Economic Activity and Applied Economic Analysis

U2 - AOS 1 - Economic Activity

Purpose of Economic Activity

  • Understanding economic activity involves grasping both material and non-material living standards.

  • Material Living Standards: Defined via the availability of goods and services.

  • Non-Material Living Standards: Such as quality of life, access to education and health care.

Five-Sector Circular Flow Model

  • Illustrates how money and goods flow through different sectors of the economy:

    • Households: Consumers of goods and services and suppliers of factors of production (labor, capital, land, entrepreneurship).

    • Businesses: Produce goods and services, employ factors of production, and make investment decisions.

    • Government: Collects taxes, provides public goods and services, and implements fiscal policies.

    • Financial Sector: Facilitates borrowing and lending, channeling savings from households to businesses for investment.

    • Foreign Sector: Represents international trade (exports and imports) and financial flows (international borrowing and lending).

Business Cycle

  • Describes the fluctuations in economic activity over time, featuring distinct phases:

    • Expansion: A period of economic growth characterized by increasing employment, output, and income.

    • Peak: The highest point of economic activity in the cycle, where growth begins to slow.

    • Contraction: A period of economic decline, marked by decreasing employment, output, and income (recession).

    • Trough: The lowest point of economic activity in the cycle, where the economy bottoms out before recovery begins.

  • Types of Economic Indicators:

    • Leading Indicators: Predict future economic activity. Examples include new building permits, consumer confidence, and stock market performance.

    • Lagging Indicators: Change after the economy has moved in a particular direction. Examples include unemployment rate, corporate profits, and interest rates.

    • Coincident Indicators: Occur simultaneously with economic changes. Examples include GDP, industrial production, and personal income.

Relationship Between Business Cycle and Economic Indicators

  • Economic indicators serve as tools to gauge the current and future health of the economy and offer insights into the business cycle's phases.

Aggregate Demand

  • Meaning: The total demand for all goods and services in an economy.

  • Importance: Reflects economic health and is critical for growth strategies.

  • Components of Aggregate Demand:

    • Consumption

    • Investment

    • Government Spending

    • Net Exports (Exports - Imports)

  • Factors Affecting Aggregate Demand:

    • Consumer confidence

    • Interest rates

    • Fiscal policies

Aggregate Supply

  • Meaning: The total supply of goods and services available to a particular market from producers.

  • Importance: Plays a crucial role in determining the overall level of economic activity.

  • Factors Affecting Aggregate Supply:

    • Production costs

    • Technology advancements

    • Supply chain logistics

Measurement of Economic Growth

  • Real Gross Domestic Product (GDP):

    • Definition: GDP adjusted for inflation, providing a more accurate reflection of an economy's size and how it's growing over time.

    • Utilized to gauge the health and performance of the economy.

Potential Benefits of Economic Growth

  • Material Living Standards: Increased availability of goods and services.

  • Non-Material Living Standards: Improvements in quality of life aspects.

  • Employment Opportunities: Higher job creation during growth phases.

  • Economic Development: Translates into infrastructure enhancements and social welfare.

Potential Costs of Economic Growth

  • Boom and Bust Cycles: Economic volatility where rapid growth is followed by sharp declines.

  • Congestion and Pollution: Environmental costs arising from rapid industrial activities.

  • Environmental Damage: The risk of deteriorating ecosystems due to unchecked growth.

  • Increasing Inequality: Economic growth can exacerbate income and wealth disparity.

  • ‘Affluenza’: A societal condition arising from the obsession with material wealth, leading to various psychological and social issues.

Limitations of Real GDP

  • GDP Limitations:

    • Fails to account for income distribution, non-market transactions, and environmental degradation.

  • Real GDP per Capita Limitations: While it reflects average living standards, it does not capture inequalities among individuals.

Alternative Measures of Economic Activity and Living Standards

  • Suggested measures may include the Human Development Index (HDI), Gini coefficient, adjusted measures of GDP that factor in leisure and environmental quality.

U2 - AOS 2 - Applied Economic Analysis of Local, National, and International Economic Issues

Key Knowledge Overview

  • Economic Issues Studied:

    • Wealth and Income Inequality

    • The Changing Labour Market

Economic Issue Definition

  • Importance of Economic Issues:

    • Relevance of metrics and statistical indicators to evaluate the magnitude and implications of issues within the economy.

Reasons for Importance

  • Understanding why these issues matter at various levels of the economy (local, national, international) is crucial for informed policy-making.

Economic Factors Influencing the Selected Issues

  • Analyzing economic determinants that contribute to the depth and spread of wealth and income inequality as well as shifts in the labor market dynamics.

Perspectives of Economic Agents

  • Households:

    • Views of consumers and workers regarding economic inequalities and labor market changes.

  • Businesses:

    • Their responses and stances on employment practices and capabilities.

  • Government:

    • Policies directed at addressing these economic phenomena.

Economic Responses

  • Exploring actions taken by relevant economic agents at various scales to mitigate issues, such as government interventions and regulations aimed at improving economic equity.