“c02DomesticMacroeconomicGoals_PrintPDF” — 2022/7/23 — 6:51 — page 216 — #116
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Aggregate supply (AS) is the total or combined supply of all types of goods and services produced at different price levels over a period by the nation’s businesses. It is especially affected by the availability of a nation’s resources and the efficiency with which these resources are used. Aggregate supply factors are the main determinants of a nation’s productive capacity or potential level of GDP (e.g. quantity and productivity of resources), especially in the long-term. They involve changes in the volume and/or efficiency of resources and might include the effects of changes in productivity, severe weather events, relative tax rates and wage costs. Boom A period of strong spending and above-average levels of economic activity, usually associated with rapid demand inflation and very low cyclical unemployment. Business confidence or expectations relate to the level of optimism or pessimism by a firm about its future sales and profits. It affects the level of business investment spending. Business cycle refers to the wave-like ups (recovery and boom) and downs (slowdown or recession) in a nation’s level of production or economic activity. There are four main phases or situations — the expansion, the peak (perhaps a boom), the contraction and the trough (perhaps a recession). Chain volume GDP refers to the market value of goods and services produced by Australia, adjusted to remove the effect on the value of national production caused by changes in prices against a reference year. It measures volume changes in production or real GDP. Consumer confidence or expectations describe the level of household optimism or pessimism about their future employment prospects and income. This especially affects the levels of saving and consumption spending. Consumer price index (CPI) is a measure of inflation or the average level of prices of a basket of goods and services over a period of time, purchased by typical metropolitan households. Cost inflation exists when cost rises are passed on by firms as higher prices to protect their profit margins. Cost rises can be caused by less favourable aggregate supply conditions. Current account deficit (CAD) refers to the total value of current payments (debits) for goods, services, primary incomes and secondary incomes exceeding the total value of equivalent credits. Cyclical unemployment is the loss of jobs due to weak aggregate demand conditions, a lack of AD and a downturn in economic activity or recession. Demand inflation typically occurs in a boom when spending (demand) outstrips production (supply) and there are widespread shortages of goods and services. Depression refers to a large economic downturn in production or GDP associated with very high cyclical unemployment, and is caused by a significant fall in aggregate demand. Disguised unemployment is when an individual has a job but is underemployed and not working to capacity. Disposable income is spendable income after receiving government welfare and paying personal income tax. Domestic economic stability is a desirable or ideal level of economic activity where, simultaneously, there is low inflation, a strong and sustainable rate of GDP growth and low unemployment. Economic activity refers to the actions of individuals, firms and governments that help to generate the production of goods and services, employment and incomes. Economic infrastructure represents capital goods such as roads, railways, power, gas, telecommunications, water and ports needed by firms to produce other goods and services. It can be provided through government investment, by the private sector or by public-private partnerships. In addition, there is social infrastructure involving the provision of schools and health systems for the community. Employment is when people aged 15 and over have a paid job and work for more than one hour per week. Exchange rate is the price or value of our currency when swapped for other currencies. It can be measured against individual currencies for each country or against a basket of key currencies each weighted by its relative importance to Australia in trade (called the trade weighted index or TWI). Five-sector circular flow model illustrates how the Australian economy works and how its different parts are interrelated. Additionally, it identifies some of the macroeconomic variables affecting our country’s domestic economic conditions. Goal of full employment means the lowest rate of unemployment, perhaps around 4.0–4.5 per cent that will not cause inflation to accelerate (NAIRU). Here, there would be no cyclical unemployment due to weak AD or recession. However, at least 4.0–4.5 per cent of the labour force would be naturally unemployed due mostly to structural causes and other changes in aggregate supply conditions. Goal of low inflation is achieved when the general level of prices for consumer goods and services are increasing fairly slowly, within the current RBA target range of between 2–3 per cent a year on average, over time, consistent with achieving other government goals.
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Key Concepts VCE Economics 2 Units 3 & 4 Eleventh Edition
