Economics U3 AOS2

• Material living standards


  The level of economic wellbeing of individuals, real per capita incomes and the 'quantity' of physical goods and services available for each person to consume
• Non-material living standards


  The 'quality' aspects of a person's daily life, including happiness, physical and mental health, crime rates, environmental quality, and leisure versus work times
• Material living standards are commonly measured by the annual real value of gross domestic product (GDP) per person
• A rise in real GDP per capita

  Means more goods and services have been produced, more incomes are generated, allowing for greater purchasing power and higher average material living standards
• Factors affecting material living standards

  • Uneven distribution of goods, services and incomes
  • High unemployment rates
• Factors affecting non-material living standards

  • Happiness
  • Physical and mental health
  • Crime rates
  • Environmental quality
  • Leisure versus work times
• Studies show that only up to a point does higher income bring more happiness, as happiness is also affected by non-material aspects like quality of relationships, freedom, security, and opportunities
• Physical and mental health can affect material living standards by influencing ability to work and earn income
• Crimes impact both material living standards by reducing income or increasing costs, and non-material wellbeing through anxiety and feelings of insecurity
• Environmental issues like greenhouse gas emissions, pollution, and depletion of non-renewable resources diminish quality of life and opportunities for future generations
• Work-life balance is important for non-material wellbeing, affecting time for socialising, recreation, and cultural enrichment
• Greenhouse gas emissions


  Pollution due to economic activities, seen as a negative externality where costs are paid by third parties not directly responsible
• Pollution has diminished the quality of common access resources on which we all depend, leading to global warming and a greater frequency of severe weather events
• These have caused the loss of life, the destruction of businesses, and the displacement of communities
• Non-renewable natural resources are being devoured at an alarming rate and will leave future generations with reduced opportunities and wellbeing
• Work


  Usually necessary to earn income and hence impacts material living standards
• Work-life balance


  Important for non-material wellbeing, affecting time for socialising, healthy recreation, and enjoyable holidays
• Literacy rates


  The proportion of the population aged 15 and over who can read and write, generally associated with higher incomes and material wellbeing
• Increased literacy opens up more employment opportunities in better paid jobs, and allows for gaining new knowledge and more satisfying employment
• Having basic literacy skills also allows for improved social interaction, participation in the community, feelings of self-worth and increased control over one's life
• Conflicting relationships between material and non-material living standards

  There is a trade-off, and progress in one area of wellbeing undermines the other
• Compatible relationships between material and non-material living standards

  Progress in one area of wellbeing helps to promote the other area
• Environmental trade-off: Materialism and greed for natural resources have raised material wellbeing but also had grave consequences for the environment
• Health and social trade-off: As material living standards have grown, aspects of non-material wellbeing have suffered, such as increased work hours, family stresses, and obesity
• Material trade-off: Policies to promote non-material living standards could undermine national production and incomes, and hence lower material living standards
• Cultural enrichment


  Higher incomes can allow for more international travel and cultural enrichment
• Longer life expectancy


  Higher incomes can be used to extend life expectancy and reduce daily suffering from pain and curable ailments
• Possibility of reduced environmental damage

  Higher incomes can be directed to combating environmental damage and reducing pollution
• More leisure time


  Higher incomes enable individuals to reduce their working hours and stress, and increase their leisure time
• Government policies (such as a carbon tax or an emissions trading scheme) could be used to reduce the production of high carbon emission goods while encouraging the growth of new green industries
• Leading indicators


  Seek to predict where the economy may be heading in the near future. While not completely reliable, they often forecast a general change in activity before it actually occurs. Indicators in this category could include the new housing approvals and monthly indexes of consumer and business confidence or sentiment.
• Looking for patterns in indicators

  1. Long-term or general trends over perhaps 10 or 20 years

  2. Short- to medium-term cycles, perhaps over 1–3 years

  3. Seasonal patterns that occur at the same time each year
• When examiners ask you to describe a graph or table, you might look for whether the overall long-term trend is up, down, or perhaps unchanged. You might also check out whether there are any cyclical patterns with ups or downs lasting just a year or so, and often it is a good idea to include statistics to support your claims.
• Circular flow model


  A model that simplifies what the Australian economy looks like and how its various parts interact to influence macroeconomic levels of GDP, unemployment, incomes and material living standards
• Five sectors in the circular flow model

  • Household or consumer sector
  • Business or producer sector
  • Financial sector
  • Government sector
  • Overseas sector
• Household or consumer sector


  • Comprises all members of the population who supply resources to firms and use income to demand finished goods and services
  • Businesses demand resources from households and supply finished goods and services to households
• Financial sector


  • Made up of financial institutions that borrow household savings and lend to businesses for investment spending
• Government sector


  • Collects revenue from taxation and uses it for government spending to provide public goods and services
• Overseas sector


  • Australians import goods and services from abroad and sell exports to other countries
• Four flows in the circular flow model

  1. Flow 1: Flow of productive resources supplied by households to businesses

  2. Flow 2: Flow of incomes paid by businesses to households for resources

  3. Flow 3: Flow of total spending on Australian production (aggregate demand)

  4. Flow 4: Flow of final goods and services supplied (GDP)