Unit 2 AOS 1

Area of Study 1

Economic Growth

An increase in the real value of goods and services produced in the economy (GDP) from one year to the next.

Macroeconomic Activity

Production, income and expenditure that takes place across the whole economy.  

Production

Total value of goods and services that are produced in an economy.  

Income

The flow of money or other economic benefits received by an individual, household, or business.

Expenditure

Total spending undertaken on the goods and services being produced.

Material Living Standards

The access individuals have to goods and services in a society. 

Non-material Living Standards

Overall wellbeing and happiness including quality-of-life factors not factored in material living standards, like environmental quality, crime rates, personal freedom, public health, leisure time, and social well-being.

Formula for GDP and Aggregate Demand

GDP = AD = C + I + G1 + G2 + (X - M)
or
C + I + G + (X - M)

5 Sectors of the 5 Sector Flow Model

• Household/Consumer Sector

• Business/Producer/Firm Sector

• Financial Sector

• Government Sector

• Overseas Sector

3 Leakages in 5 Sector Flow Model 

• Savings

• Taxes

• Imports

3 Injections in 5 Sector Flow Model 

• Investment

• Government Spending (G1 and G2)

• Exports

Aggregate Demand

The total demand for goods and services within a particular market over a period of time.

In this course, it’s based on Australia.

C Component

Consumer Spending/Consumption:
Any spending by households and consumers.

I Component

Investment Spending
Any business or financial investment in plant, equipment, factors of production or economic resources.

G1 Component

Government Consumption:
Payments made by the government on consumption items like wages or Centrelink.

G2 Component

Government Investment:
Payments made by the government on capital items (such as new buildings, roads or capital). 

X Component

Exports:
Any good or service sold overseas
(In this course, a good sold from Australia to overseas)

M Component

Imports:
Any good or service purchased from someone overseas
(In this course, a good bought from Australia by someone overseas)

Economic Cycle/Business Cycle/Trade Cycle

Series of economic contractions and expansions that an economy experiences over time with alternating periods.

4 Phases of Economic Cycle/Business Cycle/Trade Cycle

• Peak/Boom

• Slowdown (Contraction)

• Trough (Could be recession)

• Recovery (Expansion)

Peak/Boom

The 1st period of the economic cycle where GDP is growing at its fastest rate and at its highest after a recovery but before a slowdown (contraction).

• High levels of spending

• High aggregate demand

• Low unemployment rates 

Slowdown (Contraction)

The 2nd period where the speed of rise in economic activity and GDP slows down after a peak but before a trough.

Trough

The 3rd period where economic activity and rate of GDP growth are at their slowest after a slowdown but before a recovery.

• High rates of unemployment 

• Reduced incomes

• Reduces purchasing power

• Reduced living standards

• Reduced levels of spending

• Low aggregate demand

Recession

A trough lasting at least two consecutive quarters of negative GDP growth, lasting 6 months.

Recovery (Expansion)

The 4th period where the rate in GDP starts to accelerate after a trough but before another boom/peak, repeating again. 

Ideal Economic Activity/Domestic Economic Stability

The ideal, preferred and favourable level of economic activity between the peak and the trough. There is

• An inflation rate between 2-3%

• A GDP Growth rate between 3-4%

• An unemployment rate between 4-4.5%

3 Types of Indicators

• Lagging Indicators

• Coincident Indicators

• Leading Indicators

Lagging Indicators 

Indicators of economic activity that indicates economic activity that occured some time ago. 

Examples of Lagging Indicators

• GDP Figures

• Unemployment Rate

• Inflation Rate

• Weekly Earnings

Coincident Indicators

Indicators of economic activity which moves closely with actual change in economic activity. 

Examples of Coincident Indicators

• Share prices

• Monthly retail sales

• New car registrations

Leading Indicators

Indicators or predictors of future economic activity

Examples of leading indicators

• Consumer confident

• Business confidence

• Index of new housing approvals

• Share Prices

• Stock Prices

• Returns on Bonds

GDP (Gross Domestic Product) 

Final market value of all goods and services produced economy over a given period of time. Alternatively, it is the total 'value added' during each stage of the production process. 

(In this course, it is based on Australia) 

Factors Affecting Consumption Spending 

• Disposable Income

• Consumer Confidence

• Interest Rates

• Population Growth 

• Government Budgetary Policies 

Factors Affecting Private Business Investment

• Business Confidence

• Interest Rates

• Company Tax Rates

• Government Policies

• Technological Advancements

Factors Affecting Government Spending

• Unemployment Rate

• Inflation Rate

• Population Growth

• Government Debt

• Issues in the Nation

Factors Affecting Exports

• Exchange Rate of Currency

• Overseas Economic Conditions

• Natural Disasters

Factors Affecting Imports

• Exchange Rate of Currency

• Local Economic Activity

• Consumer and Business Confidence

• Overseas Economic Conditions

• Inflation Rates

Monetary Policy

Monetary policy tools of the central bank (RBA in Australia) like interest rates, money supply and the cash rate.

Aggregate Supply

The total amount of goods and services that all producers in the country can make available over a period of time.

• Shown on a PDF

• Depends on factors of production and economic resources

Factors Affecting Aggregate Supply

• Quantity of Factors of Production

• Efficiency of Usage of Factors of Production

• Climatic Events

• Anomalies like pandemic lockdowns, wars and disruptions

• Economic Policies

Factors Affecting Labour Resources

• Demographics

• Population’s Age Structure

• Education, skills, and labour productivity

• Investment levels

Factors Affecting Capital Resources

• Interest Rates

• Technology, Research, Development and Efficiency

• Mineral Exploration

Factors Affecting Natural Resources

• Mineral Exploration

• Land Management

• Climate Change and Weather Events 

Factors Affecting Production Costs

• Wage costs and labour productivity

• Taxation

• Government Investment on Infrastructure (G2)

Nominal GDP

The total value of all goods and services produced in an economy over a period of time does not account for inflation.

Real GDP

The total value of all goods and services produced in an economy over a period of time accounting for inflation.

Benefits of Economic Growth

• Employment and Opportunities

• Increase in Material Living Standards

• Increase in Non-Material Living Standards

• Economic Development

Limitations in Real GDP

Doesn’t account for

• Non-Material Living Standards

• Black (Illegal) Market

• Home production

• Cash economy (transactions done with cash)

• Volunteers

‘Guestimating’ occurs for

• Farm production consumed on the farm

• Accommodation Values

MAP (Measuring Australia’s Progress) 

Collection of measures of living standards published periodically by the Australian Bureau of Statistics. The 4 main categories of measures are society, economy, governance and environment.