ECONOMICS SAC 2
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133 Terms
What is the purpose of economic activity?
To produce goods and services that satisfy human wants and needs and improve living standards.
Q: What is macroeconomics?
The study of the economy as a whole, including growth, unemployment, inflation and trade.
Q: What is economic activity?
A: The production, distribution and consumption of goods and services.
Q: How can economic activity be measured?
A: By total production, total income or total expenditure.
Q: Give examples of economic activity.
A: Manufacturing, retail sales, healthcare, education, construction and tourism.
Q: What is non-economic activity?
A: Activities that do not involve market production or income generation.
Q: Give examples of non-economic activity.
A: Volunteering, unpaid housework, caring for family members and home gardening.
Q: What is Gross Domestic Product (GDP)?
A: The total value of goods and services produced within a country in a given period.
Q: What are the three ways of measuring GDP?
A: Production approach, income approach and expenditure approach.
Q: Why is GDP important?
A: It measures the level of economic activity in an economy.
Q: What is economic growth?
A: An increase in the economy's capacity to produce goods and services over time.
Q: How is economic growth measured?
A: By changes in real GDP.
Q: How can economic growth be expressed?
A: As an increase in total production or as a percentage change in real GDP.
Q: What is nominal GDP?
A: GDP measured at current prices.
Q: What is real GDP?
A: GDP measured at constant prices (chain volume GDP).
Q: Formula for nominal GDP?
A: Current prices × current quantities.
Q: Formula for real GDP?
A: Constant prices × current quantities.
Q: What does it mean if inflation is faster than nominal GDP growth?
A: Real GDP falls and economic activity decreases.
Q: What does it mean if nominal GDP grows faster than inflation?
A: Real GDP increases and economic activity rises.
Q: What does it mean if nominal GDP grows faster than real GDP?
A: Part of the increase is due to inflation.
Q: Why is real GDP the best measure of growth?
A: It removes the effect of inflation.
Q: Why is real GDP a better indicator of living standards than nominal GDP?
A: It reflects actual increases in production and purchasing power.
Q: What is GDP per capita?
A: Real GDP divided by the population.
Q: Why is GDP per capita important?
A: It indicates average material living standards.
Q: What are material living standards (MLS)?
A: The ability to consume goods and services.
Q: What are non-material living standards (NMLS)?
A: Quality of life factors such as health, education, leisure and the environment.
Q: Define material living standards.
A: Access to income, goods, services and economic resources.
Q: Define non-material living standards.
A: Social, environmental and personal wellbeing.
Q: How can increased economic activity improve MLS?
A: Higher incomes, more employment and greater consumption.
Q: How can increased economic activity improve NMLS?
A: Better healthcare, education and public services.
Q: Costs of increased economic activity for MLS?
A: Inflation and income inequality.
Q: Costs of increased economic activity for NMLS?
A: Pollution, congestion, environmental damage and stress.
Q: Benefits of decreased economic activity for NMLS?
A: Less pollution and congestion.
Q: Costs of decreased economic activity for MLS and NMLS?
A: Lower incomes, unemployment and reduced wellbeing.
Q: What is the five-sector circular flow model?
A: A model showing the flow of income, spending and resources between households, businesses, government, financial institutions and the external sector.
Q: Difference between the three-sector and five-sector models?
A: The five-sector model adds the financial sector and the external sector.
Q: What are the five sectors?
A: Households, businesses, government, financial institutions and the external sector.
Q: What are the leakages?
A: Savings, taxes and imports.
Q: What are the injections?
A: Investment, government spending and exports.
Q: Household sector roles?
A: Supplies factors of production and consumes goods and services.
Q: Business sector roles?
A: Produces goods and services and demands factors of production.
Q: Government sector roles?
A: Collects taxes and spends on public goods and services.
Q: Financial sector roles?
A: Receives savings and provides loans for investment.
Q: External sector roles?
A: Purchases exports and supplies imports.
Q: What is Flow 1?
A: Resources from households to businesses.
Q: What is Flow 2?
A: Goods and services from businesses to households.
Q: What is Flow 3?
A: Income from businesses to households.
Q: What is Flow 4?
A: Consumer spending from households to businesses.
Q: What happens in the circular flow model when economic activity increases?
A: Injections rise, income and spending increase and GDP expands.
Q: What happens when economic activity decreases?
A: Leakages rise relative to injections, reducing income, spending and GDP.
Q: What is the business cycle?
A: The pattern of economic expansion and contraction over time.
Q: What does growth below 0% mean?
A: Negative economic growth.
Q: What is an expansion?
A: Rising GDP, employment and investment.
Q: What is a peak?
A: The highest point of economic activity.
Q: What is a contraction?
A: Falling GDP and economic activity.
Q: What is a trough?
A: The lowest point of economic activity.
Q: What is domestic economic stability?
A: Sustainable economic growth with low inflation and low unemployment.
Q: What is a recession?
A: Two consecutive quarters of negative real GDP growth.
Q: What is a depression?
A: A prolonged and severe downturn in economic activity.
Q: What causes the business cycle?
A: Changes in aggregate demand and aggregate supply.
Q: What is stagflation?
A: High inflation combined with low growth and high unemployment.
Q: What can cause stagflation?
A: Supply shocks such as rising oil prices or natural disasters.
Q: What are leading indicators?
A: Indicators that predict future economic activity.
Q: Examples of leading indicators?
A: Building approvals, consumer confidence and business confidence.
Q: What are coincident indicators?
A: Indicators that move with the economy.
Q: Examples of coincident indicators?
A: Retail sales, GDP and employment.
Q: What are lagging indicators?
A: Indicators that change after economic activity changes.
Q: Examples of lagging indicators?
A: Unemployment and inflation.
Q: How do indicators relate to the business cycle?
A: They help identify current conditions and predict future phases.
Q: What is the relationship between AD and GDP?
A: Higher aggregate demand generally increases GDP.
Q: Unemployment during a peak?
A: Low.
Q: Unemployment during a trough?
A: High.
Q: Inflation during a peak?
A: High or rising.
Q: Inflation during a trough?
A: Low or falling.
Q: What is aggregate demand (AD)?
A: The total spending on domestically produced goods and services.
Q: What are the components of AD?
A: Consumption (C), investment (I), government spending (G) and net exports (X−M).
Q: What is consumption spending?
A: Household spending on goods and services.
Q: What are the four types of consumption spending?
A: Durable goods, non-durable goods, services and housing-related consumption.
Q: What is private investment spending?
A: Business spending on capital goods, buildings and inventories.
Q: Why is investment spending volatile?
A: It is sensitive to confidence and interest rates.
Q: What is G1 spending?
A: Government spending on goods and services.
Q: What is G2 spending?
A: Government investment spending on infrastructure.
Q: Why are welfare payments excluded from G?
A: They are transfer payments, not payments for current production.
Q: What are net exports?
A: Exports minus imports.
: What are AD factors
A: Factors that influence total spending in the economy.
Q: Examples of AD factors?
A: Interest rates, disposable income, confidence, exchange rates and overseas growth.
Q: How do stronger AD conditions affect economic activity?
A: Spending rises, income increases and GDP grows.
Q: How do weaker AD conditions affect economic activity?
A: Spending falls, income declines and GDP slows.
Q: Key factors affecting consumption spending?
A: Disposable income, consumer confidence, interest rates, population growth and government policy.
Q: Key factors affecting investment spending?
A: Business confidence, interest rates and company tax rates.
Q: Key factors affecting government spending?
A: Unemployment, inflation, population growth and government debt.
Q: Key factors affecting net exports?
A: Exchange rates, overseas growth, inflation, local economic activity and natural disasters.
Q: Major demand-side factors?
A: Real disposable income, consumer confidence, business confidence, overseas growth, interest rates, exchange rates and income tax rates.
Q: What is aggregate supply (AS)?
A: The total quantity of goods and services businesses are willing and able to produce.
Q: Why is aggregate supply important?
A: It determines the economy's productive capacity and long-term growth.
Q: What is productive capacity?
A: The maximum output an economy can produce sustainably.
Q: What are aggregate supply-side factors?
A: Factors affecting production costs and productive capacity.
Q: Key AS factors?
A: Labour, capital, natural resources, productivity, costs, regulations, exchange rates and supply chains.
Q: How do favourable AS factors affect economic activity?
A: Increase productivity, lower costs and raise GDP.
Q: How do unfavourable AS factors affect economic activity?
A: Reduce output and increase production costs.
