Year 12 Economics Topic 3 – Economic Issues

Flashcards about Economic Growth, Aggregate Demand, Consumption, Investment, Government Spending and Taxation, Exports and Imports, Supply Side Growth, Injections and Withdrawals, and the Multiplier.

What is Economic Growth?

An increase in the real GDP of an economy over a period of time.

How is Economic Growth measured?

The annual rate of change in real Gross Domestic Product (GDP).

What is the equation for Economic Growth?

(real GDP cy - real GDP py) / real GDP py

What is defined as Aggregate Demand?

Total level of expenditure and demand in an economy over a given period of time.

What components make up aggregate demand?

Consumption, Investment, Government Spending, and Net Export Spending.

What is Aggregate Supply?

The total productive capacity of an economy, i.e., the potential output when all factors of production are fully utilized.

What is the formula for Injections?

I + G + X

What is the formula for Leakages?

S + T + M

What does the General Price Level refer to?

The average of all current prices for goods and services in an economy at a given time.

How does an increase in demand affect the AD curve and the economy?

If any part of demand (consumption, investment, government spending, exports) increases, the AD curve shifts right — which can boost growth, but may cause inflation if the economy is already full.

What is induced consumption?

Induced consumption is the part of consumer spending that changes when income changes. When people earn more, they spend more — that extra spending is called induced consumption.

What is defined as autonomous consumption?

Autonomous consumption is the spending that occurs even when income is zero. It represents basic or essential spending (e.g. food, rent), often funded by savings or borrowing.

What is Average Propensity to Consume (APC)?

Is the proportion of total income that is spent on consumption.

What is Average Propensity to Save (APS)?

Is the proportion of total income that is not spent, but is saved for future consumption.

What are the greatest influences on a consumer's APC?

Consumer expectations, interest rates, and distribution of income.

How do interest rates influence the consumer's APC/APS?

Higher interest would encourage higher savings as there are more returns.

How does the distribution of income influence consumption?

The more equitable the distribution of income, the higher the level of total spending will be in the economy.

What are the two main influences over investment decisions?

Business expectations and the cost of capital goods.

What are businesses sensitive to regarding business expectations?

Any expected changes in demand for their products and general economic climate/outlook.

How do changes in interest rates influence business investment decisions?

A fall in interest rates would make it cheaper to borrow funds for purchase of capital equipment, and a rise in interstate rates would raise borrowing costs, as well as making it more attractive to save.

What factors do businesses sensitive to regarding cost of capital equipment?

Changes in Interest Rate, Changes in Government Policies and Changes in the Price of Productivity of Labour

What is the Australian Government’s instant asset write off scheme?

Enables small businesses with turnover of less than $10 million to claim the full cost of capital equipment valued under $20,000 immediately instead of claiming depreciation.

What is the main goal of government spending and taxation policies?

To maintain a strong and stable rate of economic growth (2 to 3%).

What are the three main areas of Government Spending?

Public consumption, investment, and transfer payments.

What are transfer payments?

Payments made without receiving goods/services in return (e.g., welfare payments, unemployment benefits, pensions).

What factors influence Australia's volumes of exports and imports?

Exchange Rate, Overseas Economic Conditions, and Domestic Economic Conditions.

How does the exchange rate influence exports and imports?

When Australia has a weaker exchange rate, domestic industries are more competitive as the relative cost of foreign purchases decreases, often resulting in increased sales.

how does rising participation rates influence unemployment?

Increase in the labour force participation rate will tend to cause an increase in the rate of unemployment in the short term

What factors contribute to Supply Side Growth (AS)?

Quantity of New Resources, Improvements in Technology, and Microeconomic Reform.

What does Microeconomic reform aim to accomplish?

Aims to improve efficiency and productivity across the economy.

What are the two key challenges to Australia's aggregate policy relating to capacity constraints?

Labour skills shortage and infrastructure bottlenecks.

What is Labour skill shortage?

When firms are unable to fill positions for occupations that demand specific skills.

What are infrastructure bottlenecks?

Refer primarily to physical distribution methods which are unable to handle the output capacity.

What does the Multiplier measure?

The number of times the final effect on national income exceeds the initial sum.

what are the three different time periods used to measure Australia’s rate of economic growth

Quarterly economic growth, year on year growth and annual Economic Growth.

What is the definition of Year on year Economic Growth?

A less volatile measures of economic growth, which measures the percentage change in GDP between one quarter and the corresponding quarter for the previous year.

What are the sources of economic growth in Australia?

Consumption spending, investment spending, government spending, net exports, rate of technological change, and labour and capital productivity.

What are the benefits of economic growth?

Living Standards, Lower Unemployment, Improvement in Government Budget, and Increased Innovation.

What are the costs of economic growth?

Income Inequality, Inflation, Environmental Impacts, and External Stability.

What is ‘productivity’?

Generating productive output based on minimal amounts of inputs, thereby boosting output for a given input level.

What is Technical or Productive efficiency?

Producing the maximum output at the minimum average cost.

What is Dynamic efficiency?

Adjusting production to changes in circumstances, such as new technology.

When can an economy grow faster and more sustainably?

When aggregate supply is increased — leading to higher GDP growth alongside price stability through lower inflation.

What factors influence Australia’s business cycle?

General economic conditions, terms of trade, sustainable rate of economic growth, pre-emptive monetary policy, fiscal policy, and external economic conditions.

How does the government sustain Economic Growth?

Using macroeconomic policies (fiscal and monetary) to influence economic growth in the short term, with the goal of smoothing fluctuations in the business cycle.

What are Equity and Efficiency trade off?

Government options where equity increases causes inefficiency and promoting efficiency will likely come at the cost of achieving equity.

What is the labour force?

The section of the population 15 years and above who are either working or actively seeking work.

Who is included in the labour force?

Persons aged 15 years and above who are currently employed for at least 1 hour per week of paid work and unemployed persons aged 15 and above, who are currently available for work AND are actively seeking work.

Who is not included in the labor force?

Full-time non-working students above the age of 15 and unemployed persons who are not willing to actively apply for jobs and attend job interviews or who are not available to start work.

What is the formula for the Labour Force Participation Rate?

Labour Force / Working Age Population x 100

What Factors Affect Participation Rate?

Study Commitments, Family Responsibility, and Ageing Population.

What is unemployment?

A situation where individuals want to work, but are unable to find a job, and as a result labour resources in an economy are not utilized.

What is the formula for the Unemployment Rate?

: Total Number Unemployed / Labour force (Employed+Unemployed) x 100

What is defined as Underemployment?

People who are employed but are not working as many hours as they would live to (e.g., part-time workers who want full-time work.)

What is hidden unemployment?

People who have given up looking for work, even though they still want a job.

What are the types of Unemployment?

Structural, Cyclical, Frictional, Seasonal, Hidden, Underemployment, Long-Term, and Hardcore.

What is Structural unemployment?

Occurs when the skills of jobseekers doesn’t match the characteristics demanded by firms.

What are the Causes of Structural Unemployment?

Technological Progress, Changing Consumer Demand, Poor Training and Education, and Geographical Immobility.

What is Cyclical Unemployment?

Cyclical unemployment is caused by contractions in economic activity. When economic activity and aggregate demand decreases, cyclical unemployment increases.

What is Frictional Unemployment?

Represents the people who are temporarily unemployed as they are in the process of changing jobs.

What is Seasonal Unemployment?

Occurs at predictable and regular times throughout the year because of the seasonal nature of some kinds of work.

What is Hidden Unemployment?

Includes those who are considered unemployed but do not fit the ABS definition of unemployment and are thus are reflected in unemployment statistics.

What is Underemployment?

Refers to people who work for less than full-time (35 hours per week), but would like to work longer hours.

What is long term unemployment?

Refers to those people who have been out of work for 12 months or longer, usually as a result of structural unemployment.

What is Hardcore unemployment?

Refers to people who are out of work for so long that employers consider them unemployable due to their personal circumstances.

What are the Causes of Unemployment?

The Level of Economic Growth, The Stance of Macroeconomic Policies, Constraints on Economic Growth and Rising Participation Rates.

What is the Constraints on Economic Growth regarding Unemployment?

Unemployment is influence by the level of sustained economic growth achieved in an economy.

What is Okun's Law?

Is an inverse relationship between unemployment and economic output.

How does productivity relate Labour and Unemployment?

The productivity of labour is a significant factor affecting the decision of employers to increase or reduce employment.

What is the inflexibility in the Labour Market?

Skilled vs Unskilled employees or Minimum Wages or Licensing requirements or deregulation effects.

What is the Non-Accelerating Inflation Rate of Unemployment (NAIRU)?

The level of unemployment at which, there is no cyclical unemployment, that is, where the economy is at full unemployment.

What are the Main Groups Affected by Unemployment?

Youth, Indigenous Australians, Age-Related people, Specific Regions, People Born Outside of Australia.

What are the Economic Costs of Unemployment?

Opportunity Cost, Lower Living Standards, Declining in Labour Market Skills for the Long Term Unemployed costs to the Government and Lower Wage Growth.

What are the Social Costs of Unemployment?

Increased Inequality and Other Social Costs.

What are the Policies to Reduce Unemployment?

Promoting stable economic growth & Microeconomic policy .

What are the aims of Labour Market Policies and Tax & Welfare reform?

Labor market policies & tax and welfare reform.

What is Inflation?

: a sustained increase in the general level of prices in an economy.

What is Price Stability?

The goal of keeping inflation at a low stable level.

What is the Headline inflation formula?

CPI (CY) - CPI (PY) / CPI (PY) x 100

What are the government inflation goals attempts to avoid?

Hyperinflation and Deflation.

What is the causes of Inflation?

Demand-pull inflation, Cost inflation, imported inflation and inflationary expectations

What is Demand-pull inflation?

Aggregate demand (or spending) exceeds the productive capacity of the economy, prices rise as output cannot expand any further in the short term.

What is Cost-push inflation?

There is an increase in production costs (such as the increase in oil price or wage increases) that producers pass on to consumers in the form of higher prices, thus raising the rate of inflation

What is the Wage Price Spiral?

Is a self-reinforcing cycle where rising wages lead to higher prices, and higher prices lead to more pressure for wage increases.

What occurs when governments are attempting to decrease unemployment but more inflation is traded for less unemployment?

Government attempting to decrease unemployment will use expansionary policy, which stimulates AD and increases inflammation.

What is imported inflation?

Imported inflation is transferred to Australia through international transactions. The most obvious cause of this type of inflation is rising import prices.

What are the two ways that imported inflation is made?

Rising import prices and depreciation of the Australian dollar.

What is stagflation?

A condition of slow economic growth and relatively high unemployment- economic stagnation- accompanied by rising prices (inflation) or inflation and a decline in Real GDP.

What is Inflationary expectatations?

If the prices of goods and services are expected to increase in the economy, consumers will attempt to purchase products before price increases.

What macro economic policies are there to sustain low inflation?

Contractionary monetary policy and contractionary fiscal policy.

What is external stability?

External stability refers to maintaining sustainability on external accounts, so Australia can service its foreign liabilities.

What is CAD as a % GDP?

Is a key measure of how sustainable the CAD is over time.

What causes a CAD?

Trade Balance & Savings and Investment Gap.

What is the formula of CAD/GDP?

CAD / GDP x 100

What is Foreign Equity?

Refers to ownership of Australian assets (e.g. companies, land) by foreign investors.

What is Australia's Terms of Trade?

Is an indicator of trade performance as the ratio index of a country’s export prices relative to import prices

What is the role of global instability for external stability? .

Volatile terms of trade will reduces demand and Investment inflows, decrease the australian dollar and currency depreciation

What are the policies to achieve external stability?

Contractionary monetary policy that can be used to curb the growth in import spending and stabilise the CAD position & Microeconomic policy.

What are the aim for Microeconomic Policy regarding External Stability?

To manipulate the supply or demand of a good through pricing example Pollution Taxes, EMT and Quotas and Incentives.

What is Ecologically Sustainable Development?

Economic development that meets the needs of the present without compromising the ability of future generations to meet theirs.