Government Intervention in the Economy

Flashcards reviewing key concepts from lecture notes on government intervention in the economy.

Why do governments intervene in markets?

Governments intervene because unregulated free markets may lead to undesirable economic and social outcomes, such as market failures or inequitable distribution of resources.

What are the benefits of government intervention?

Government intervention can lead to better resource allocation, ensuring essential goods and services are provided, and promoting a more equitable income distribution across society.

What are public goods? (e.g., national defense)

Public goods are non-excludable (difficult to prevent non-payers from using) and non-rival (one person's use doesn't diminish availability to others), making them available to all.

Why doesn't the private sector provide public goods?

The private sector avoids providing public goods because the non-excludable nature of these goods provides no profit incentive; private firms cannot easily charge for usage.

What are merit goods? (e.g., education, healthcare)

Merit goods provide benefits to the broader community beyond just the individual consumer, leading to positive externalities when consumed.

What are demerit goods? (e.g., tobacco, alcohol)

Demerit goods are undesirable items that the free market tends to overproduce, leading to negative impacts on individuals and society.

What are collective goods? (e.g., national security)

Collective goods are services and resources that benefit the entire community, often provided by the government due to their large-scale nature.

What is a natural monopoly? (e.g., utilities)

A natural monopoly occurs when high infrastructure costs and other barriers to entry create a situation where only one supplier can efficiently provide goods or services.

What is market failure?

Market failure happens when market forces result in inefficient resource allocation or create unfavorable outcomes that deviate from economic efficiency and social welfare.

What is absolute poverty?

Absolute poverty refers to the condition where individuals lack sufficient income to afford basic necessities like food, shelter, and clothing, often benchmarked against a poverty line.

What is relative poverty?

Relative poverty is measured by comparing the living standards of the poorest members of society against the average living standards of the rest of the population.

What is an oligopoly? (e.g., auto industry)

An oligopoly is a market structure dominated by a small number of large firms, leading to limited competition and potential collusion.

What is a monopoly? (e.g., single provider of a utility)

A monopoly is a market situation where a single large firm controls the entire market supply of a particular product or service.

What is monopolistic competition? (e.g., restaurants)

Monopolistic competition occurs when many small sellers offer differentiated products or services; each seller has some market power but faces competition.

What is price discrimination?

Price discrimination involves selling the same goods or services at different prices to different buyers, based on their willingness to pay.

What are PTEs? (e.g., Australia Post)

Public Trading Enterprises are government-owned businesses that operate with commercial objectives, often providing essential services.

What are the three levels of government in Australia?

The three levels of government in Australia are Federal (Commonwealth), State (e.g., New South Wales), and Local (e.g., city councils).

What are exclusive powers (Australian context)?

Exclusive powers are powers that can be exercised only by the federal government, as outlined in the Australian Constitution.

What are concurrent powers (Australian context)?

Concurrent powers are powers that are shared between the federal and state governments, allowing both to legislate on the same matters.

What are residual powers (Australian context)?

Residual powers are those powers that are not specifically listed in the Constitution and are therefore exercised only by the state governments.

What does the public sector consist of?

The public sector comprises all entities owned and operated by the government, including Commonwealth, state, and local governments, as well as PTEs.

How does the government reallocate resources?

The government reallocates resources through various mechanisms such as taxation, direct spending, producing goods and services, and implementing regulatory policies.

What is the Average Rate of Tax (ART)?

The Average Rate of Tax is the proportion of total income that is paid as tax, calculated by dividing total tax paid by total income.

What is the Marginal Rate of Tax (MRT)?

The Marginal Rate of Tax is the proportion of any additional income that must be paid as tax, reflecting the tax rate on the last dollar earned.

What is a progressive tax? (e.g., income tax)

A progressive tax is a tax system where higher income earners pay a larger percentage of their income as tax compared to lower income earners.

What is a regressive tax? (e.g., GST)

A regressive tax is a tax system where higher income earners pay a smaller percentage of their income as tax compared to lower income earners.

What is a proportional tax?

A proportional tax is a tax system where all income earners pay the same percentage of their income as tax, regardless of how high or low their income is.

What is the government's aim in competition policy?

The government's aim in competition policy is to promote workable competition, fostering an environment where competition is maximized while considering existing market conditions.

What are the phases of the Business Cycle?

The phases of the Business Cycle include Expansion (growth), Peak (high point), Contraction (decline), and Recession (significant decline).

What is fiscal policy?

Fiscal policy involves the government using its budget to influence economic activity, often acting countercyclically to stabilize the economy.

What are the budget stances?

The budget stances are Expansionary (increasing spending or cutting taxes), Contractionary (decreasing spending or raising taxes), and Neutral (no significant change).

What is the simple multiplier?

The simple multiplier effect describes how an initial change in spending can lead to a proportionally larger change in total income within an economy.

What is monetary policy?

Monetary policy is a macroeconomic tool used by the Reserve Bank of Australia (RBA) to manage interest rates and credit conditions, influencing economic activity.

Name the three goals of macroeconomic policy.

The three primary goals of macroeconomic policy are stabilizing economic activity, maintaining low inflation, and achieving full employment.

What is an unemployment/deflationary gap?

An unemployment or deflationary gap occurs when the economy is operating below its full potential, resulting in cyclical unemployment and potentially deflation.

What is an inflationary gap?

An inflationary gap arises when the economy operates above its full employment level, leading to increased inflationary pressures due to high demand.

Name some influences on government policies.

Government policies are influenced by a variety of groups, including political parties, businesses, unions, environmental advocates, welfare organizations, and the media.

What is economic growth?

Economic growth is the increase in the volume of goods and services an economy produces over a specific period, usually measured as a percentage change in real GDP.

What is inflation?

Inflation is a sustained increase in the general price level of an economy, eroding the purchasing power of money over time.

What is full employment?

Full employment is the level of employment at which there is no cyclical unemployment; some frictional and structural unemployment may still exist.

What is a budget deficit?

A budget deficit occurs when a government spends more money than it receives in revenue during a given period.

What is a budget surplus?

A budget surplus occurs when a government receives more money in revenue than it spends during a given period.

What is the role of the RBA (Reserve Bank of Australia)?

The Reserve Bank of Australia's main role is to maintain currency stability, promote full employment, and ensure the economic prosperity and welfare of the Australian people.

What are the main instruments of monetary policy?

The primary instruments of monetary policy include the cash rate, open market operations, and reserve requirements for banks.

What is the cash rate?

The cash rate is the interest rate charged on overnight loans between financial institutions in the money market, influencing other interest rates in the economy.

What are open market operations?

Open market operations involve the RBA buying or selling government securities to influence the cash rate and overall liquidity in the financial system.

What is the aim of competition policy?

The aim of competition policy is to promote workable competition by preventing anti-competitive behavior, ensuring markets remain fair and efficient.

What are the main goals of government intervention?

The main goals of government intervention are to correct market failures, provide public goods and services, and redistribute income to reduce inequality.

What is sustainable economic growth?

Sustainable economic growth is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

What is allocative efficiency?

Allocative efficiency occurs when resources are used to produce the mix of goods and services that society values most highly, maximizing overall welfare.

What is technical efficiency?

Technical efficiency is achieved when it is impossible to increase output without using more resources or to reduce inputs without decreasing output.

What is dynamic efficiency?

Dynamic efficiency refers to how quickly firms and industries adopt new technologies and adapt to changing economic conditions over time.

What are externalities? (e.g., pollution)

Externalities are costs or benefits that affect parties who are not directly involved in a transaction, leading to market inefficiencies if not addressed.

What is information asymmetry?

Information asymmetry exists when one party in a transaction has more or better information than the other party, leading to potential exploitation or market distortions.

What is Gini coefficient?

A measure of statistical dispersion intended to represent the income inequality or wealth inequality within a nation or any other group of people.

What is Lorenz curve?

A graphical representation of the distribution of income or wealth within a population.

What is HDI (Human Development Index)?

A statistic composite index of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development.

What is GDP (Gross Domestic Product)?

A monetary measure of the market value of all the final goods and services produced and sold (not resold) within a country in a specific period of time.

What is opportunity cost?

The loss of potential gain from other alternatives when one alternative is chosen.

What is frictional unemployment?

The unemployment which results from people being between jobs.

What is structural unemployment?

A form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers

What is cyclical unemployment?

The component of unemployment that results from decreases in economic activity

What is seasonal unemployment?

A situation where people become unemployed at particular times of year when demand for labour is lower than usual

What is hidered unemployment?

When the official unemployment rate understates the true level of unemployment

What is participation rate?

The percentage of the working-age population who are members of the labour force

What is labour force?

All the employed and unemployed people in a country

What is Gini coefficient?

A measure of statistical dispersion intended to represent the income inequality or wealth inequality within a nation or any other group of people.

What is Lorenz curve?

A graphical representation of the distribution of income or wealth within a population.

What is HDI (Human Development Index)?

A statistic composite index of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development.

What is GDP (Gross Domestic Product)?

A monetary measure of the market value of all the final goods and services produced and sold (not resold) within a country in a specific period of time.

What is opportunity cost?

The loss of potential gain from other alternatives when one alternative is chosen.

What is frictional unemployment?

The unemployment which results from people being between jobs.

What is structural unemployment?

A form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers

What is cyclical unemployment?

The component of unemployment that results from decreases in economic activity

What is seasonal unemployment?

A situation where people become unemployed at particular times of year when demand for labour is lower than usual

What is hidered unemployment?

When the official unemployment rate understates the true level of unemployment

What is participation rate?

The percentage of the working-age population who are members of the labour force

What is labour force?

All the employed and unemployed people in a country

What is Exchange Rate?

The value of a currency expressed in terms of another currency.

What is Export-Led Growth?

The sustained and considerable increase in exports relative to imports.

What are Imports?

Products that are bought from overseas.

What are Tariffs?

Taxes on imported goods to increase the price of imports and reduce their attractiveness to domestic consumers.

What are Quotas?

A limit on the quantity of a good that can be imported into a country.

What is Exchange Rate Manipulation?

Government policies designed to artificially lower the price of a country's exports or raise the price of its imports.

What is Balance of Trade (Trade Balance)?

The difference between a country's total exports and total imports.

What is Balance of Payments?

A record of all transactions made between one particular country and all other countries.

What are International Capital Flows?

Capital that flows between countries, particularly for investment or trade purposes.

What is Absolute Advantage?

A situation where a country can produce a good or service at a lower cost than another country.

What is Comparative Advantage?

A situation where a country can produce a good or service at a lower opportunity cost than another country.

What is Globalization?

The process by which businesses or other organizations develop international influence or start operating on an international scale.

What is Free Trade?

A system of trade between nations where there are no artificial barriers to trade imposed by governments

What is Protectionism?

The use of trade barriers to protect domestic industries from foreign competition.

What is a Trade Surplus?

When a country exports more than it imports, it records a trade…

What is a Trade Deficit?

When a country imports more than it exports, it records a trade…

What is Nominal Exchange Rate?

The price of one country's currency in terms of another country's currency.

What is Real Exchange Rate?

Nominal exchange rates adjusted for differences in inflation between countries.

What is Increased Global Interdependence?

The increase in international exchange of goods, services, capital, labor, and information.

What is Increased Export Revenue?

An increase in the exports of goods and services, resulting in an inflow of foreign currency.

What is Foreign Exchange Market (Forex)?

A market in which international currencies are traded.

What is Currency Depreciation?

Occurs when the value of a currency falls relative to another currency.