Why do we measure the economy
to see if we are on the right track, to compare with other countries (influence trade, currencies, power relationships), visualising where to make improvements (budgeting and redirecting money)
What are economic indicators for
measure people’s consumption of goods and services and gather data
What does the economy need to do?
To grow at a sustainable rate to meet the needs of its growing population and their changing life stages
What are the 3 economic growth indicators
GDP, inflation, unemployment
Outline what GDP is
Gross Domestic Product - total value of all goods and services of a country over a year, measured quarterly (ever 3 months), sustainable growth is 2-3% annually
What is a recession
if quarterly GDP figures record negative growth for two consecutive quarters (6 months)
What are some reasons for growth in an economy
mining sector (abundance of material, trading), spending money, labour force, injection of money from government (stimulus money), greater education
What is the difference between a recession and depression?
Depressions are a much greater severity and lasts for over 8 quarters (2+ years)
Outline the Global Financial Crisis
between 2007-2008. referring to extreme pressure in global financial markets and banking systems. the crashing of the US housing market and spread globally through leakages in the global financial system
What are some effects of a depression
unemployment, decline in industrial production, deflation, increase of poverty
Outline inflation
inflation measures the increase in the general level of prices paid for goods and services over a certain period of time.
What is the sustainable range of inflation
2-3%
Define cost pull factors
cost pull inflation is caused by the producers putting additional cost on the consumers to cover their extra expenses
Define demand pull factors
an increase in prices due to an increase in the demand for goods and services
Define cost of living
referring to how much it costs to purchase necessities
How is inflation an economic indicator
high inflation can signal an overheated economy
moderate inflation is associated with economic growth
if economic growth accelerates very rapidly, demand grows even faster and producers raise prices continually
Why can’t we just print more money?
printing money increases inflation
How can an increase in supply of money occur?
government can print more notes
the currency in circulation can be devalued
government bonds can be purchased, loaning new money into existence through the banking system
Outline CPI
CPI measure the price change of a typical basket of goods and service purchased by Australian household every quarter. The change in prices in each quarter is the inflation rate
What are the groups in a CPI basket
87 categories, 11 groups weighted differently on how likely they are used by the average Australian family
transport
alcohol and tobacco
clothing and footwear
communication
recreation and culture
education
insurance and financial services
food and non-alcoholic beverages
housing
health
furnishing, household equipment and services
Define unemployment
the percentage of people in the labour force who are unemployed.
What are the types of unemployment
Structural, Cyclical, Frictional, Frictional, Seasonal
Define structural unemployment
is a type of unemployment that can last for many years due to changes in technology or changing demographics
Define cyclical unemployment
caused by economic downturns or is relates to changes in business conditions that affect the demand for workers
Define frictional unemployment
when people move between jobs in the labour market, as well as when people transition into and out of the labour force
Define seasonal unemployment
occurs at different points over the year because of seasonal patterns that affect jobs
List some causes of unemployment
When production or GDP is weak/decreased spending in the economy - business cutback on employment to save money
Increased competition overseas
Businesses may take their operations offshore or close down
Labour saving technology introduced
Define labour force
total number of people in Australia working and willing and able to work
Consequences of high unemployment
Economic spending is low, government collects less revenue from tax and must pay more to direct it towards social benefits, reduced standard of living, loss of skills from workforce, possible psychological effects
Define material living standards w/ examples
Refers to access to physical goods and services and is assessed or measured by the GDP - groceries, transport, maintenance
Define non-material living standards w/ examples
Refers to things that cannot be measured in dollar terms and are intangible, but affect enjoyment of life
freedom of speech
free elections
low levels of crime and discrimination
preservation of the environment
adequate leisure time
5 policies uses to increase living standard by government
Budgetary (gov budget)
Monetary (bank)
Microeconomics (company)
Productivity (improvement)
Training and Workforce
Migration (migrant criteria - age, skills, education, language, family, humanitarian)
Define macroeconomic policy
economic policy that focuses on an industry or market segment, focuses on improving production over the medium to long term.
Define monetary policy
actions by the Reserve Bank of Australia that affect the money supply and interest rates
What is the trend of a business cycle over time
follows a wave like pattern
What do the expansions of an economy signify
economic growth is growing
unemployment is falling
inflation is likely rising
What do contractions of an economy signify
economic growth is too low
unemployment is too high
inflation is low
Define fiscal policy
is the use of government revenue collection and expenditure to influence a country's economy
Define budget surplus
revenue minus spending is positive number - government collected more money than spent
Define budget deficit
if government revenue minus spending creates a negative number - spent more than collected
What type of budget should the government use during a economic boom? Why?
budget surplus. a boom will have an unsustainable inflation rate >3%. they can reduce this by lowering spending and raising taxes
What type of budget should the government use during economic trough? Why?
budget deficit. The government should spend more money towards stimulating the economy through injections (social benefits) and lowering taxes, as spending is low during this time
Define disposable income
income remaining after the deduction of taxes and social security charges, available to be spent or saved as one wishes
Define income
money received, especially on a regular basis, for work or through investments
Define equity
equity is impartiality, fairness and justice for all people in social policy. Social equity takes into account systemic inequalities to ensure everyone in a community has access to the same opportunities and outcomes
Define taxation
compulsory payment to the government (from current income or consumption) from the private sector to finance government spending
Outline tax
tax is money charged by the government on items such as wages, goods and services you provide money to government services
in a time of the strong economics business cycle, the government can try reduce inflation by lowering spending and raising taxes
taxes go towards education, infrastructure, transport, health, etc.
Outline direct taxes
direct taxes are tax you pay directly to the government
direct taxes cannot be paid by anyone else
the amount of tax you pay depends on how much money you earn
other factors also include
whether you have children or other dependents
whether you are single or married
Outline indirect taxes
indirect taxes are taxes on goods and services
this is because tax has been imposed on producers and is then shifted to the consumer
they are usually included in the price of the item, making them less visible to consumers
examples of indirect taxes include sales tax and value added tax (VAT)
indirect taxes can be regressive, meaning they take a larger percentage of income from low-income individuals than from high-income individuals
List purposes of taxes
raise revenue - money for government services
e.g. welfare, hospitals, school
redistribute income - people who earn more money pay more tax
resources allocation - used to encourage or discourage the use of certain resources
e.g. carbon tax, cigarette tax
stabilise economic activity - reducing fluctuations
List examples of government spending
investing on infrastructure (roads, bridges, public transport, power, water)
providing healthcare services and funding medical research
supporting education through funding schools and university
providing social welfare programs (unemployment benefits and food assistance)
funding scientific research and development
supporting environmental protection and conservation efforts
providing public safety services (police and fire departments)
funding public parks and recreation facilities
maintain defense and military services
define externalities
a consequence of an industrial or commercial activity which affects other parties not directly related to the activity, without this being reflected in market prices. can either have positive or negative effects
How can the government increase positive externalities
promoting policies (walking to school - reduces traffic congestions)
How can the government reduce negative externalities
increasing taxes on items or practices to deter people from buying or engaging in action - cigarettes, mining
Define income
money received, especially on a regular basis, for work or through investments
Define wealth
an abundance of valuable possessions or money
Outline the Lorenz Curve
the Lorenz curve is a way of showing the distribution of income (or wealth) within an economy
the Lorenz curve shows the cumulative share of income from different sections of the population
if there was perfect equality (everyone has same salary) the poorest 20% of the population would gain 20% of the total income; the poorest 60% of the population would get 60% of the income
What is the realistic income distribution in comparison to the cumulative share of income (probs don’t need remember, given graph)
the poorest 90% of the population holds 55% of the total income; the richest 10% of income earners gain 45% of total income
Outline the Gini coefficient
it is between 0 and 1 - the closer the number is to 0, the more income is distributed amongst the population; the closer to 1 the more inequitable the distribution of income
the closer the Lorenz curve is to the line of equality, the smaller area A is - the Gini coefficient will be low
if there is high degree of inequality, then area A will be a bigger percentage of the total area
a rise in the Gini coefficient shows a rise in equality - it shows the Lorenz curve is further away from the line of equality
How do you calculate the Gini Coefficient
G = A/(A+B)
the area above the Lorenz curve but below the line of perfect equality is A, the remaining area is B
we divide A by (A+B) to determine the Gini coefficient