4.3 The meaning of material and non-material living standards

KEY KNOWLEDGE

• the purpose of economic activity • the meaning of material and non-material living standards • the five-sector circular flow model of the economy • the business cycle • types of economic indicators, such as leading, lagging and coincident • the relationship between the business cycle and economic indicators • the meaning and importance of aggregate demand and its components • the factors that may affect the level of aggregate demand and the level of economic activity • the meaning and importance of aggregate supply • the factors that may affect the level of aggregate supply and the level of economic activity • the measurement of economic growth using changes in real Gross Domestic Product (GDP) • the potential benefits of economic growth, such as growth in material living standards, improved non-material living standards, employment opportunities and economic development • the potential costs of economic growth, including boom and bust economic cycles, congestion and pollution, environmental damage, potentially widening inequality and ‘affluenza’ • the limitations associated with using real GDP and real GDP per capita to measure changes in living standards • alternative measures of economic activity and living standards Key skills • define key economics concepts and terms and use them appropriately • construct and interpret economic models including the business cycle and the five-sector circular flow model of the economy • gather, synthesise and use economic data and information from a wide range of sources to analyse economic issues • identify trends, patterns, similarities and differences in economic data and other information • discuss the potential costs and benefits associated with increasing economic activity Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. Resourceseses Resources Digital document Key terms glossary (doc-37948) UNCORRECTED PAGE PROOFS

KEY KNOWLEDGE

• the purpose of economic activity

Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission.

In each economy, lots of people are involved in producing and selling goods and services that we need to help satisfy our many needs and wants. This allows most people to enjoy reasonable living standards. We call this production process, economic activity. 4.2.1 Definition of economic activity Economic activity is simply a term used to describe the process of making or selling goods and services. Each day, most of us perform two main types of activities, but for measurement purposes, only some are classed as economic: • Economic activities: With the odd exception, economic activities are those that use scarce resources to produce and sell goods and services in exchange for money, to earn income and to make a living. At the national level, activity involves the output of primary (rural and mining), secondary (manufacturing), and tertiary (services) industries. So, a farmer producing wheat, a teacher taking a class, a plumber fixing a tap, a doctor operating on a patient, a check-out person in a supermarket, a council employee collecting waste, a builder constructing a house, or the CEO of a company like Qantas or BHP making decisions — all are performing economic activities because they are producing and selling goods and services that are exchanged for money or income. • Non-economic activities: In contrast, non-economic activities are generally not sold for money but are done for emotional reasons, concern for others, or on a volunteer basis. Here we might think about cutting the lawns at home, painting the house, donating blood at the Red Cross, cleaning up your bedroom, looking after your younger brother, volunteering for the Salvation Army’s door knock collection, playing basketball for your local team, helping a friend with their homework or cooking the evening meal. These are classified as non-economic activities partly because they are often done to help others and are not designed to earn money. Of course, had you received money for doing the lawns or tutoring your UNCORRECTED PAGE PROOFS friend, these non-economic activities might then be seen as economic in nature. As we shall detail later, Gross domestic Product (GDP) is a commonly used measure of the total value of a nation’s output of finished goods and services resulting from all types of economic activities that is measured over either a 3-month or 1-year period. As such, GDP excludes the sort of non-economic activities just

mentioned, even though both types of activity can impact our overall living standards. In addition, while some things like the sale of illegal drugs, crime money, selling on the black market, and undeclared work done for cash, all represent economic activities and involve the payment of incomes, they are not included in the official GDP data because their value is usually unknown.

4.2.2 The purpose of economic activity

From our earlier studies, we realise that people (individuals, families, businesses, and governments) have almost infinite wants, but unfortunately, the resources available to satisfy these wants are relatively limited. This gives rise to the basic economic problem of relative scarcity. This forces us to make choices between alternative uses for our natural, labour and capital resources. Despite our best efforts to use these resources efficiently, not all wants can be satisfied. There are not enough resources to go round, and this limits the level of economic activity or production. So, the main purpose of economic activity is to use our available resources efficiently to produce and sell those goods and services that best help to maximise the general satisfaction of society’s wants and wellbeing. In Australia’s predominantly market economy involving the operation of the price system, consumers largely direct resources into economic activities that are most valued or wanted. In other words, different types of economic activity or production allow people to earn income that can then be used to help satisfy their many needs and wants through the consumption of goods and services. This has an important influence on Australian living standards. Consumption (influencing living standards) is the ultimate purpose or goal of economic activity. So, up to a point, higher levels of economic activity (production) can allow for higher consumption, improving most (but not all) aspects of living standards. In contrast, lower levels of economic activity restrict our incomes, consumption and can have mostly negative effects on living standards. FIGURE 4.1 The end purpose of economic activity is to use the incomes generated to help satisfy our needs and wants through the consumption of goods and services. 1. Economic activity = the production and selling of goods and services The purpose and role of economic activity in a simple economy 2. Income = the reward for producing and selling 3. Consumption = using income for spending on goods UNCORRECTED PAGE PROOFS and services to help goods and services satisfy people’s needs and undertaking and wants economic activities