Economics AT 1 Economic Activity

Purpose of Economic Activity

Economic Activity takes place to improve living standards, both in material and non material terms.

generally positive correlation between economic activity and living standards, however a high degree may be detrimental to non material living standards

Material Living Standards

Growth in production levels leads to more income/expenditure, enabling households to purchase more goods and services, commonly measured by increases in GDP per capita.

Non Material Living Standards

A wide range of factors that influence our quality of life beyond our ability to purchase goods and services.

Economic Activity

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

(over time, production, income and expenditure should be equal)

Production

The total value of goods and services that are produced in the economy.

Income

The total incomes that have been earned by those who have contributed to the production of goods and services

Expenditure

The total spending undertaken on goods and services being produced

Leakages

Savings: Money that is saved rather than spent on goods and services

Taxes: Money that is paid to the Government in the form of tax

Imports: Money that is spent on goods and services that have been produced overseas

Aggregate Demand

Total expenditure on final Australian made goods and services

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

Consumption

Household spending. The most stable component of AD, approx. 60% of AD

Investment

Business spending. The most volatile, as heavily influenced by business confidence/willingness to supply. Approx 15-20% of AD.

Government

G1: Government consumption spending (non discretionary); spending used to run Government departments such as health and education, relatively stable

G2: Government investment spending (discretionary); capital spending such as infrastructure, volatile depending on economic conditions.

Net Exports

Exports minus imports, both volatile depending on exchange rates, approx 20-25% of AD, net 0%.

Aggregate Supply

Total real value of production producers are willing and able to supply to the market. (reference to productive capacity of economy as a whole)

AD will only increase production of goods and services if the economy has sufficient productive capacity (AS)

Aggregate Supply factors

-Productivity

-Quality and quantity of factors of production

-Costs of production

-Exchange rates

-Technological change

-Climatic conditions

-Government policy

Aggregate Demand Factors

-Business and consumer confidence

-Interest rates

-Overseas economic growth

-Disposable income

-Exchange rates

-Terms of trade

Economic Growth

The rate at which economic activity grows over time, determined by changes in the real value of production from one year to the next

Real Growth

Ignores any growth that has taken place due to inflation.

Increase in GDP

An increase in the final market value of goods and services produced over time

Intermediate Goods

Goods not sold to the final consumer but instead sold to other consumers as inputs that are converted into another product.

GDP

Gross Domestic Product, the final market value of all goods and services produced in an economy over a certain period of time.

Benefits of Economic Growth

Material living standards will go up from employment and income produced by economic growth. Non Material living standards depend on other factors.

Strong economic growth earns more tax revenue for governments

Economic development

Improvements in the economic well-being of a nation, including material and non material factors.

Potential costs:

Detrimental to non material living standards, congestion, pollution, depletion of CARs, strain on infrastructure, Affluenza, inequality

Real GDP shortcomings

Excludes non-marketed goods and services, where it is difficult to get accurate values (e.g. home based production, blackmarket transactions, charitable activities)

Doesn't measure changes in the quality of goods and services

May be innacuracies converting nominal gdp to real gdp

GDP figures based on estimates

GDP does not capture changes in purchasing power of incomes

Also fails to capture changes to non material standards

Does not distinguish between welfare improving transactions

Does not account for depletion of CAR

Does not take into account leisure time

Genuine Progress Indicator (GPI)

Seeks to measure collective living standards for a nation. Measures expenditure on goods and services, but also

includes social costs, such as unemployment, crime, problem gambling and other problematic purchases, pollution and depletion of common access resources detracts them from national welfare despite adding to social effort

MAP (measure of australia's progress)

Aims to answer the question of if life in Australia has gotten better. Looks at society, economy, environment and governance

HDI (human development index)

Focuses on people centred policies, not so much national production of goods and services comparing well being. Includes living standards, health and education

Consumer confidence

Consumer's perception of their economic wellbeing in the future

Business confidence

Business's perception of their future levels of sales and profitability

Interest rates

the cost of borrowing or the return offered by lending money

Exchange rate

The exchange rate is the value of the Australian dollar against another currency

DDA-CAM

analysis of demand factors.

1. Look at data

2. Describe the factor influencing

3. All other things being equal

4. Component of aggregate demand

5. Link to aggregate demand

6. Effect on production, macroeconomic goal of SSEG

DDA-PAM

Analysis of supply factors

1. Look at data

2. Describe the factor

3. All other things being equal

4. Effect on willingness and or ability of producers to supply goods and services

5. Link to aggregate supply, direction of change

6. Effect on production macroeconomic goal of SSEG

Affluenza

The addictive pursuit of more and more utility maximising goods and services which comes with greater access to them, as the satisfaction gained from purchases is temporary

Leading Indicators

Indicators that are looking that tell economists what is likely to happen in the future

e.g. Consumer confidence (consumers perception of their future wellbeing)

Building approvals

Job vacancy rates

Coincident Indicators

Indicators that reflect what is simultaneously occurring in the economy

e.g. Sales volumes

Hours worked

Interest rates

Exchange rates

Lagging Indicators

Indicators that are backward looking that tell economists what has happened, allowing them to predict the direction of economic activity from there

e.g. inflation

economic growth

unemployment rate

Peak

Generally strongest economic growth, high inflation as greater consumption spending putting pressure on AS, unemployment will be low as maximum production of G&S

Trough/Recession

Low growth, low inflation as less consumer spending, high unemployment as less production