Commerce (Term 2) - Economics

Revenue

the amount of money brought into the company (income)

Expenditure

the action of spending funds

Household sector

Individuals in the economy that provide time and labour in exchange for income and pay taxes

Firms sector

Businesses in the economy that produce output sold to consumers for revenue and pay taxes

Financial sector

Banks and other financial institutions that receive savings from households and firms and invest through lending money

Government sector

National, state and local governments that receive taxation from household and firms, which they spend on public goods and services

Overseas sector

Australia’s trade with other nations in exporting and importing

Injections

Exchanges that put money into the economy e.g investment, government expenditure and exports

Leakages

Exchanges that take money out of the economy e.g savings, taxation, imports

S+T+M > I+G+X translation

Savings + Taxation + Imports > Investments + Government expenditure + Exports

Economic growth

An increase in the size of a country’s output measured by GDP

GDP (Gross Domestic Product)

The total production of goods and services in the economy

Business cycle

Fluctuations in the level of economic growth due to domestic or international factors

4 phases of the business cycle

Expansion/Boom, Peak, Contraction, Trough/Bust

Boom in the business cycle

Increased consumer spending → Businesses increase production (employment rises) → Greater tax revenue for the government from GST, PAYG and company tax

Bust in the business cycle

Decreased consumer spending → Businesses decrease production (unemployment rises) → Less tax revenue for the government from GST, PAYG and company tax

Consumer spending

The amount of money people spend on goods and services within a country

Inflation

The overall rise in prices for goods and services, measured by Consumer Price Index (CPI)

Wages and salaries

Forms of income people receive in return for doing work

Interest rates

The annual cost or return of borrowing credit

Unemployment

Amount of people who are not working but actively seeking work

Monetry policies

Actions taken by a country’s central bank to regulate interest rates, control the supply of money and amount of funds banks must hold

Fiscal policies

The spending and taxation policies of the government that can influence how much money businesses and consumers have to spend

Contractionary policies

Policies that aim to reduce spending within an economy to slow growth

Expansionary policies

Policies that aim to increase spending within an economy to increase growth

Standard of living

Measured by GDP per capita (if there is an increase, it is assumed standard of living is better)

Economic growth

The real growth in volume (value) of goods and services produced by an economy over a period of time

AD = C + I + G + (X-M) translation

Aggregate demand = Private sector consumption expenditure + Private sector investment expenditure + Government consumption/investment expenditure + (Expenditure on exports - Expenditure on imports)

Private sector consumption expenditure

Spending by individuals, households and businesses on goods and services e.g food and clothing

Private sector investment expenditure

Spending by individuals, households and businesses on capital goods used to produce other goods and services such as factories

Government sector consumption expenditure

Spending by all levels of government on goods and services to satisfy immediate needs and wants

Government sector investment expenditure

Spending by all levels of government on capital goods used to produce other goods and services such as hospitals

Expenditure on exports

Spending by households, businesses and governments overseas on goods and services produced in Australia

Expenditure on exports

Expenditure by Australian individuals, households, businesses and governments on goods and services produced overseas

Personal income

Amount of funds, or other benefits measured in money terms, that flow to individuals or households from the sale of factors of production over a period of time e.g wages from enterprise

Income equality

the degree to which income is evenly distributed among people in the economy

Indicators of economic performance

Standard of living, economic growth, distribution of income and wealth, environmental sustainability

Effects on inequality

Living standards, The way resources are allocated or used, Production levels and unemployment rates, Labour productivity and the motivation to work

Welfare benefits

Payments to the unemployed, Indigenous Australians, aged, veterans, the sick and the disabled

Progressive taxes

Higher income earners pay more tax than low income earners

Provision of essential services

Provides services to low-income earners such as healthcare

Compulsory superannuation

All people must allocate 11% of their income to their retirement fund

Labour force

Section of the population 15 or above who are either working or actively seeking work

Employment

A person is employed if they worked for an hour or more in the survey reference week

Unemployed

A person is counted if they were not employed during reference week and had actively looked for and were available to start work

Labour force formula

Labour force = Employment + Unemployment

Unemployment rate formula

Unemployment rate = Unemployment/Labour force

Participation rate formula

Participation rate = Labour force/Working age population

Economic growth/conditions on unemployment

Unemployment rises when growth falls below 2.5%

Structural change on unemployment

Large pool of workers are no longer in demand due to technology or consumer spending

Technological change on unemployment

Implementation of new technology = Job losses e.g self-checkout machines

Outsourcing on unemployment

Workers in high-income economies cannot compete with people who are paid low wages e.g manufacturing in china

Structural unemployment

Change in the structure of the economy over time due to technology changes and changes in the pattern of consumer spending

Frictional unemployment

Voluntarily changing employment, may reflect acquisition of more skills or training

Cyclical unemployment

Occurs in downswing or recession phases of the trade cycle due to reductions in aggregate demand or total spending in the economy

Seasonal unemployment

Occupations such as fruit-pickers or fishermen, where the nature of their work means that employment may not be available for the whole year

Hard core unemployment

Those who cannot get a job due to mental, physical or anti-social behaviour or disability

Hidden unemployed

Those people who have given up seeking work due to frustration

Underemployed

Indivdiuals who have part time or casual jobs but would like to work more hours per week

Negative effects of unemployment

Families separate/relocate, government must allocate money, quality of life is reduced, poverty, boredom, poor-health, loss of self-esteem and skills, prejudice, isolation and discrimination

Consumer price index

Measures the average change in retail price of a basket of local and imported goods and services that represent a high proportion of expenditure by metropolitan households

Regimen

The basket of goods and services important to Australian households of which the government uses to measure CPI

Demand-side factors

Factors that are influenced by the level of spending or demand in the economy. If there is too much demand with too few goods and services, the economy would be operating ahead of productive capacity

Supply-side factors

In producing goods and services for sale, producers and suppliers may experience and increase in their costs. When costs increase, producers pass on the cost to consumers a.ka. cost-push inflation

Macroeconomics

The branch of economics that involves the level of expenditure (the amount) or aggregate demand (total demand for goods and services in an economy)

Fiscal policy

The manipulation of government spending and/or revenue to achieve government economic objectives by influencing the level of economic activity, income distribution and resource allocation

Balanced budget (G =T)

Government expenditure is fully funded by revenue

Budget deficit (G > T)

Government expenditure is greater than revenue There has been a rise in government expenditure or a fall in taxation Occurs through a larger deficit or smaller surplus (expansionary stance)

Budget surplus (G < T)

Government expenditure is less than revenue There has been a fall in government expenditure or a rise in taxations Occur through a larger surplus (contractionary stance)

Direct tax

a tax that a person or organisation pays directly to the entity that imposed it.

Indirect tax

collected by one entity in the supply chain, such as a manufacturer or retailer, and paid to the government

Personal income tax

A direct tax paid by individuals who earn incomes in the forms of wages, salaries, rent, interest and dividends a.k.a PAYG (pay-as-you-go) - progressive

Capital gains tax (CGT)

Tax levied on the real profits made from the sale of capital assets such as land and sahres purchased after 1985

Medicare levy

Designed to provide medical insurance to cover basic costs of health care (2%)

Withholding tax

Applied to individuals who fail to register their tax file number (TFN) wgen recieving income such as dividends and interest (47%)

Company tax

Flat or proportional tax levied directly on business profits (30% for large companies and 27.5% for smaller companies)

Fringe benefit tax (FBT)

Paid by firms on the value of perks provided to employees (47% of taxable benefit)

Superannuation fund tax

15% tax on all superannuation contributions

Petroleum resource rent tax (PRRT)

40% of profits made from petroleum

Excise duty

An indirect tax imposed on selected, produced good costs such as tobacco and alcohol

Customs duties

Taxes levied on certain imported goods to raise revenue and protect local producers from foreign competitors

Goods and services tax

10% on all goods and services in the economy

Monetry policy

the Reserve Bank’s use of changes in interest rates to influence the level of Money Supply and economic activity

Aim of monetry policies

The stability of Australia’s currency, The maintenance of full employment & The economic prosperity and welfare of Australians

Demand

The quantity of a particular good or service that consumers are willing and able to purchase at various price levels at a given point in time

The Rational Consumer

The person who weighs up the costs and benefits to them if each additional unit of a good purchased

Factors affecting market demand

The price of the good or service itself, Price of other goods and services, Expected future prices e.g sales, Changes in consumer tastes and preferences, The level of income, Size of population and it’s age distribution

Positive network externality (bandwagon effect)

Occurs when people demand a good because everyone else has one

Negative network externality (snob effect)

Occurs when demand for a good is higher due to the fact fewer people own it e.g sports cars

Ceteris paribus

The assumption used in economics to isolate the relationshup between two economic variables e.g ‘other things being equal’ or assuming that nothing else changes

Law of demand

The quantity demanded by consumers falls as price rises, when the price is reduced, consumers will buy more of the product

Substitute goods

A product that can be used in the place of another e.g Coke Price goes up, Pepsi demand goes up

Complementary goods

A good that goes well with another good e.g Playstation price goes up, Playstation games demand goes down

Law of supply

Other things remaining the same, the higher the price of a good, the greater the quantity supplied due to an expectation of greater profits

Supply curves

Show the relationship between the quantity supplied of a good and its price (ceteris paribus)

Supply schedules

List the quanities supplied at each different price