Econ definitions

Leakages: The savings, taxes and import expenditure that remove spending from the circular flow of income.

Injections: The investment, government expenditure and export revenues that add spending to the circular flow of income.

Income: A flow of earnings from using F.O.P to produce goods and services. (wages, interest, profit and rent)

Consumption: Spending by households on consumer goods and services over a period of time

Investment: The addition of capital stock to the economy or expenditure by firms on capital

Imports: Goods and services purchased by consumers in one country that have been produced in another country

Exports: Goods and services produced in one country and purchased by consumers in another country

Government spending: Spending by governments on goods and services.

Explain how changes to leakages and injections may affect the circular flow of income and overall economic activity: When injections (investments, gov. spending, exports) exceed leakages (savings, taxes, imports), the economy grows. However, if leakages exceed injections, the economy contracts.

  • Capacity of economy is determined by its quantity and quality of resources and he efficiency (Productivity) with which they are used

  • Actual output (Real GDP) is linked with the level of income and expenditure in the economy. The level of expenditure is known as aggregate expenditure or aggregate demand and is the sum of consumption, investment, government spending and net exports

    Gross national income: Income earned by all national factors of production independently of where they are located over a period of time (REGARDLESS of where in the world they are); it is equal to GDP plus factor income earned abroad minus factor income paid abroad

    • GNI = GDP + Net income from ABROAD (Income in - income going out)

    • If GNA > GDP It means that we are earning MORE in foreign countries compared to other foreign countries earning in AUSTRALIA

    • GNI = produced OUTSIDE THE BORDERS

    • GDP = produced WITHIN/INSIDE THE BORDERS

 

  • Gross domestic product (GDP) per capita indicated in bold in the text:

    • Gross domestic product is the total money value of all goods and services produced within a country's borders in a given time period (usually a year) divided by the population (per capita)

Aggregate demand: Curve showing the planned level of spending on domestic output at different prices (total spending on goods and services)

    THREE MAIN FACTORS: Inflation, Output (GDP), and unemployment

Aggregate Supply: Total quantity of goods and services produced by the firms in a nation at a range of price levels in a particular period of time.

Short run aggregate supply (SRAS): Relationship between the price level and the quantity of real output (real GDP) produced by firms when resources prices (wages e.g.) do not change

Long run aggregate supply (LRAS): Relationship between real GDP and price level in long run (shows potential output)

Short run macroeconomic equilibrium: Occurs when SRAS is equal to AD, resulting in the equilibrium price Ple and real GDP Ye.

Recessionary (deflationary) Gap:

  • Occurs when equilibrium real GDP lies to the left of potential GDP (LRAS), and unemployment is greater than natural rate of unemployment(when aggregate demand is BELOW than potential output)

Inflationary Gap

  • Occurs when equilibrium real GDP lies to the right of potential GDP (LRAS). When real GDP is larger than potential GDP, unemployment will be less than the natural rate of unemployment.

Unemployment:

  • People of working age who are actively looking for a job but who are not employed.

 

Underemployment:

  • People of working age with part-time jobs when they would rather work full time, or with jobs that do not make full use of their skills and education

  • Increase in actual growth: increase in the total real output produced by an economy over time (increase in GDP). It can also be expressed in a per capita basis

Increase in potential output: increase in the full employment level out output, or the  production possibilities/ Due to increases in the quantity, quality or level of technology of the factors or production.

  • Inflationary spiral: Price increase leads to higher wages demand (to maintain standard of living). Business then increase prices to maintain profits --> BUT higher prices then put further upward pressure on wages --> ALSO KNOWN AS WAGE PRICE SPIRAL

  • Inflation: A sustained increase in the average level of prices (as measured by a consumer price index) over time.

 

  • Inflation rate: Annual % change in prices for the average households

  • Deflation: when the average price level decreases over time

  • Disinflation: decrease in the rate of inflation --> when it becomes closer to

  • Cost-push inflation: Occurs when costs of production are increasing --> leads to inward shift in short run aggregate supply --> firms raise prices to protect profits --> wages often follow prices --> if there is an increase in inflation, this may lead to a rise in pay claims --> RESULTS IN WAGE PRICE SPIRAL

  • Stagflation (caused by cost-push inflation): Increase in price level but decrease in R.GDP/output

    • So do bring price levels down, short term growth may need to be sacrificed (find ways of HOW the prices can be brought down)

 

  • Demand pull inflation: When aggregate demand is rising faster than the ability of the economy to supply goods and services --> leading to excess demand

    • Is associated with the boom phase of the business cycle