Economics- Term 2

Invisible Hand

The invisible hand is a metaphor for the unseen forces (price mechanism) that move the free market economy. The concept describes the unintended greater social benefits and public good brought about by individuals acting in their own self‐interests.

Laissez faire

is an economic system in which transactions between private groups of people are free from or almost free from any form of economic interventionism such as regulation and subsidies. Underpinning such organisation of economy is the belief that the market will find its equilibrium without government interventions. In reality, no economies are purely laissez faire, or completely free from government inventions.

Market Failure

is the economic situation where resource allocation by free market leads to inefficient or inequitable outcomes. Examples of market failure abound (e.g., climate change, income inequality, trade war) and are the reasons for government intervention

Modified market economy

is a market economy in which there are varying amounts of intervention and property ownership by the government. Australia is a modified market economy. The use of fiscal and monetary policy, the provision of public education and health care, the taxation and welfare system, the labour market rules and regulation are all examples of government intervention.

Industrial revolution

the process of change from an agrarian and handicraft economy to one dominated by industry and machine manufacturing. Industrial revolution marks the emergence of markets and foundation of economics as a subject.

Business cycle

also known as the economic cycle or trade cycle, are the fluctuations of gross domestic product (GDP) around its long‐term growth trend. A typical business cycle consists of four phases: recovery and expansion (boom, growth), peak, recession (bust), trough.

Recession

refers to a significant decline in general economic activity. Technically, it is defined as two consecutive quarters of economic decline. The most recent recession Australia had was the pandemic recession in 2020, before that Australia kept a near 30‐year growth record.

Depression

is a deep and prolonged recession

Economic recovery

is the business cycle stage following a recession that is characterised by a sustained period of improving business activity.

Boom

is the expansion and peak phases of the business cycle. It's also known as an upswing, upturn, and a growth period.

Circular flow of income

is a model of the economy in which the major exchanges are represented as flows of income and spending between economic sectors (households, firms, banks, government, and foreign sectors).

Factors of production

the resources people use to produce goods and services; they are the building blocks of the economy. Economists divide the factors of production into four categories: land, labour, capital, and entrepreneurship.

Leakage

refers to the withdrawal of money from an economy that results in a reduction of the national income. Savings, taxes and imports are examples of leakages.  

Injection

refers to money added to an economy from a source other than households and businesses. Sources of injections include government spending, investment, and exports.

Paradox of thrift

or paradox of savings, is an economic theory that posits that personal savings, while beneficial for individuals, can be detrimental to overall economic growth during a recession.  

Monetary policy

is the macroeconomic policy that involves adjusting interest rates to achieve macroeconomic objectives like price stability, full employment, and economic growth.  

Fiscal policy

is the macroeconomic policy that involves adjusting government spending levels and tax rates to influence a nation's economy

Budget surplus

occurs when government revenue exceeds government expenditures. Budget surplus decreases government debt.

Budget deficit

occurs when government expenditures exceed government revenue. Budget deficit increases government debt.  

Tax revenue

refers to the revenues collected from taxes on income and profits, taxes levied on goods and services, taxes on the ownership and transfer of property, and other taxes. In Australia, the three main sources of tax are individual income tax, company and resource rent tax, and sales tax (GST). These three taxes contribute to about 75% of the overall government revenue.

GST

Goods and Services Tax (GST) is a value‐added tax levied on most goods and services sold for domestic consumption. It is the third largest tax revenue source for Australian government

Multiplier effect

occurs when an initial injection into the economy causes a bigger final increase in national income. For example, if the government increased spending by $1 billion and this caused GDP to increase by a total of $3 billion, then the multiplier would have a value of 3.