Economy

The Producers

Producers supply the goods and services to the consumers. They use resources to deliver goods and services to those who demand them. e.g. businesses.

The Government

Represents the views of the community. Role in the economy (mixed) is to provide goods and services from taxes and create a stable economy by stabilising distribution, employment and economic growth.

Monetary Policy

Reserve bank uses interest rates to regulate level of economic activity. Raising rates will slow the economy.

Expansion

Sales are rising, consumer and business confidence is high, unemployment is falling, economic activity increases.

Stagflation

Slow economic growth, high inflation and high unemployment. The economy remains stagnant, so your money is staying the same but inflation is increasing.

Consumer Sovereignty

The idea that consumers' demand ultimately decides what will be produced within an economy as demand=supply. Items will not continue to be produced if no one is buying them.

Business Cycle: Trough

The lowest point in the business cycle between the end of a contraction and start of an expansion. Unemployment is at its highest and consumer demand is very low.

Cash Rate

The rate that banks charge other banks as interest for borrowing money on an overnight basis.

Business Cycle.

The recurring swings in GDP. Peak, recession, trough, expansion.

Scarcity

The state of being short in supply. The gap between having unlimited wants but only having limited resources to satisfy these wants.

Microeconomics

The study of how consumers, firms and workers interact with each other to generate outcomes in specific areas. Looks at the effects of individual decisions on the economy.

Economics

The study of how individuals, governments, firms and nations allocate and distribute limited resources to satisfy their unlimited wants.

Macroeconomics Definition

The study of the economy as a whole. Looks at things such as production, employment, prices and policies on a nationwide scale.

Inflation

The sustained increase in the general level of prices for goods and services overtime. Measured as a percentage increase.

Labour Force

The total number of unemployed and employed people. Does not include students or discouraged workers. LF/PR=labour force/ population (15+) x 100

Structural Unemployment

Unemployment as a result of employers not offering jobs for the skills an employee can provide. e.g. machines taking jobs. A mismatch between skills an employee can offer and the skills demanded by the employer.

Frictional Unemployment

Unemployment as a result of the natural "frictions" or issues in the economy. e.g. when a student leaves school to enter the work force, a mother rejoining the work force.

Cyclical Unemployment

Unemployment as a result of the swings in the business cycle. e.g. during a recession businesses fired workers as they are unsure whether consumers will buy their products.

Seasonal Unemployment

Unemployment as a result of workers not being able to do their jobs due to it being a certain time of the year. e.g. landscaping.

Calculating Unemployment

Unemployment rate= the percentage of the labour force that is unemployed. UR= number of employed persons/labour force x 100

GDP per Capita

Used to determine the impact of the average national income on individual people. Result of GDP divided by the country's population.

Effects of Inflation: Wage Rates & Fixed Income

WR: If IR increases greater than the WR does, a person's real income actually decreases, meaning their money now buys less. FI: Slow increases in income means SOL falls as money cannot purchase as much as it used to.

Globalisation: Culture

Western culture is becoming more popular as a result of globalisation resulting in less cultural diversity.

Unemployment

When someone in the labour force is actively seeking employment but is unable to find it. Unemployment is a cost to the economy CAPTAIN OBVIOUS

Fiscal Policy

When the government uses the budget or taxes to increase or decrease spending and revenue. Increasing tax will slow the economy.

Globalisation: Economies

World is becoming more interdependent as a result of globalisation. International exports and multinational corporations are increasing, and technology is expanding economies.

Why do People Borrow Money?

-Businesses to fund expansions -Australia to fund foreign loans -To finance a house (mortgage) -Individuals to purchase goods and services and other luxury items -The government to finance defecits

Role of the Reserve Bank of Australia (RBA)

-contribute to the stability of the Australian currency -maintain employment -contribute to the economic prospect and welfare of australia -regulate interest rates to avoid major swings in the business cycle

Traditional Economy

A bartering system, the goods and services produced within the community is determined by the beliefs and customs of the people. Usually a hunting/gathering society. e.g. Native American communities.

Business Cycle: Recession

A period in the business cycle where economic growth is declining. Demand is failing so businesses decline. Unemployment increases.

Business Cycle: Expansion

A period in the business cycle where economic growth is increasing. GDP is going up as demand increases businesses hiring.

Advantages/Disadvantages of Variable Interest Rates

Advantages: If rate decreases you will have to pay less. Can borrow large amounts of money for a short period of time. Disadvantages: If rate increases you will have to pay higher rate. If the rate increases you may not be able to afford the repayment.

Advantages/Disadvantages of Fixed Interest Rates

Advantages: You can plan your loan as you know exactly how much you have to pay the whole time. If the rate rises you don't have to pay the higher amount. Disadvantages: If the interest rate falls you will still have to pay the higher amount.

Mixed Economy

An economy that is consumer driven while utilising limited government involvement. Applies some free market principles. e.g. US, Australia (most economies)

Command Economy

An economy where the country's production and distribution is entirely controlled by the government. e.g. North Korea (usually communist).

Long Term Interest Rate

An interest rate on a loan with a maturity greater than one year. Long term interest rates will usually be higher than short term ones as there is added risk when committing capital as a loan for longer than a year.

Short Term Interest Rate

An interest rate on a loan with a maturity of less than one year.

Fixed Interest Rate

An interest rate that remains the same throughout the entire course of the loan.

Effects of Inflation: Business Profits & Savers and Investors

BP: During times of increasing inflation the RBA will increase interest rates to slow down economic activity. Increasing IR will mean businesses won't borrow money to expand their businesses, hence no profit increases. S&I: High inflation makes it difficult to maintain financial security, so there will be less saving and investing.

Recession

Caused by lack of spending. If products aren't bought, businesses cut back on production and employees lose their jobs -Economic growth slows -Income & production are at their lowest levels -Unemployment is at its highest -Wages and salary falls -Consumer demand de-clines -IR and inflation is very low

Employees and Employers

Employees: work for employees, work for a salary or a wage. Employers: are in business for a profit. Employ employees. Are a producer.

Hyperinflation

Extreme inflation. Defined as a 50% increase in prices per month. Usually a result of the lack of a currency to maintain its value after a war.

Current RBA Governor

Glenn Stevens

Globalisation: Politics

Governments are becoming more interdependent as a result of globalisation. More global issues are arising as a result of globalisation. Governments need to work together in order to solve issues such as climate change and terrorism as one government cannot fix them alone.

Effects of Interest Rates Rising

Higher interest rates encourage people to save their money as it cost more to borrow, and encourages people to invest. Generally slows down economic activity.

Business Cycle: Peak

Highest point between the end of an expansion and start of a contraction in the business cycle. Production and consumer confidence is high and businesses expand as a result.

Peak

Income & production are at highest levels, full employment, interest rates are rising, businesses are operating well

Variable Interest Rates

Interest rates that change throughout the loan according to the current economic conditions. Good if cash rate lowers.

Interest & Interest Rates Definition

Interest: Money paid regularly for the use of money lent, or for delaying a repayment of a debt. Interest Rate: An annual proportion or percentage of a loan that is charged to the borrower as interest.

Market Economy

Investment, production and distribution decisions in an economy are made due to market determined supply and demand in a community. Prices are determined in a free price system.

Opportunity Cost

Is the component of a choice that you give up in order to make your decision. The values you place on certain aspects of a choice determine the opportunity cost.

Resources: Land, Labour, Capital & Entrepreneurial Ability

Land: All natural resources Labour: Human ability, skills and work Capital: Not money, assets that can be turned into money e.g. equipment, furniture EA: organisational skills needed to produce goods and services, the ability to recognise a business opportunity and be willing to take a risk.

Effects of Interest Rates Falling

Lower interest rates increases economic activity and causes people to spend their money on loans and things. Less investment occurs.

Consumer Price Index (CPI)

Measure inflation. (This years PI-Last years PI/Last years PI x 100)

Standard of Living

Measured using real GDP per capita =GDP/ population. Looks at income inequality between countries based off real GDP per capita. Doesn't take into account GDP composition and generally overstates state of wellbeing in a country.

Gross Domestic Product (GDP)

Measures the total market value of all final goods and services produced within an economy in a given year.

Nominal and Real GDP

Nominal: GDP before being adjusted for inflation. Real: GDP after being adjusted for inflation. Measure economic growth by comparing real GDP overtime.

Deflation

Occurs when inflation falls below 0%. Means the value of money is increasing which allows one to buy more goods and services, but increases the real value of debt.

Enterprise

Organisational skills needed in order to produce goods and services.

Discouraged Workers

People who are unemployed and not actively seeking a job.