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Economic Activity

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Refers to the actions of individuals, firms, and governments that help to generate the production of goods and services, employment and income

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The Business Cycle

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the name given to the periodic fluctuations in the level of economic activity that arise from movements in the level of aggregate demand

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4 distinct phases of the business cycle

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1. Contraction 2. Trough (also known as a recession) 3. Expansion 4. Peak (also known as a boom)

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Contraction

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This phase will usually follow a boom, or a period of rapid economic expansion.

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Trough (Recession)

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A recession is a phase in which the rate of growth is seen to be negative for two consecutive quarters.

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Expansion

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During a recession policies will be put in place to try and encourage economic expansion once again.

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Peak (Boom)

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An economic boom is considered the peak of the business cycle.

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Aggregate demand

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The total amount of expenditure on all goods and services produced in Australia in a given period. AD = C + I + G1 + G2 + X - M

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Consumption

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Total spending in the economy on consumer goods and services by private individuals or households Factors affecting consumption: Interest rates Consumer confidence Level of disposable income Government action

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Investment

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Any expenditure during the year on fixed assets (buildings, plant, machinery, etc), new houses, changes in value of shares Factors affecting investment: Interest rates Business confidence Government action (expanding/contracting)

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G1

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Government consumption expenditure Wages and salaries of public servants The costs of providing services (education, health, law and order) Includes spending on defence (including most capital expenditure)

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G2

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Government capital expenditure Purchase of fixed assets, whether additions or replacements Provision of hospitals, schools, power, transport, roads, vehicles, infrastructure Includes spending on defence for peaceful purposes (defence ships used for patrolling, used in rescue operations)

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Government expenditure

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Factors affecting government: Availability of funds (usually from taxation revenue and borrowings) Government priorities (eg education) Areas of management (either increase or decrease AD, depending on economic circumstances)

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Net External Demand (X - M)

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Exports - goods and services made in Australia and sold overseas Australia exports: Wool, wheat, meat, commodities Imports - goods and services made overseas and sold in Australia Australia imports: Manufactured goods In Australia: X<M (current account deficit)

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Net External Demand

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Factors affecting net external demand: Exchange rates between countries (a high $A is good for importers, but bad for exporters) Relative prices of goods between countries Differences in rates of inflation Effect of taxes, tax concessions and subsidies in encouraging exports and imports Free trade agreements between countries

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How an increase in AD expands economic activity

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When AD and its components grow strongly, firms are seeing growing sales, lengthening orders and falling stocks of unsold goods and services Businesses will respond by expanding their levels of production or output supplied, providing unemployed resources or unused capacity is available. If most firms do this there is an expansion in economic activity

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Wage rates

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- change levels of disposable income

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Income tax rates

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- change levels of disposable income (also other consumer taxes such as GST, CGT)

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Savings ratio ('household')

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- consumers are spending greater/lesser proportion of their income

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Consumer confidence

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- change levels of optimism re: future earning potential hence propensity to spend

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Commodity prices

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- as commodities have an inelastic demand curve and Australia is a net exporter of

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Business confidence

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- change levels of optimism re: future profit opportunities hence expansion prospects

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Interest rates

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- change levels of discretionary income

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Budget Outcome

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- change to government revenue relative to expenditure, hence net Surplus or Deficit

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Overseas economic conditions

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- foreign consumers are more/less willing to purchase Australian exports

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Terms of trade

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- foreign consumers are more/less willing to purchase Australian exports

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Local economic & climatic conditions

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- change local demand for imports, eg domestic inflation, natural disasters

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Exchange rate

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effectively changes the price of exports and imports eg depreciation AUD = ↑ exports as they are more attractive to foreign buyers and ↓ imports as they become more expensive for Australians

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Aggregate Supply

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The total annual quantity of all finished goods and services produced by every business in the Australian economy in a given period

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How favourable supply-side conditions can increase economic activity

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When an economy reaches its productive capacity, AS is limited and economic activity cannot grow. At this point, AS and economic activity can expand only if generally more favourable supply-side conditions develop, such as the discovery of minerals, technological breakthroughs in farming or manufacturing, improved organisational or structural aspects in the economy, lower costs and higher profitability levels for firms, and increased worker productivity. Given these developments, firms generally become more able and more motivated to produce. This results in increased AS and economic activity (providing that AD is at adequate levels).

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A

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Availability of resources

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Migration levels

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- skilled migration changes the size of the labour market

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Labour force participation rate

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- affects the price of labour and ease of access for firms

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Climatic conditions

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- affects access to natural resources (agriculture) and possibly capital (natural disasters)

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C

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Cost of production

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Wage rates

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- labour costs make up a large proportion of a firms' COP

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Raw material prices

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- the cost of oil, raw materials & component parts

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Interest rates

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- affects cost of servicing loans for those businesses with existing loans

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Taxation (business)

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- businesses pay more/less of their income in tax

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Exchange rates

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- change to cost of imported machinery and component parts

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E

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Efficiency

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Skills

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- training programs improve skills & knowledge, increasing creativity & innovation in the workplace

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Productivity rates

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- firms gain more output per unit of input

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Infrastructure

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Buildings etc

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Real Unit Labour Costs (RULCs)

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- labour costs per unit of output

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Technological development

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- ability to produce more and better quality products with the same resources

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Economic activity, material living standards and long-term economic prosperity

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- The purpose of economic activity is to increase the living standards of the individual and society - Material living standards involve the level of economic well-being of individuals related to the quantity of material or tangible goods and services available for consumption In order for each person to be able to purchase more goods and services, there is an emphasis on growing the economy and lifting production and GDP (increasing economic activity) This means incomes will rise from one year to the next at a faster rate than the rise in our population This depends on: Improved efficiency in the use of resources Access to increased quantities of natural, labour and capital resources

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Economic activity, non-material living standards and long-term economic prosperity

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Non-material living standards refer to quality aspects of one's daily existence -We cannot continue to grow the economy indefinitely In order to increase the volume of goods and services produced each year we need to consume more and more resources This results in waste, less clean air, fewer trees, more pollution, more congestion -Therefore our focus should be on sustainable development Development that meets the meeds of the present without compromising the ability of future generations to meet their own needs

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Factors affecting living standards

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Income per capita Environmental quality Distribution of income

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Income per capita

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Income per capita depends directly on growth in GDP As the volume of goods and services increases from year to year, the income generated also increases in real terms An increase in income per capita will increase both access to goods and services, as well as average material living standards

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Environmental quality

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The environment is the basis for all economic activity and if material living standards are to be maintained (and improved) the environment must be cared for There is sometimes seen to be a trade-off between pursuing economic growth and protecting the natural environment

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Distribution of income

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If the labour market is purely driven by market forces with no protection for low income earners, the gap between high and low income earners could be vast A more equal distribution of income may not provide the right incentives for individuals and businesses to increase their productivity, to innovate or take risks that may lead to a more prosperous society with higher living standards There can be a trade-off between equity and efficiency

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Economic growth

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is a sustainable increase in the volume of goods and services produced from one year to the next.

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Government aim

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The Government aims to 'promote an economic climate conducive to high levels of sustainable economic and employment growth' No set target, but 2.5-3.5% is considered sustainable (revised down in 2015) Current growth rate is 3% and is considered below trend

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Sustainable economic growth

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The rate of economic growth is only ecologically sustainable in the long term if it does not deplete non-renewable resources, degrade the environment and reduce the ability of future generations to meet their needs and wants.

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GDP

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GDP is equal to the total value of all goods and services produced in an economy during a year.

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GDP(E)

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= Total market expenditure

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GDP(Y)

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= Total market incomes

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GDP(P)

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= Total market production

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define GDP (E)

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GDP should be equal to the total annual market value of expenditure (AD) on final goods and services produced in Australia.

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define GDP (I)

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GDP should also be equal to the total market value of incomes paid to those selling the resources needed for production.

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define GDP (P)

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Additionally, GDP should be equal to the total market value of final goods and services produced each year.

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Real GDP

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Real GDP is simply nominal GDP divided by the CPI inflation rate This is more useful than nominal GDP, but the CPI measures inflation based on a 'basket' of 110,000 goods and services The CPI contains information about prices changes in different industries and sectors but they are not used in the overall calculation of real GDP.

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Chain Volume GDP

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Chain volume GDP takes account of the annual market value of expenditure on GDP and then uses special chain price indexes to deflate the figures (if there has been inflation) or inflate them (if there has been price deflation).

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Limitations of GDP

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1. Non-market production is excluded (including illegal production and housework). 2. Quality changes are not recorded. 3. Higher growth does not necessarily equate to better living standards (eg growth resulting from longer working hours). 4. GDP doesn't take into account the value of 'leisure time' that may be sacrificed when there are gains or decreases in GDP

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GPI - Genuine Progress Indicator

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GPI seeks to overcome the limitations of GDP as it uses GDP data, but makes both negative and positive adjustments to reflect the good or bad effects on society's welfare of different types of activity and spending, thus taking some negative externalities and other issues into account.

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GPI - Deductions

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1. environmental damage due to air, noise and water pollution, and the loss of wetlands, farmlands and forest-road accidents 2. reduced leisure time due to increased hours of work 3. increased crime that reduces the benefits gained by present and future generations. 4. inequality in the distribution or sharing of income

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GPI - Additions

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1. the ongoing services provided from consumer durable household items and from public infrastructure with relatively long life spans 2. contributions derived from performing housework, parenting, completing unpaid community voluntary work and 3. other socially productive uses of time

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Demand Factors that may have influenced the rate of economic growth over the past 4 years.

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1. Consumer Confidence 2. Business confidence 3. Household disposable income 4. Interest rates/cost of borrowing credit 5. Government macroeconomic policies

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Consumer Confidence

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Refers to consumer's perception of their economic wellbeing in the future Confidence is negatively affected by changing income levels, inflation, unemployment, geopolitical events (eg 9/11 or GFC Confidence is high when the economy is strong and unemployment low When confident, consumers will spend more and be more willing to take on debt This will increase C and consequently GDP, increasing economic growth

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Business confidence

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Refers to business' perception of their economic wellbeing in the future, mainly affecting future sales and profitability Business confidence correlates closely with the business cycle When confidence is high, the rate of business investment will increase, helping to lift I, GDP and economic growth

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Household disposable income

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Defined as gross income less any direct government taxation and adjusted for inflation If after-tax income has increased, households will have more purchasing power, and this should lead to an increase in C This will increase AD and GDP and consequently increase economic growth If real disposable income falls, so will C, GDP and economic growth

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Interest rates/cost of borrowing credit

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Interest rates (the cost of borrowing credit) are an AD factor (and AS factor) that can affect the level of savings. Interest rates also influence the level of household borrowing used to finance the purchase of larger consumer items (such as a car, house or plasma TV) and business borrowing used to purchase new capital items (that is, plant and equipment).

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Supply Factors that may have influenced the rate of economic growth over the past 4 years.

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1. Productivity 2. Interest rate changes/cost of borrowing 3. Climatic conditions 4. Exchange rates (1)

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Productivity

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Productivity is defined as total output per unit of input It shows how efficiently resources are being used to produce goods and services Labour productivity is a commonly used measure (total output/hours worked) We also use capital productivity and multi-factor productivity (output/labour and capital) Productivity increases should increase economic growth because more output is being produced using the same or less inputs This will lower costs per unit and increase business profitability

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Interest rate changes/cost of borrowing

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As a AS factor, interest rates influence business production costs and profits for firms that need to borrow credit to finance expansion. For example, when the RBA cut official interest rates during 2008-09 and again in 2011-12-13, a bonus was the positive supply-side impact. Lower interest rates helped to cut business costs, lift profits, grow investment in new technology and equipment, increase productive capacity or AS. This helped to boost Australia's long term sustainable rate of economic growth.

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Climatic conditions

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Changing climatic conditions (such as storms, floods, drought and fires) are an aggregate supply-side factor that greatly affects the level of rural production and GDP.

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Exchange rates

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As an AS factor, when the $A increases this tended to make Australian-made goods and services less attractive or competitive overseas, while making imports more attractive at home The rising Australian dollar recently forced some local manufacturing firms to close down and/or scale back their operations. This reduced the growth in our productive capacity, along with our sustainable rate of economic growth. By contrast, the recent depreciation of the $A in mid-2013 tended to strengthen the international competitiveness of local exporters.

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Factors that might influence Australia's future rates of growth

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1. Labour shortages/ageing population 2. A global recession (GFC) 3. Climate change 4. Exhaustion of non-renewable resources 5. Global uncertainties 6. Technological advances

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Labour shortages/ageing population

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Economic growth requires access to resources including labour. Australia has an ageing population where an increasing proportion is nearing or in retirement. This has now resulted in periodic labour shortages or bottlenecks that are restricting productive capacity and AS, thereby reducing Australia's economically sustainable rate of GDP growth. In response, the government has boosted its annual immigration targets to try and alleviate this structural problem. However, a bigger population also creates environmental issues that may impact on the ecologically sustainable rate of growth.

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A global recession (GFC)

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Because some major economies including the US, Japan and much of Europe were in or near recession during 2008-09 and 2010-11, Australia's exports were weaker than otherwise. This slowed AD, caused rising stocks and put a brake on economic growth. Some economists believe that another GFC-like economic event is 'inevitable' due to high levels of government debt around the world

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Climate change

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Climate change is predicted to create more severe weather events, such as cyclones, bushfires, floods All will reduce supply and force governments to allocate resources to non-productive sources (eg rebuilding) There are dire predictions (ie guesses) about the economic effect of climate change

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Exhaustion of non-renewable resources

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Over the past 10-15 years, the world has been using up its oil reserves faster than new deposits have been discovered and brought into production. Supply cannot keep up with demand and remaining reserves are more expensive to extract. As a result, oil prices have generally trended upwards. Although solar, hydro, wind, geothermal and nuclear options can replace oil in some uses, for transport, alternatives are not as convenient, cheap or efficient.

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Global uncertainties

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Many dangers exist to global growth: Diseases (swine flu and bird flu) The dangers presented by monocultures and genetic modifications in agriculture and biology; the growth of extreme terrorist groups such as ISIS; Catastrophic and brutal regimes with no respect for freedom and democracy; the prospects of war presented by the dangerous international race to control water and energy resources; mass migrations of people driven by hopelessness and starvation (eg Syria)

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Technological advances

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Technology in almost every area has advanced much faster than anyone could have predicted 50 years ago. Technology could help solve problems that might otherwise slow the future rate of economic growth. We may be able to satisfy the demand for cheap and clean energy to replace oil convert salt into fresh water. Old materials may be replaced by new ones developed from more abundant resources. The threats posed by disease may be controlled. More discarded products will be recycled and the global risks posed by pollution, limited.

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Full employment

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The lowest rate of unemployment possible that will not cause inflation to accelerate, cyclical unemployment will be avoided.

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Participation rate

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The percentage of the total working age population who are members of the labour force (they are 'participating' - either working or looking for work)

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The unemployment rate

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T15 years of age or older and is not working or is working less than an hour a week and is actively seeking work. they must be available to work in that survey week.

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Labour force underutilisation rate

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Made up the unemployed and those under employed that are willing to work more hours than they currently are.

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Labour force statistics

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ABS conducts a monthly Labour Force Survey Surveys 0.7% of the civilian population (29k houses and flats) -The Labour Force survey also provides information on: -the size of the labour force -employment rate and level -unemployment rate and level by age, region, race and --gender -labour force underutilisation rate -participation rate by gender and age -duration of unemployment -reasons for leaving last job -annual change in aggregate hours worked -number of job vacancies

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Limitations of the labour force survey

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1. Definitions of employment and unemployment are arbitrary and distort the statistics -why should the cut-off point for employment be those who work more than one hour a week? Or actively seeking? 2. The unemployment rate may be an underestimation -Due to the hidden unemployed -'not actively seeking' definition -Disguised unemployed -People lying on the surveys (to protect benefits) 3. Survey error -0.7% of population surveyed only

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The benefits of pursuing full employment

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1. Full employment improves living standards of Australians Material - moving people from unemployment to employment will increase their access to goods and services Non-material - for the newly employed, they will no longer face the 'stigma' of being unemployed they will have an improved sense of connection to the community and a higher self-esteem 2. Social benefits also exist Lower levels of crime, homelessness and social exclusion Reduced incidence of psychological harm and ill health Minimise any 'loss of skills' that the long-term unemployed may suffer

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The costs of pursuing full employment

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1. If full employment is pursued, INFLATION is highly likely to occur in the economy - When pursuing unemployment, the government may need to implement expansionary Monetary Policy. - This will expand the demand for labour - Excessive growth in AD in an economy with high levels of capacity utilisation will mean that AS can't expand to meet the growth in AD

macroeconomic activity, economic growth, full employment. – Flashcards

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