UNIT 2 AOS 1 Definitions

Affluenza is a term used to describe a situation where making money and consuming goods and services is an obsession that hurts individuals and others around them.

Aggregate demand (AD) represents the total value of all spending each year on Australian-made goods and services (AD = C + I + G + X – M).

Aggregate demand factors are the conditions affecting total spending or demand for a nation’s goods and services and include consumer or business confidence. Stronger aggregate demand factors boost spending, while weaker conditions slow spending.

Aggregate supply (AS) represents the total value of goods and services that the nation’s producers are collectively prepared to produce over a period.

Boom is a period of excessively strong economic activity and is shown as a peak on the business cycle. It is caused by spending or demand rising faster than productive capacity or supply, leading to widespread shortages of good and services and hence inflation.

Business confidence relates to the level of optimism or pessimism by firms about their future level of sales and profits. It affects upcoming levels of new private investment spending and hence AD.

Business cycle diagram is used to describe how GDP changes upwards and downwards over a period of years. Typically, the economy passes through four main phases — a boom, slowdown, recession and recovery. In addition, the ideal economic situation is called domestic economic stability. This is located on the business cycle, midway between a boom and a recession.

Chain volume GDP is the value of final output of a nation’s goods and services. It is measured over a period of time and is adjusted statistically downwards to compensate for the effects of inflation, or upwards to compensate for the effects of deflation, on the value of national production.

Circular economy is a more sustainable type of economic system where minerals and some other resources are used to make more durable goods that, when they have finished their useful life, can be recycled rather than thrown away as waste.

Climate change relates to global warming caused by the release of greenhouse gasses resulting from the production, consumption and disposal of goods and/or services.

Coincident indicators are measures of the economy that move very closely with actual changes in the level of economic activity (e.g. share prices, monthly retail sales).

Common access goods are those things we all share and depend on like air, rivers and oceans.

Consumer confidence relates to the level of household optimism or pessimism about their future employment and income prospects. It affects upcoming levels of household consumption spending and hence AD.

Cyclical unemployment is when individuals lose their job due to weak AD and a slowdown or recession.

Disposable income is money available for spending after households receive welfare and pay tax. It affects AD.

Domestic economic stability is the ideal economic position for an economy to be in. Conditions do not get better than this, where simultaneously there is a strong and sustainable rate of economic growth (around 3 per cent rise in GDP per year), full employment (around 4.0-4.5 per cent unemployment rate) and low inflation (an annual rise in general prices averaging 2-3 per cent).

Economic activity occurs when resources are used by an economy to produce goods and services. In the process, this also affects inflation and unemployment rates in an economy.

Economic growth exists when a country's economy gets bigger and there is a rise in the volume of goods and services produced between one year and the next.

Erratic behaviour of economic activity show no pattern of change since their direction is caused by unpredictable, one-off events.

Exchange rate for the A$ relates to the value of an $A when it is swapped for another currency in international transactions. Its level affects the values of exports and imports and hence AD.

Expansion or the recovery phase of the business cycle is where the level of real GDP is rising and growth rates are increasing towards perhaps 3 per cent per year.

Export spending (X) represents overseas spending on Australian-made goods and services (e.g. cotton, wool, minerals, manufactured items and travel). This is an injection on the circular flow model that adds to AD.

The five-sector circular flow model is a diagram that shows how the various parts of an economy interact through the four main flows – resources, incomes, spending and production. The five sectors include the household, business, financial, government and overseas sectors.

The goal of full employment is the lowest rate of unemployment, in 2022 around 4.0-4.5 per cent of the labour force, which does not accelerate inflation.

Government spending (G) represents public sector outlays that are designed to help satisfy the needs and wants of the community for goods and services (e.g. roads, water, schools, telecommunications). This is an injection that adds to AD.

Green GDP is a measure of a nation’s economic growth adjusted downwards for the environmental impacts (e.g. the depletion of resources, environmental degradation and loss of biodiversity) of producing goods and services. Some believe this more accurately reflects society’s living standards than the traditional GDP measure.

Gross domestic product (GDP) is a quarterly or annual measure of the value of finished goods and services produced by a nation. On the circular flow model, is also equal in value to AD and total incomes.

Gross National Happiness (GNH) is a composite index made up of several indicators such as GDP per head, social support, health and life expectancy, freedom to make life’s choices, generosity and trust. Some believe this is a better guide to living standards than the traditional GDP measure.

Human Development Index (HDI) is one of the most widely used indicators of our economic development and wellbeing. It is an index created by combining a range of economic and social indicators. However, it does not incorporate environmental considerations.

Import spending (M) is expenditure by Australians on foreign-made goods and services, which is designed to help satisfy our needs and wants (e.g. oil, electronics, travel). It is a leakage on the circular flow model, slowing AD.

Income is the payment of money, generally to those who have sold productive resources to firms.

Inflation refers to a situation where most prices paid for a basket of consumer goods and services are rising over a period, causing a drop in the purchasing power of money. It may be the result of higher production costs or general shortages of goods and services due to too much spending.

Infrastructure represents capital resources like roads, ports, power, hospitals, railways, and water supply that enable businesses to produce other goods and services. Often this is provided by governments, sometimes in partnerships with private firms. There is economic infrastructure (e.g. the construction of the NBN, the new airport in Western Sydney) and social infrastructure (e.g. schools and hospitals).

Injections are elements in the circular flow model (e.g. investment spending/I, government spending/G, and export spending/X), which act like an accelerator and add to the total value of spending on Australian-made goods and services.

Interest rates are the price or cost of borrowing credit from banks and influence the incentive to save and the levels of consumption and investment spending.

Lagging indicators are measures of the economy that only tell the level of activity that occurred some time ago (e.g. GDP figures, the unemployment rate).

Leading indicators are measures that can help to predict where the economy may be heading soon (e.g. consumer confidence, business confidence).

Leakages are elements in the circular flow model (e.g. savings/S, taxes/T and spending on imports/M) that act like a brake and slow down the total value of spending in our economy.

Living standards refers to how well-off a nation is overall. There are two components — material living standards (relate to the level of incomes and the quantity of goods and services consumed by each person each year), and non-material living standards (relates to the quality of daily life for individuals as affected by subjective elements including levels of happiness, job satisfaction, crime, environmental health, mental and physical health, life expectancy, urban congestion, hours of work and leisure, family tensions and stress).

Long-term or run refers to changes in economic activity or other variables that occur over perhaps 10 or 20 years, or more.

Material living standards are dependent on a person’s level of income and consumption of goods and services, measured over a period. Real GDP per head per year is often used as a rough indicator of average material living standards.

Measures of Australia’s Progress (MAP) is not a single statistical indicator of overall welfare, but is a collection of measures within four areas — society, the economy, governance, and the environment. It allows people to determine whether their wellbeing is progressing or regressing.

Negative externalities are the costs transferred to third parties not directly involved in economic activities, which result from the production and consumption of goods and services (e.g. global warming).

Non-economic activities are those generally not sold for money, but are performed for emotional reasons, concern for others, or on a volunteer basis. Their value is not included in GDP.

Non-material living standards are not related to the quantity of goods and services that we have, but instead are elements of our wellbeing that affect the quality of our daily lives, and may perhaps involve levels of freedom, happiness, quality of family life, justice, amount of leisure time, crime, health and life expectancy, pollution, and the state of the natural environment.

Overseas economic activity relates to whether globally, demand and economic conditions abroad are strong or weak. Its level affects the sales of Australian exports or injections and, hence, AD.

Peak is a phase on the business cycle diagram that occurs when GDP reaches its maximum level, and the rate of growth is strong. If there is a boom, inflation will rise and unemployment will fall to very low levels.

Private consumption spending (C) represents household expenditure that is designed to help satisfy people’s immediate needs and wants for goods and services (e.g. food, holidays and clothing). It is the biggest single component of AD.

Private investment spending (I) is outlays by businesses for the purchase of machinery, technology and buildings (e.g. a tractor, or robot or a factory) used to help produce other goods and services. It is designed to help grow efficiency and expand a firm’s productive capacity by growing its physical capital resources.

Productivity is an aggregate supply factor that is a measure of efficiency — that is how much output is gained from a unit of resources or inputs used in production. GDP per hour worked is a measure of labour productivity that can grow a nation’s productive capacity and potential GDP.

Purchasing power parity is used to make adjustments to the purchasing power of money in different countries so as to allow international comparisons of incomes. The adjusted number is usually expressed in international dollars.

Recession is a period on the business cycle where there is very weak economic activity and GDP falls over at least two consecutive quarters (a 6-month period). It is caused by a lack of spending, leading to much unused productive capacity. This results in high levels of unemployment, lower average incomes and depressed material living standards.

Recovery is a period on the business cycle where the levels of national production and employment are rising.

Seasonal pattern in data or graphs are those that occur in the same month or time each year.

Severe weather events include floods, cyclones, drought, and bushfires. They are unfavourable aggregate supply conditions that are linked with economic activities, increased CO₂ emissions, and global warming.

Short-term refers to changes in the direction of an economic variable lasting perhaps 1–5 years.

Slowdown is the downswing phase on the business cycle where the rate of growth in GDP is decelerating. Typically, this is caused by a softer levels of national spending. Here, unemployment rises and inflation slows.

Structural unemployment can occur when firms change their production methods and use new technology to become more efficient (such as robots on an assembly line, ATMs for banking, automated warehouses, online shopping and so on). It can also occur when firms relocate perhaps overseas, or there is a mismatch between the skills possessed by unemployed workers and the requirements of the jobs that are currently available.

Total income is one of the four flows making up the circular flow model. It represents the total value of payments to individuals selling resources used by firms to produce goods and services. It is equal in value to AD and GDP.

Trough is the phase on the business cycle diagram that occurs when production reaches its lowest level. It may also represent a recession or depression, where GDP falls. Usually, unemployment is higher, and inflation is slower.