government spending. Elected officials may allocate funds to projects based on public needs and political agendas.

What factors affect net exports (GET)?

Global economic conditions, exchange rates and trade policies.

How do global economic conditions affect net exports?

Strong global economic growth typically leads to an increase in demand for exports.

How does exchange rates affect net exports?

The relative strength of a country's currency can affect the demand for its exports and the cost of its imports. A weak currency can increase exports and decrease imports.

How do trade policies affect net exports?

Government policies and trade agreements can influence the volume of exports and imports.