Grade 12 Economics Unit 1: Managing the Economy

Comprehensive practice flashcards covering the circular flow of income models, national income analysis, and the macroeconomic goals of Papua New Guinea based on the Grade 12 Economics Unit 1 module.

How is Economics defined in the course introduction?

Economics is the study of the way we try to satisfy our material wants with the limited resources available to us, covering earning and spending of income, and the production of goods and services.

What are the five broad sectors of a modern complex economy?

1. Household, 2. Firm, 3. Capital, 4. Government, and 5. Overseas.

What are the six assumptions of the Two Sector Circular Flow of Income Model?

1. Economy consists only of Households and Firms. 2. All production is done by firms. 3. No savings in the financial market. 4. No government taxation or spending. 5. No overseas trade. 6. Only consumer (final) goods and services are produced.

In the two sector model, how are 'Commodity flows' and 'Money income flows' distinguished?

Commodity flows comprise resources and finished goods, while money income flows comprise household income ($Y$) and consumption spending ($C$).

What is the equilibrium equation for the simple circular flow of income model?

$Total\,Income = Total\,Expenditure = Total\,output$ or $\text{Y = O = E}$.

According to the transcript, what are the factor incomes received from the factors of production?

LAND: rent; LABOUR: wages; CAPITAL: interest; ENTERPRISE: profit.

What does the 'Capital sector' (or Financial sector) refer to in the three sector model?

Financial institutions such as banks, savings and loans societies, and micro-finance companies.

Define 'Injection' and 'Leakage' in the context of the circular flow.

An Injection refers to money added to the circular flow of income, while a Leakage refers to the withdrawal of money from the circular flow of income.

In the three sector model, what are the equations for Income ($Y$) and Expenditure ($E$)?

$Y = C + S$ and $E = C + I$, where $C$ is Consumption, $S$ is Savings, and $I$ is Investment.

What happens to the level of economic activity when Injections are greater than Leakages?

The level of economic activity will increase (the economy will expand).

What is the equilibrium condition for the four sector circular flow of income model?

The economy is in equilibrium if $S + T = I + G$, where $T$ is Taxation and $G$ is Government Expenditure.

Which sector is added to the four sector model to create the 'complete' five sector model?

The overseas (or foreign) sector, taking into account Imports ($M$) and Exports ($X$).

Why is Import ($M$) considered a leakage and Export ($X$) considered an injection?

Import ($M$) is a leakage because money is paid to firms in other countries (withdrawal), whereas Export ($X$) is an injection because money income is received from overseas (addition).

What is the formula for National Income equivalent to Gross Domestic Product ($GDP$)?

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

What are the three ways to measure National Income (Total Production)?

1. The production/value added method, 2. The income method, and 3. The expenditure (outlay) method.

What is the difference between Gross Domestic Product ($GDP$) and Gross National Product ($GNP$)?

$GDP$ is the value of all goods and services produced within an economy during a year; $GNP$ is the sum of all incomes received by residents, including $GDP$ plus income received from overseas.

What is the primary risk identified in measuring GDP?

Double counting, such as counting the same income or product more than once, or counting intermediate/capital goods instead of final goods only.

What are the three core economic goals of the Papua New Guinea government?

1. Economic growth and fair distribution of the benefits of development. 2. Creation of income earning opportunities and employment growth. 3. External balance equilibrium and price stability.

How is GDP per capita calculated?

$$GDP\,per\,capita = GDP \div Population$$

Define 'Import-substitution manufacturing.'

The production of goods to replace goods that are imported, aiming to increase domestic production and reduce foreign imports.

What does 'Down-stream processing' refer to in PNG's economic goals?

The process where raw materials are processed into finished products (secondary production) within the country.

Define 'Price stability' (or inflation control).

Controlling the rate at which the general price level increases; inflation is defined as the long-term increase in the average price level of goods and services.

What is the significance of the Philip's curve?

It shows a conflict (trade-off) between lowering the rate of inflation (Price stability) and lowering the rate of unemployment.

Define 'Stagflation.'

A period of simultaneous high rate of inflation and high rate of unemployment, where the Philip's curve shifts to the right.

What characterizes an 'Economic recession' according to the transcript?

A downturn in economic activities marked by a decline in economic growth, lower investment and production, rising cost of living (high inflation), and high unemployment.