economics unit 3 aos 2

• economic activity


  refers to the actions of individuals, firms and governments that help to generate the production of goods and services, employment and incomes.
• level of economic activity

  simply describes the general pace or speed at which productive activity is occurring nationally.
• two reasons why economic activity impact our living standards

  1. society can only satisfy growing needs and wants through increased production.

  2. higher levels of economic activity are not sustainable long term due to limited non-renewable resources.
• material living standards


  refers to the access of physical things we have which improve our economic wellbeing.
• examples of material living standards

  money in the bank, a house, a car, laptop, very big TV
• non-material living standards


  refer to the non-tangible aspect of life that impact on our overall quality of life
• the business cycle


  refers to the wave-like ups and downs in a nations ;eve; of production or economic activity
• what happens when the graphs meets the dotted line (average growth trend)


  we are at domestic stability
• the expansion or recovery phase


  - Signalled by rising GDP growth, falling unemployment and inflation gradually rises.
• the peak or boom phase


  - Unemployment reaches its lowest level and inflation is at a high.
• the slowdown or contraction phase

  GDP slows, and in severe cases production falls. After a time lag, unemployment will rise and inflation eases.
• the trough or recession phase


  slowdown in the rate of economic growth, unemployment rises further. a recession occurs if national output falls over 2 quarters
• the ideal level of economic activity

  domestic economic stability is a desirable or ideal of economic activity where, simultaneously, there is low inflation, a solid and sustainable rate of GDP and low employment.
• long-term trends for economic activity

  • over time rises in economic activity should outweigh the falls so that the average growth can trend upwards on the business cycle
  • a country's productive capacity controls the level of growth they can have sustainably over time
  • productive capacity is the potential level of national production of goods and services dictated by the quantity and efficiency of a nation's resources. this determines the sustainable rate of economic growth in the long term.
• the circular flow model 


  • illustrates how the Australian economy works and how its part are interrelated.
  • it identifies some of the macroeconomic variables affecting our country's economic conditions.
• 1. household sector 


  some members sell their resources (natural, labour and capital) to business firms and use the money received to demand or buy finished goods and services
• 2. business sector 


  purchases or demands resources from households, which are then converted into finished goods and services.
• 3. the financial sector


  banks, building societies, stock exchange, credit union and finance companies. these organisation borrow household savings and lend these to credit worthy customers to finance investment spending and business expansion.
• 4. the government sector


  collects revenue from taxation (T) and other sources, and uses this to pay for government spending and other outlays that help to provide collective goods and services for society to use.
• 5. the overseas/external sector


  the amount we spend on imports compared to what gain from selling exports to people overseas.
• flow no.1- the supply of resources 


  when the household sector supplies, or makes available, resources for use by the business sector.
• flow no.2- total incomes or the demand for resources


  where the business sector purchases or demands resources by paying different types of incomes to the household sector.

  eg. income and wages, rent and interest payments
• examples of flow no.3 -total expenditure or aggregate demand 


  households, financial sector, government sector, overseas sector
• what is aggregate demand 


  the total value of all expenditure on goods and services in an economy over a period of time
• what is AD influenced by


  the total leakages relative to the total value of injections
• what is AD made up of

  • private consumption spending- household spending on goods and services
  • private investment spending- business investment in plant and equipment
  • government spending- infrastructure spending and government outlays
  • exports- foreign nations purchasing Australian goods and services
  • imports- Australians purchasing goods and services from other countries.
  • savings and tax are not included in the calculation because although they are not contributing to AD currently they will in the future.
• Factors Affecting aggregate demand

  • disposable income
  • interest rates
  • consumer confidence
  • business confidence
  • the exchange rate
  • rate of economic growth overseas
• flow no.4- the flow of final goods and services supplied (GDP)


  
  

  • total value of finished goods and services produced or supplied by the business sector over a period of time.
  • this flow reflects the overall level of Australian economic activity and is commonly measured by GDP.
• aggregate supply 


  the total of goods and services that a nation can potentially produce. it is especially affected by the availability of a nation's resources and the efficiency in which these are used. This then limits our potential for growth in the short term.
• factors which impact aggregate supply

  • quantity and quality of the factors of production
  • costs of production
  • technological change
  • productivity growth
  • exchange rates
  • climatic conditions
  • other events including government regulations
  • disruptions to international supply chains
• government goal for strong and sustainable economic growth

  achieve the highest growth rate possible consistent with strong employment growth, but without running into unacceptable inflationary, external or environmental pressures.
• sustainable rate is

  3 to 3.5% GDP growth per year
• why 3-3.5%

  target set at a rate to help achieve other government economic objectives
• if economic growth was less than 3% p.a annually

  then unemployment would soon increase, and there would be growing poverty, and inequity in income distribution would decrease material and non-material living standards.
• if rates of economic growth were consistently higher than 5% p.a


  then the pressures created would make it hard for the government to achieve other objectives like low inflation
• sustainable growth cannot be so high that it:

  • causes inflation to rise to unacceptable levels
  • results in external pressures on the economy ( creates an excessive current account deficit)
  • leads to environmental pressures which means an overuse of the nation's natural resources.
• how do we measure economic growth

  using annual real GDP growth
• GDP stands for

  Gross Domestic Product represents the annual value of goods and services produced or sold in the nation over a period of times after removing the impact of price increases (inflation)
• annual growth figures

  take the start and end of the periods year/quarter
• annualised growth

  multiply the quarterly growth by 4 and it can tell us more about the volatility that is occurring in the economy.