Macroeconomics

• An economy is the economic system of a country

  • refers to the state of a country in terms of the production and consumption of goods and services and the supply of money.
  • The economy decides how resources are organised and distributed so that the goods and services improve the living standards and lifestyles of the people.
• There are 3 types of economic systems (although most economies of the modern world fall somewhere between the extremes of a planned and unplanned economy.)

  1. Unplanned/traditional economy
  2. Market economy
  3. Planned/command economy
• Unplanned/traditional economy are used by primitive societies and is based on survival, customs and tradition.

  • Barter trading and subsistence economies are two types of traditional systems.
  • The people of this society own the resources and make all the decisions and economic roles are often passed from generation to generation.
  • Men and women are given different economic roles and tasks.
  • E.g. Mbuti people of Central Africa
• Market economy is favoured by most developed nations.

  • Private businesses and households own the resources
  • Decisions are made by the free market (in other words it's the forces of demand and supply that determine what is produced in this market
  • E.g. a capitalist economy like the US.
• Planned/command economy is a system where the government has total control.

  • The government own the resources and make all the economic decisions - this means that technically no-one owns their own home, business or car and any income also belongs to them
  • The ideology of a planned economy is the principle that 'all people are created equal', there is no self-interest, the good of society is more important than the good of the individual.
  • E.g. North Korea
• The circular flow of income is an economic model which describes the flow of resources, goods and services, spending and income between different sectors of the economy. It is used to illustrate the interdependence between the major sectors of the economy and helps us to understand how one macroeconomic event can have impacts throughout the economy.
• 2 sector CFOY model

  Households (income + resources) and Firms (expenditure and output)
• Real Flow is the flow of resources and output (is like a flow of 'tangible' things).
• Money Flow is the flow of money in return for the real flows. E.g. Income for labour, expenditure for output.
• Business Flow

  Upswing, boom, downturn, trough.
• Recession

  • 2 consecutive quarters of negative economic growth
• Indicators of Economic activity

  • inflation
  • economic growth
  • imports
  • levels of investment
  • levels of expenditure
  • levels of income
  • levels of taxation
  • levels of consumer and business confidence
  • unemployment
  • levels of government spending
  • levels of savings
• Key macroeconomic objectives (3 goals AUS government aims to achieve)

  • Sustainable economic growth - This is the increasing capacity of the economy to satisfy the want of its members (3% real GDP per year)
  • Price Stability - This occurs when inflation rates are low (2-3% inflation per year)
  • Full employment - When everyone who is willing and able to work can find employment (4.5% people are unemployment)
• GDP (gross domestic product)

  • the total market value (price paid in market by a consumer) of all final goods and services (sold to the end user) produced in a country during a period of time (usually a year)
• Economic Growth

  • defined as real growth in the volume of goods and services produced by an economy over a period of time
• Financial Sector (savings + investments)

  • Savings go into financial institutions (banks, credit unions, stock market) and are considered a leakage as it reduces the flow of money around the economy.
  • The financial sector uses household's savings to lend to firms who need to invest. Investments are considered injections as they increase the flow of money around the economy.
• Government Sector (taxation + government spending)

  • The government sector take some of the household's income in the form of tax and is considered a leakage as it reduces the flow of money around the economy.
  • The government puts money back into the economy via firms and is considered an injections as it increases the flow of money around the economy
• Overseas Sector (imports + exports)

  • When we buy imports from overseas, the money is paid to the overseas sector. Imports are considered leakages as it reduces the flow of money around the economy.
  • When Australia sells exports, the money is paid from the overseas sector. Exports are considered injections as it increases the flow of money around the economy.
• Equilibrium is a state of balance in the economy and occurs when leakages = injections. The equation is S+T+M= I+G+X
• 3 Macroeconomic issues

  1. Dominance of china in manufacturing putting Australian jobs at risk.
  2. Diminishing number of Australian farmers
  3. Increasing aging population in Australia.
• Real GDP

  • removes the effects of inflation (price rises) from the nominal GDP figures and gives a truer reflection of increases in production.
• Advantages of using GDP to measure growth

  • Offers us an overarching indicator for economic activity/growth.
  • Standardised measure (used globally as every country calculates GDP in the same way, allowing for easy international comparison)
  • Guides policy formulation (helps the government decide if and where the economy needs assistance/support)
• Disadvantages of using GDP

  • Doesn't include non-market production (unpaid work is not included because it can't be measured. E.g. charity work, second hand clothes)
  • Doesn't provide information about the distribution of production (there isn't information regarding who receives this increased number of goods and services.)
  • Doesn't consider the impact of production on the environment
  • Involves some 'guestimates' of production.
• Mixed market economy (Australia's good are produced by 70% private and 30% government)

  • consumer freedoms/sovereignty (market)
  • supported by laws protecting consumers and producers (command)
  • skill is rewarded (market)
  • welfare payments for those with no skill (command)
• Australia's recession

  • economic growth fell to -7% in June 2020 due to the global pandemic of covid-19
  • recovered with the highest GDP in 2021 within the last decade
• Living Standards refer to how well off a nation or country is
• Material living standards relate to the level of economic wellbeing, which is influenced by...

  • GDP
  • GDP per capita
  • income levels
  • expenditure/consumption of goods and services
• Non-material living standards refers to the quality of life, which is influenced by...

  • happiness
  • self-fulfilment
  • crime rates
  • death rates
• Why is GDP not a good measure of Living Standards

  • GDP isn't evenly distributed (and GDP per capita is an average)
  • doesn't consider quality of goods and services, only quantity
  • doesn't consider non-material wellbeing (ie. happiness)
  • doesn't consider factors such as environmental damage
• income: flow of money earned or received over a period of time
• Wealth: value of all assets owned by an individual
• Difference between wealth and income

  • income is the money households receive regularly from work/labour, government support, and investments (e.g. Job at Macca's earning $20/hr -> work 10hr/wk -> weekly income $200)
  • wealth is total assets owned by individuals/households, businesses/country minus debt such as property, savings, investments (e.g. person owns house + car + savings = wealth is combined value of assets minus debt)
• 3 main sources of income in Aus (2019-2020)

  1. wages + salaries (77%)
  2. investment + other income (10%)
  3. social security payments (8%)