UNIT 3 AOS 2

• flow 1 + 2: five-sector flow model

  • Flow 1: households provide resources to businesses
  • Flow 2: the businesses pay income to those who provide the factors of production
• flow 3 + 4: five-sector flow model

  • Flow 3: represents total value of spending on Australians-made good and services over a period (AD = C + I + G + X - M)
  • Flow 4: production of goods and services (GDP)
• leakages (five-sector flow model)

  • Leakages refer to the income diverted away from spending on Aus goods
  • Savings: redirected through the financial sector
  • Taxes: redirected through the government sector
  • Imports: redirected through the exports sector 
• injections (five-sector flow model)

  • Injections refer to the income spent on goods and services from Aus businesses
  • Investment:money flows back into the economy
  • Government: injects money back into the economy
  • Exports: money injected through overseas sales 
• business cycle: peaks

  • strong rates of economic growth
  • Consumer and business confidence are high encouraging: greater propensity to spend, reduction in savings, a willingness to take on new debt
  • Strong growth in demand = encourages expansion in production and thereby increased demand for labour 
  • Leakages relative to injection
• business cycle: economic booms

  • a peak which has become excessive and unsustainable
  • Triggers inflationary pressures such as: likelihoods of wage demand, increased prices of property and shares, greater purchases of imports
• business cycle: downturns/contractions

  • excessive rates of inflation and the existence of capacity constraints 
  • High inflation, higher interest rates, and strong growth in asset prices
  • Results in market corrections, leading to fall in private consumption and investment
  • Injections rall relative ti leakages
  • Demand for labour falls, consumer and business confidence and inflation falls
• business cycle: troughs

  • ow rates of economic growth
  • Greater propensity to save, reduction in spending, reluctance to take on new debt
  • Low.negative demand = decreased production → decreased demand for labour 
  • Leakages rising relative to injections
• business cycle: economic troughs

  • troughs which involve two or more quarters of negative growth in EA
• business cycle: upturns/recoveries

  • relatively low inflation rate combines with lower costs and lower interest rates to spark an economic recovery
  • Injections rising relative to leakages 
• effects of strong AS

  Stronger AS factors→increased production→lower unemployment→higher incomes→decreased inflation

  Weaker AS factors→decreased production→higher unemployment→lower incomes→increased inflation
• reasons for AD curve

  • he wealth effect: higher prices on average = people have less purchasing power
  • The interest rate effect: fall in prices = consumers save more of their income
  • More savings = less incentive to borrow, decreasing demands for loans
  • International competitiveness: lower prices in relation to other countries makes local products more attractive to buyers, increasing net exports 
• Horizontal section of AS curve

  • Existing at low levels of national output, where productive capacity is available
  • Firms would find it easy to increase their production levels in response to little rise in prices
• Vertical section of AS curve

  • Production is at its limit as all resources are fully employed
  • Firms cannot all get hold of the extra resources that they would require to further lift GDP unless more favourable aggregate supply conditions develop
• Intermediate section or the elbow of AS curve

  • Line bends upwards
  • Gradual onset of full employment of labour and resources
  • Little excess capacity remaining
• benefits of measuring EG using real GDP

  • Boosts material living standards
  • Economic expansion enhances non-material living standards
  • Positively impacts employment rates growth in gov revenue from taxes =increased spending = increased material living standards
• consequences of not achieving strong and sustainable growth

  • Environmental degradation: if growth too high, natural resources could be depleted
  • High inflation: if growth rises too quickly, it leads to inflation, especially if the capacity of the economy to supply is constrained
  • External pressures: excessive growth can cause a large current account deficit and growth in net foreign debt, burdening future generations
  • If too low: high unemployment→if demand is less, less is produced therefore fewer jobs
• living standards: measure the quality of life and may indicate society's happiness
• material living standards: depend on the real quantity of goods and services consumed by each individual
• non-material living standards: depend on the quality of daily life for all people
• factors affecting material living standards: GDP. When GDP rises, average incomes and purchasing power does too
• factors affecting non-material standards: happiness, physical and mental health, crime rates, environment quality, leisure time, literacy rates
• conflicting relationships: occur when there is a trade off, and progress in one area of wellbeing undermines the other
• compatible relationships: exist where progress in one area of wellbeing helps to promote the other area
• economic activity: the actions of individuals, firms, and governments that help generate the production of goods and services, employment, and incomes
• effects of EA on material living standards:

  • It affects the quantity and quality of goods and services produced produced and available, to help satisfy needs and wants
  • It influences employment opportunities, the no. of jobs and unemployment rate
  • It determines the average incomes, purchasing power and consumption levels
• effects of EA on non-material living standards: extra production can degrade our common access resources
• Gross Domestic Product: determined by the changes of real value of production from one year to the next
• lagging indicators: level of activity occurring a while ago
• coincident indicators: moves closely with actual changes in the level of economic activity
• leading indicators: predict where the economy may be heading in the near future
• effects of increased EA on material living standards:

  • Higher production = increased jobs and incomes, boosting consumption
  • If too strong = prices rise, reducing purchasing power
• effects of increased EA on non-material standards:

  • Production expands = employment and income rise
  • Lower employment = social isolation
  • Less pollution
• aggregate demand: refers to the total expenditure on final Australian made goods and services (C+I+G+X-M)
• AD components: private consumption, private investment, government consumption, government investment, net exports
• factors affecting AD: household or consumer confidence, business confidence, disposable income, population growth, interest rates, budgetary policy, economic activity overseas, the exchange rate
• effects of strong AD:

  • GDP, employment if resources, and incomes all increase to help maintain equality between four flows
  • If economy is near its productive capacity, stronger AD = spending exceeds production
  • Causes widespread shortages of G&S = inflation and boom conditions 
• aggregate supply: the total volume of goods and services that all producers in the country can make available over a period of time
• factors affecting AS: quantity and quality of resources, costs of production, technological change, productivity growth, exchange rates, climatic conditions, government regulations, disruptions to International supply chains
• economic growth: any increase in the amount or level of national production that has occurred over time