Economics U3AOS2

Material living standards

Access to goods and services that can be measured by monetary factors, e.g. income, housing, healthcare and education

Non-material living standards

Quality of life factors that can’t be measured by monetary factors, e.g. happiness, safety, mental health and environmental quality

Aggregate demand (AD)

Total spending on Australian goods and services in the economy over a period of time

Aggregate supply (AS)

Total production of goods and services in the economy over a period of time

Business cycle

Fluctuations in economic activity over time involving expansions and contractions

Strong and sustainable economic growth

A sustained increase in real GDP over time, ideally around 3–3.5% annually

Real GDP

The inflation-adjusted value of all goods and services produced in Australia over a year

Full employment

A situation where everyone who wants work can find a job except for frictionally unemployed workers

NAIRU

The lowest unemployment rate possible before inflation begins accelerating

Low and stable inflation

Keeping inflation between 2–3% on average over time

Inflation

Sustained increase in the general price level over time

Disinflation

A fall in the rate of inflation where prices are still rising but more slowly

Deflation

A sustained decrease in the general price level over time

Consumer Price Index (CPI)

Measure of changes in the average price of a basket of consumer goods and services

Headline inflation

Total CPI inflation including volatile items like fuel and food

Underlying inflation

Inflation measure excluding volatile price movements to show the underlying trend

Demand inflation

Inflation caused by excessive aggregate demand relative to aggregate supply

Cost inflation

Inflation caused by rising production costs increasing prices

Participation rate

Labour force divided by working-age population × 100

Unemployment rate

Number of unemployed people divided by labour force × 100

Underemployment

Workers wanting more hours than they currently receive

Hidden unemployment

People willing to work but not actively searching for jobs

Long-term unemployment

Unemployment lasting longer than 12 months

Frictional unemployment

Short-term unemployment occurring when people move between jobs

Cyclical unemployment

Unemployment caused by weak aggregate demand during downturns

Structural unemployment

Unemployment caused by industrial reorganisation because of a mismatch between workers' skills and job opportunities

Five-sector circular flow model

Model showing movement of income, resources and spending between households, businesses, government, financial institutions and the external sector

Households

Sector supplying factors of production and consuming goods/services

Businesses

Sector producing goods/services using factors of production

Government sector

Sector collecting taxes and spending on public services

Financial sector

Sector facilitating saving and lending in the economy

External sector

Overseas sector involving exports, imports and capital flows

Disposable income

Income remaining after taxes and transfer payments are accounted for

Consumer confidence

Measure of how optimistic consumers feel about the economy and future spending

Business confidence

Measure of business optimism about future economic conditions

Exchange rate

Price of one currency expressed in terms of another currency

Productivity

Output produced per unit of input

Productive capacity

Maximum level of output an economy can produce using available resources

International competitiveness

Ability of Australian businesses to compete with overseas firms on price and quality

Demand-side factors affecting AD

Disposable income, interest rates, consumer confidence, business confidence, exchange rate and overseas growth

Supply-side factors affecting AS

Quantity/quality of resources, costs of production, productivity, technology, exchange rates, climate conditions and supply chain disruptions

Expansion phase

Period of rising economic activity and growth in the business cycle

Contraction phase

Period of falling economic activity and growth in the business cycle

Peak

Highest point of economic activity in the business cycle

Trough

Lowest point of economic activity in the business cycle

Consequences of excessive growth

Inflationary pressure, environmental damage and external instability

Consequences of weak growth

Rising unemployment, lower incomes and weaker living standards

Consequences of high unemployment

Lower GDP, reduced tax revenue, poverty and lower living standards

Consequences of unemployment below NAIRU

Labour shortages and rising inflationary pressures

Consequences of high inflation

Reduced purchasing power, wage-price spirals and loss of international competitiveness

Consequences of very low inflation/deflation

Delayed spending, weaker growth and higher unemployment