MACROECONOMIC GOALS - U3 AOS2

• What is the purpose of economic activity?

  To generate the production of goods and services, employment, and incomes
• What is the difference between material and non-material living standards?

  • Material living standards: depend on the quantity of goods and services consumed
  • Non-material living standards: depend on the quality of daily life
• How are living standards measured?

  By the quality of life and societal happiness
• What factors affect material living standards?

  Measured by the annual real value of GDP per person
• What does GDP per capita measure?

  The total market value of all goods and services produced over a year, adjusted for population
• What happens when GDP rises?

  Average incomes and purchasing power increase, raising material living standards
• What are the factors affecting non-material living standards?

  • Happiness
  • Physical and mental health
  • Crime rates
  • Environmental quality
  • Leisure time
  • Literacy rates
• What are the types of relationships between living standards?

  • Conflicting relationships: trade-offs that undermine one area of wellbeing
  • Compatible relationships: progress in one area promotes another
• What is an example of a conflicting relationship in living standards?

  Environmental trade-off
• What is an example of a compatible relationship in living standards?

  Cultural enrichment
• What is economic activity?

  • Actions of individuals, firms, and governments
  • Generate production of goods and services
  • Create employment and incomes
• How does economic activity affect material living standards?

  • Affects quantity and quality of goods and services
  • Influences employment opportunities and unemployment rates
  • Determines average incomes and consumption levels
• How does economic activity affect non-material living standards?

  • Extra production can degrade common access resources
• How is GDP measured?

  By changes in the real value of production from one year to the next
• What does ABS do to measure GDP?

  Converts nominal figures to real GDP or chain volume GDP
• Why is GDP divided by the population at the time of measurement?

  To account for an increasing population
• What are the types of economic indicators?

  • Lagging indicators: reflect past activity
  • Coincident indicators: move with actual changes
  • Leading indicators: predict future economic direction
• What is the effect of increased economic activity on material living standards?

  Higher production leads to increased jobs and incomes, boosting consumption
• What happens if economic activity is too strong?

  Prices rise, reducing purchasing power
• What is the effect of increased economic activity on non-material standards?

  Production expands, leading to higher employment and income
• What can lower employment lead to?

  Social isolation
• What does the five-sector flow model represent?

  The interactions between households, businesses, and the government in the economy
• What are the flows in the five-sector flow model?

  1. Households provide resources to businesses
  2. Businesses pay income to resource providers
  3. Total value of spending on Australian goods and services
  4. Production of goods and services (GDP)
• What are leakages in the five-sector flow model?

  Income diverted away from spending on Australian goods
• What are the types of leakages?

  Savings, taxes, and imports
• What are injections in the five-sector flow model?

  Income spent on goods and services from Australian businesses
• What are the types of injections?

  Investment, government spending, and exports
• What does the business cycle summarize?

  • Movement in economic activity over time
  • Fluctuates in a wave-like pattern
  • Periods of higher and lower economic growth
• What occurs during peaks in the business cycle?

  • Strong economic growth
  • High consumer and business confidence
  • Increased demand for labor
• What triggers inflationary pressures during economic booms?

  Excessive and unsustainable growth
• What happens during downturns or contractions in the business cycle?

  • High inflation and interest rates
  • Fall in private consumption and investment
  • Decreased demand for labor
• What characterizes troughs in the business cycle?

  Low rates of economic growth and increased savings
• What defines economic recessions?

  Troughs involving two or more quarters of negative growth
• What occurs during upturns or recoveries in the business cycle?

  • Low inflation rates
  • Increased injections relative to leakages
  • Spark economic recovery
• What is aggregate demand?

  The total expenditure on final Australian-made goods and services
• What are the components of aggregate demand?

  • Private consumption (C)
  • Private investment (I)
  • Government consumption (G1)
  • Government investment (G2)
  • Net exports (X-M)
• What percentage of aggregate demand does private consumption normally represent?

  Approximately 60%
• What percentage of aggregate demand does government consumption represent?

  Approximately 17%
• What is the impact of net exports on aggregate demand?

  It can vary by plus or minus 4% and is very volatile
• What factors affect the level of aggregate demand?

  • Household disposable income
  • Consumer confidence/sentiment
  • Business confidence/sentiment
  • Budgetary policy
  • Interest rates
  • AUD exchange rate
  • Overseas economic activity
  • Population growth rate