Explain the 3 minor sectors and their relationship with households and firms

Financial sector - banks and financial institutions Households give income to financial institutions to be saved Financial institutions lend this money to firms which make investments Government sector - all governments Income taxed is held by governments, who use this money to pay for collective goods through government expenditure such as roads, healthcare, education and defence Overseas sector - transactions between a nation and rest of the world Goods and services bought overseas imports, taking money out of the economy to overseas Goods and services sold overseas are exports, where money flows into the economy from overseas

Leakages and injections Leakages (S+T+M) < Injections (I+G+X) = Leakages (S+T+M) > Injections (I+G+X) = Leakages (S+T+M) = Injections (I+G+X) =

Leakages: what goes out of the economy Injections: what goes into the economy Leakages (S+T+M) < Injections (I+G+X) = expansion/boom/up swing in economy Leakages (S+T+M) > Injections (I+G+X) = contraction/bust/down swing in economy Leakages (S+T+M) = Injections (I+G+X) = no change/equilibrium

Gross Domestic Product: total output or total value of all final goods and services produced in an economy over a period of time.

the cyclical fluctuation in the level of economic activity (measured in GDP or output) that an economy goes through over a period of time

Expansion and its characteristics

Expansion - when the economy is growing Rising levels of production, increased consumer spending Rate of inflation may rise, wages generally rise Interest rates eventually rise, level of unemployment falls

Boom/peak and its characteristics

Boom/peak - when the economy reaches its highest point before starting to slow down (growth/prosperity) High income and production : Full employment, rising wages and salaries. Increased spending and confidence : Consumers and businesses invest and expand. Business growth : Companies hire more employees, boosting overall income and spending. Rising interest rates and inflation : Higher demand leads to increased borrowing costs and price pressures. Inflation and Economic Limits Finite resources : The economy cannot grow indefinitely due to limited goods and services. Inflationary pressures : Increased spending on scarce resources drives up prices. Economic risks : Inflation can lead to higher wage demands, reducing business profitability.

Contraction and its characteristics

Contraction - when the economy is shrinking Falling levels of production, decreased consumer spending Rate of inflation may fall, wage rates generally fall Interest rates eventually fall, level of unemployment rises

Trough - when the economy reaches its lowest point before recovery begins, marking the end of a recession/depression

Recession and its characteristics

Recession - a relatively mild, short-term contraction in the level of economic activity Occurs due to a lack of spending, not the inability for the economy to produce goods Falling consumer demand : Leads to declining sales and profits. Reduced business output : Companies cut jobs, increasing unemployment. Excess capacity : Many businesses have unused resources. Low interest rates : Few investment opportunities arise. Low inflation : Weak demand keeps prices and resource costs stable

Depression and its characteristics

Depression - a severe, long-term contraction in the level of economic activity Many business failures, high sustained levels of unemployment, falling prices

The cause of recessions and depression is__ Why would consumers stop spending money or buy less goods and servuces?

Prices of goods and services are too high due to inflation, consumers defer purchases or buy less High interest rates makes borrowing money on credit too expensive so consumers don't buy or buy less G + S Fear of a slowdown in economic activity and risk of job loss may encourage saving and consuming less A shock to the system undermining confidence e.g COVID-19 resulting in consumers spending less

Economic indicator and list them all

a piece of economic data that provides information about the state of the economy. There are 5 main indicators: economic growth (GDP), unemployment, inflation, environment, income distribution

an increase in the size of a country's economy over a period of time measured in GDP.

What are the two ways to calculate GDP?

The two broad ways to estimate GDP are to calculate the value of production (supply) or the value of consumption (demand). Supply and demand in an economy are roughly equal, so GDP equals the value of either of these

What is Aggregate demand and equation? What is Aggregate supply?

Value of consumption aka Aggregate Demand (AD): AD = C+I+G+(x-m) or Aggregate Demand = consumption + investment + government spending + (exports - imports) Value of supply aka Aggregate Supply (AS): the total value of goods and services produced by firms

Nominal GDP: calculating GDP using today's prices Real GDP: calculating GDP using constant prices

Why is real GDP more reliable?

Real GDP is a more reliable measure of economic output because it adjusts for inflation , offering a clearer view of an economy’s growth. By removing the effects of price changes, it allows analysts to focus on the actual increase in goods and services produced.

Unemployment Employed Unemployed Not in the labour force Labour force

Unemployment : when people who want to work cannot find jobs Employed: people who are in a paid job for one hour or more in a week Unemployed: people who are not are actively looking for work Not in the labour force: people not in a paid job and not looking for work Labour force: the sum of employed and unemployed people

Participation rate and equation Unemployment rate and equation

Participation rate: the % of people in the working-age population that are in the labour force Participation rate = Labour force/ working-age population x 100 Unemployment rate: the % of people in the labour force who are unemployed Unemployment rate = no of unemployed/total labour force x 100

What are the types of unemployment? Give detail

Cyclical: unemployment that occurs due to fluctuations in the economy. During an economic recession/downturn, a little demand for goods and services results in businesses reducing production, and workers being laid off Structural: unemployment that occurs when workers' skills do not match the jobs available or because jobs are far away from the jobseekers. This could be due to technological advances, industry shifts, and geological mismatches. Frictional: short-term unemployment that occurs when workers move between jobs in the labour market as well as people that transition in and out of the labour force Underemployment: unemployment that occurs when people are employed, but would like and are available to work more hours. There are two categories: part-time workers who would prefer to work additional hours, and people who usually work full-time but are currently working part-time hours Hidden: unemployment that occurs when people are not counted as unemployed, but don't have a job and are not actively seeking work. They would probably work if they had the chance.

Impacts of unemployment. Elaborate

Impacts of unemployment Financial - short-term, it significantly reduces a person's income, and long-term reduces their ability to save for retirement. The longer they are isolated from the workforce and unemployed, the less likely it becomes to secure re-employment. Psychological/social - low self-esteem and loss of self identity associated with not having a job. Can lead to bad mental health and social isolation and loss of social networks and support. Health - poverty reduces people's capacity to buy nutritious food, housing and health care. Unemployment can indirectly affect health because of reduced participation in society or from the stress of financial strain. Wider economic impacts - Unemployment is a loss of valuable productive resources to the economy because people who are willing and able to work are not being put to productive purposes. It also increases costs associated with increased reliance and welfare and health services.

an increase in the level of prices of the goods and services that households buy

a decrease in the level of prices of the goods and services that households buy

The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the % change in the price of a basket of goods and services consumed by households. The CPI is calculated by the Australian Bureau of Statistics (ABS) and published once a quarter To calculate the CPI, the ABS collects prices for 11 groups of items and calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket

What are the 11 groups in the CPI basket

housing, food and non-alcoholic beverages, recreation and culture, transport, furnishings + household equipment + services, alcohol and tobacco, health, insurance and financial services, education, clothing and footwear, communication.

What inflation rate does Australia aim for? Is inflation good? Why? What happens when extreme inflation occurs?

Australia aims for an inflation rate of 2-3% per year, which allows for an economy growing at a stable rate. Inflation if GOOD! It indicates good economic performance However, too much inflation is a BAD thing (extreme inflation) People can't buy goods and people can't sell Prices change too quickly for an efficient economy Wages decrease People don't know how much goods and services are worth

What are the two main causes of inflation? Define them.

Demand-pull inflation: when total spending (C+I+G+X-M) is increasing faster than the ability of business to supply markets. This can lead to shortages due to capacity restraints. As a result, the general price level will rise as consumers auction up prices. Cost-push inflation: when businesses production costs increase so business must pass these costs onto consumers through higher prices to maintain their profit margin.

Causes of demand-pull inflation Causes of cost-push inflation

Causes of demand-pull inflation: - increasing consumer optimism about the future - An increase in business confidence - An increase in income/ability to spend more Causes of cost-push inflation: - An increase in costs of raw materials, wages, interest rates, government taxes, utility prices - One-off supply-side shocks due to a one-off event causing scarcity of resources and higher prices - Australia's trading partners experiencing a period of inflation, which is passed on to producers (as many resources to make goods are imported) who pass these prices on to consumers

the rate at which a nation's economy can grow its production of goods and services without jeopardizing the living standards of future generations.

Explain the traditional view of the environment in terms of economic growth.

Economists have historically assumed that natural resources are abundant enough to meet production demands. They believed that as demand for goods increased, supply would naturally expand to accommodate it. However, this perspective has led to nature being taken for granted, with sustainability concerns often overlooked, as if resources could sustain society indefinitely

Explain the modern view of the environment in terms of economic growth.

As environmental issues have begun to emerge, economic thinking has changed to say economic growth should be sustainable. Economists now include environmental factors in their economic analysis alongside traditional economic indicators

Define Resource depletion and its economic impact

Resource depletion: the consumption of a resource faster than it can be replenished. It is most commonly used in reference to fishing, farming, mining, water usage, and consumption of fossil fuels Economy impact: industries reliant on natural resources will suffer significantly, hurting communities and creating scarcity which increases prices of essential commodities e.g food and water

The growth/economic trade-off

The growth/economic trade-off: a balancing of unsustainable short-term economic growth and environmental sustainability, living standards, and long-term growth

the manner in which income is divided amongst an economy's population

What does the government aim for to reduce unequal income distribution?

The government does not seek to distribute income equally, as doing so could weaken people's motivation to work and earn. Instead, it focuses on achieving a fairer distribution of income. This approach ensures that low-income earners and their families have access to a minimum standard of living.

Causes of economic inequality in the distribution of income Demand-side factors (3) Supply-side factors (2)

Demand-side factors Unemployment, hours worked and incomes: As an economy enters a downturn, businesses will cut production, often resulting in employees working fewer hours or being laid off. These changes will affect the income of these workers, widening the unequal distribution between low and high-end jobs, even if only for a short period. Inflation and purchasing power of incomes: People without access to regular wage increases are going to suffer during times of inflation, as the purchasing power of their income is diminished unlike high-paying jobs. Our capitalist economic system as an institution: In a capitalist economy, those with 'better' labour are able to receive greater incomes, which can be used to generate additional incomes through saving, investing and purchasing assets. Also, inheritances allow wealth to be passed on, making income inequalities generational. Supply-side factors Increases in the costs of production: usually through wage rises, can see workers retrenched. New technology: can lead to worker being retrenched.

Role of government in reducing income inequality

The private sector does not provide for people who don't, can't or are limited in their ability to earn an income. In these circumstances, the government intervenes to provide these people with a minimum level of income through: Welfare benefits: the government provides direct payments through its welfare system to vulnerable Australians, including the unemployed, Indigenous Australians, the elderly, veterans, the sick, and the disabled. The government also makes payments to certain groups for various reasons: The First Home Owner Grant: helps young people move into their first home and out of renting or public housing An extra Family Tax Benefit payment: this is an extra amount for eligible families when a child is born, helping with the cost of raising children. Progressive taxes: income tax is applied progressively. Higher income earners pay a larger percentage of their income in tax than low-income earners. The money collected can be used to pay for welfare benefits and government expenditure to help the economy. Provision of essential services: the government does not only pay money directly to underprivileged people. It also redistributes income by providing services to low-income earners , giving them benefits such as healthcare, public education, concession travel cards for school children and rental assistance. Compulsory superannuation: to protect the future of Australians and reduce future reliance on government pensions, the government introduced a compulsory national superannuation scheme for all employees through a levy (currently 9.5% of wages earned) on employers. The objective is for workers to be able to live off this superannuation and have less need for welfare when they retire.

Fiscal policy (budgetary policy)

a government macroeconomic policy that involves altering the level of government spending and government receipts (income) to achieve economic goals.

a document outlining where the government plans on receiving money (receipts), and where it intends to spend that money (expenditure).

The 3 budget outcomes

1. Balanced Budget - planned government revenue = planned government spending 2. Budget surplus - planned government revenue > planned government spending 3. Budget deficit - planned government revenue < planned government spending

Define Fiscal Stance and explain the 3 stances

The Fiscal Stance: the desired impact the budget outcome will have on the economy 1. Expansionary stance - a budget deficit/smaller surplus aimed to encourage spending through tax reductions and increased gov spending 2. Contractionary stance - a budget surplus/smaller deficit aimed to discourage spending through tax increases and decreased gov spending, resulting 3. Neutral stance - not changing the budget outcome from the previous year's level, having no effect on Aggregate Demand and economic activity

the process of influencing interest rates to affect aggregate demand, employment, inflation and the growth of the economy.

Who conducts the monetary policy? What does it aim to do?

This is conducted by the Reserve Bank of Australia (RBA), Australia's Central bank, using monetary policy to achieve its goals of price stability, full employment and the economic prosperity and welfare of the Australian people.

How is the RBA different from commercial banks

The RBA is different from commercial banks because it aims to help the people instead of making profit. It implements policies helping to foster economic stability and growth, while commercial banks want money. The RBA also doesn't loan money like regular banks to customers.

CFOI, Business cycle, indicators, Monetary, Fiscal

Flashcard

•

Financial Education

•

10th Grade

•

Easy

Tobias Hua

Used 7+ times

FREE Resource

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56 questions

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FLASHCARD QUESTION

Front

The Circular Flow of Income

Back

a simplified model of the economy enabling economists to identify solutions to problems in the business cycle (level of economic activity)

FLASHCARD QUESTION

Front

What does The Circular Flow of Income show?

Back

It shows the connections between the 5 different sectors of an economy: household, firms, financial, gov, overseas
It shows where money is being injected and leaked from the economy

FLASHCARD QUESTION

Front

What is the economic problem?

Back

Our human wants significantly outweigh the resources available. Human wants are unlimited, while natural resources are limited and finite.

FLASHCARD QUESTION

Front

Scarcity

Market

Back

the excess of human wants over what can actually be provided and produced

where limited resources are allocated and exchanged between buyers and sellers

FLASHCARD QUESTION

Front

What are the factors of production?

Back

Economic resources needed for the creation of goods and services

FLASHCARD QUESTION

Front

List the factors of production with detail, and their income return

Back

Land - any type of land (agricultural, commercial real estate etc) and all natural resources (minerals, water, forests etc) Factor income return: rent

Labour - the effort, time and skills expended by individuals to produce goods and services

Factor income return: wages

Capital - produced assets created or acquired used to make goods and services (tools, machinery, technology etc. Factor income return: interest

Enterprise - the ability of people to take financial risks and organise the other factors of production into a unit capable of producing goods and services. Factor income return: profit

FLASHCARD QUESTION

Front

Explain the 2 sector model by defining both and explaining the process

Back

Household sector - comprised of consumers who own economic resources
Firm sector - banks, businesses and organisations

Households sell their economic resources to firms
Firms pay income for these resources
Firms use these resources to produce goods and services for household
Household use their income to buy/consume goods and services provided by firms

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