The difference between material and non-material living standards

 Material living standards: the ability of individuals to access goods and

services, this is heavily influenced by purchasing power
 
o Non - Material living standards: Factors other than purchasing power which affects
the overall, quality of life and wellbeing
 

Factors that may influence living standards:

 including access to goods and services
 Material living standards
 Measured in Real GDP per capita
 This can be a misleading indicator
 The way the wealth is spread --- > could be very top heavy
 The consumption can have a negative externality e.g.
Cigarettes
 Affluenza can have a negative effect on mental health
 
o environmental quality
 The availability of perpetual, renewable and non-renewable resources so
that life can be sustained
 If resources are depleted at an excessive rate, than material living standards
might decline -- Venezuela
 Pollution
 Access to national parks, and so on
 
 
 physical and mental health
 A healthy population is more productive
 Being healthy influences a person's non-material living standards
 Excessive focus on material consumption can have a negative effect on
physical and mental health
 
 
 life expectancy
 The number of years a person can expect to live
 One factor in the Human Development Index
 If a person lives longer, than they can work longer, which will have an
increase on material living standards
 A longer life expectancy means that the taxpayer has to support the person
for longer, as they are retired for more time
 Quality of life decreases with age
 
 
 crime rates
 This has a material cost, because e.g. Shop lifting makes it more expensive to
run a retail store
 Decreases the physical and mental wellbeing of the victims
 
 
  literacy rates
 The percentage of the population, aged 15 or over who can both read and
write
 A literate person has a much higher ability to participate in the economy
 As technology becomes more jobs require more literacy, as there is less
manual labour
 Illiterate people earn less, reducing their material living standards
 Literacy is important for a country's ability to compete in a globalised
economy
 Also affects a person's non-material living standards, as reading is enjoyable
etc.
 
 

 
The circular flow model of income including the role of:
 households
 Households provide the factors of production
 Income is returned from firms in rent, interest, and profits
 Expenditure is given to firms (consumption), in turn production is
returned
 Largest factor is household consumption (C) (60%)
 
 
 Businesses
 Take money from consumers
 Return money in the form of wages, which is a return for the factor of
production of labour
 
 Government
 G1: This is consumption expenditure, such as wages and keeping the lights on
 G2: This I government investment expenditure
 
 financial institutions
 Investment is the second largest area
 
 External sector
 Many imports are needed to help our economic activity
  

The nature and causes of the business cycle

 Over time, the level of economic activity (and therefore growth) fluctuates
 This typically is cyclical
 Periods above average and periods below averaged
 There are peaks, troughs, recoveries, and downturns
 Government attempts to smooth the cycle as much as possible, which is
what the Aus government has gotten good at
 Stage 1: Peak
 There is no longer any increase
 This is where there are strong rates of economic growth
 Consumer and business confidence are high
 Savings rates falls
 Leakages fall relative to injections
 If the peak is a boom, than may be excessive and unsustainable
 Lead to inflationary pressures on the economy
 For example, tight labour market will lead to inflationary pressure to
wages
 
 Stage 2: Contraction or downturn
 High inflation, and interest rates, and strong growth in asset prices will lead
to overvaluing in the economy
 This leads to a market correction
 
 
 Step 3: Trough
 This is the minimum point in the cycle
 The cycle may or may not be a recession (two consecutive quarters of
negative growth)
 Prolonged recession known as a depression
 Rates of unemployment or underemployment will begin to increase
 Circular flow model, this will reduce the amount of consumption,
reducing production
 Inflation falls
 More leakages, as there is more savings
 
 Step 4: Recovery
 During the recovery, low inflation and lower labour costs, and lower interest
rates spark recovery
 Injections rise relative to leakages
 Cash injections from the state
 Stabilisation policies from the state
 Some economists argue that there isn't a need for intervention to manage
the naturally stable economy
 It is possible to have periods of high unemployment, inflation and low
growth, referred to as stagflation, this occurred in the West in the 70's
 Causes of the business cycle:
 Peak phases is where AD is growing faster than AS, putting upward pressure
on inflation
 This will lead to a decrease in purchasing power
 Decrease in the amount of expenditure
 Can also be driven by investment, such as during the mining boom
 This can lead to a sudden drop, once the productive capacity
has been met

 
 Contractions
 Many contractions are caused by unexpected events that have a negative
affect on AD
 For example, Coronavirus
 The GFC was triggered by the realisation that a number of loans should
never have been issued
 During the GFC, the banking sector ceased to function in it's normal fashion
 Much more difficult to obtain finance
 
 
 Trough
 A lack of AD in the economy
 For example, in Japan an ageing population is a cause of their recession
 
 
 

The meaning and importance of aggregate demand

 Components of Aggregate Demand
 C
 I
 G
 X
 -M
 These are not the aggregate demand factors
 AD = C + I + G + X - M
 C= Private consumption expenditure
 Approximately 60% of expenditure
 
 
 I = Private investment expenditure
 Spending to expand the productive capacity and productive of the business
sector
 Not putting money in the bank, and not putting money into shares
 This is businesses spending on capital goods and services
 Most volatile
 Really responsive to economic conditions
 This includes spending on areas such as:
 New housing
 Business expenditure
 
  G = Government Expenditure
 G1 - Government consumption expenditure
 Current in nature
 Things which are going to be used up
 Wages
 Petrol
 Phone bills
 Utilities
 G2 - Government Investment expenditure
 Roads
 Schools
 
 
 X - M = Net Exports (Exports - Imports)
 Imports is a leakage
 Exports is an injection
 Exports:
 Iron
 Coal
 Tourism
 Education
 This is dependent on other country's economies
 Imports
 Goods purchased by Australians from other countries
 Imports detract from economic growth (LEAKAGE)
 

Factors that may influence the level of aggregate demand in the

economy: Aggregate demand factors, not components of aggregate
demand
 changes in the general level of prices (Inflation)
 Increases in the general level of prices will result in an erosion to the
purchasing power of consumers
 The real value of income and wealth is decreased when there is
inflation
 High price levels have a negative effect on the international
competitiveness of a country
 Decreases the purchasing power of households
 Reduces competitiveness
 
 disposable income
 The rewards received by households from their direct contribution and
indirect contributions
 This is the total amount of money which consumers have to spend on goods
and services
 There is a measure the ABS uses calls the 'real net national disposable
income'
 This modifies disposable income by looking at Australia's Terms of
Trade
 Increase disposable income = increased purchasing power
  
 
 interest rates
 The cost of someone else' money
 An increase in interest rates = more savings less borrowings
 A decrease in interest rates = more borrowings less savings
 Change in interest rates will affect the amount of discretionary income
 This is because households with a variable rate home loan will have
more or less money available after repayments are made
 Businesses with variable rate home loans will have a reduction in
cash flow
 Interest rates are a monetary policy and are determined by the RBA
manipulating the cash rate

 Consumer Confidence
 The certainty of future earnings
 The general level of optimism or pessimism about the future state of the
economy (from a consumer's perspective)
 The main measure is consumer confidence (sentiment), which is an index
with an average of 100 since 1980
 This can be affected by many different sub factors:
 Perceived global employment prospects
 Media reports of global economic conditions
 Geopolitical events such as terrorist attacks or a decision for a trade
war
 Climatic conditions
 Change in world Leader
 Pandemic
 
 
 business confidence
 The level of optimism or pessimism from businesses
 The sub factors are:
 The future state of the economy
 Future demand for the firm's goods or services
 Future costs associated with the production of their goods and
services
 The likelihood of increased competition
 Expected rates of inflation
 Changes in, or uncertainty surrounding government policy
 Differing industries will have differing confidence, for example, tourism vs.
Farming right now
 
 
 the exchange rate
 Net exports is affected by this
 Measures the value of one currency relative to another
 This is done by the Trade Weighted Index (TWI)
 Interest rates affect the structure of relative prices
  Low value for AUD will mean high demand for exports, as Australian
products are comparatively more affordable and therefore better value
 Australians get paid the same amount, which is less in foreign
 E.g. Farmers want low AUD
 Low exchange rate = low imports additionally = less leakages = higher AD
 
 
 
 rates of economic growth overseas
 Australia has an abundance of Natural resources, therefore when overseas
economies grow, it means that there is a larger market for Australian products.
 High growth overseas means that the AD increase

 
 
 

The aggregate demand curve

 When an AD curve is drawn, AD is redefines as the total quantity of

aggregate output (or real GDP)

 The AD curve shows an inverse relationship between the general level of

prices and the total quantity of output demanded in the economy

 As prices fall, real disposable income increases, and the real GDP increases
 The AD curve is downward sloping

 An increase in the general level of prices will cause the total demand for
goods and services to decrease
  A decrease in the general level of prices will cause the total demand for
goods and services to increase
 
 Wealth effect
 Higher prices on average (increase in general prices) will reduce the
purchasing power of any given amount of savings
 This reduces the amount of consumption
 
 The interest rate effect
 A fall in the general level of prices means that consumers have more of their
income left to save
 In addition, a fall in general level of prices means that puts downward
pressure on interest rates, because there is less incentive to borrow, as consumers
have more purchasing power
 This can stimulate investment in the economy
 
 International competitiveness
 Lower level of general prices leads to an increase in net exports

 
 
 

The meaning and importance of aggregate supply and the factors that
may influence the level of aggregate supply in the economy:
 Aggregate supply: is the total volume of goods and services that all suppliers
have produced and supplied over a period
 When an economy has reached the maximum amount of production at that
time, then it has reached its productive capacity
 Aggregate supply is the ability of the market to meet demand
 AS curve can be elastic
 Shows the relationship between output and inflation
 
 When AD> AS = inflation
 
 changes in the general level of prices
 This is not as straight-forward as with AD
 There is debate about the relationship and the extent of that relationship
 An increase in the general level of prices can lead to an increase in aggregate
supply but only in the short term
 
 
 quantity of the factors of production
 The more factors of production, land, labour and capital, the more
production which is possible
 
 quality of the factors of production
 Quality of the factors can affect the level of production
  For example, if land is used in an unsustainable manner, the ability to supply
may be reduced, some fertilisers and other techniques degrade the productive capacity
of the land
 Another example is the quality of labour, this is related to health and
education outcomes
 Quality of capital can also affect aggregate supply, as increase to the quality
of technology and other capital will improve the efficiency of production
 
 
 
 cost of production
 Falling oil prices is a factor which influences aggregate supply, as it makes it
cheaper to transport goods
 Slower wage growth makes it relatively cheaper
 Falling technology prices, which have made it easier to increase efficiency
 RULC: Real Unit Labour Cost
 Increase in wages decreases the Aggregate Supply
 
 
 technological change
 The internet increases businesses' abilities to supply
 Industrialisation of previously labour-intensive industries
 Advances in technology
 
 
 productivity growth
 Productivity: The outputs per unit of input
 There are several measures of this:
 Labour productivity: GDP / Hours worked
 Capital productivity
 Multifactor
 Productivity growth is linked to the ability and willingness of firms to
produce, because 1) a greater volume can be produced from the same or less inputs and
2) The costs of production will fall because the cost per unit decreases
 This results in an increase to the purchasing power of consumers
 
 
 exchange rates
 A depreciation of the AUD will make it more expensive for firms to purchase
inputs that might be used in production
 An appreciation in the AUD will make it cheaper for firms to purchase inputs
from overseas, making it easier to produce
 The level of AS has a positive relationship with AUD price
 70% of imports are used in production
 
 
 climatic conditions
 Favourable conditions = more production
 Unfavourable conditions = less production
 
 the aggregate supply curves
  The slope of the New Classical short run Aggregate supply curve (SRAS)
curve is upward sloping, because in aggregate, firms are willing to supply more
 
 the effects of changes in
 aggregate demand:
 the level of economic growth
 Increase in AD will increase economic growth
 
 Employment
 Increase in AD will increase the amount of employment
 
 Price levels
 Increase in AD will put upward pressure on prices

 
 Aggregate Supply:
 the level of economic growth
 Increased AS = increased economic growth
 If Australia had a bumper crop year, than it will improve the
economy, even if the price point was lower
 
 Employment
 Increase in As will increase employment
 
 Price levels
 Downward pressure on prices
 
 

 
The Australian Government’s domestic macroeconomic goals:
 Disinflation = fall in the inflation rate (E.g. 4% ---> 3%)
 Deflation = negative inflation
 the meaning of the goal of low inflation (price stability)
 Target to maintain a consumer price inflation of 2-3%
 This is measured by the Consumer Price Index (CPI)
 This is done because they want to avoid 0 for three reasons
 Small amounts of inflation allow for reductions in the 'real' prices of
some products, without a drop in the nominal prices of products
 Some inflation is accounted for by rising quality of goods and
services, which isn't captured in CPI
 It may create other problems like low growth, high unemployment,
and deflation
 
 
Full employment
 Sustainable: the achievement of economic growth should not come at a cost
to other economic goals - specifically inflation and external stability and not lead to an
overuse of the nation's natural resources
 Economic growth refers to any increase in the amount or level of national
production that has occurred
 The government does not set a growth target
 Pursues sustainable growth: Considered to be around 3-3.5% PA (Real GDP)
 Does not cause inflation above 2-3%
 Does not result in significant external pressures on the economy like
a deficit (or trade deficit)
 Doesn't lead to an over use of the nation's resources
 Real GDP is GDP, but deflated, and therefore measuring the actual
production, which is better
 Deflating the GDP figure leads to the volume of Goods and Services
 The 3-3.5% goal is to avoid inflation
 The economies' productive capacity can only grow three percent a year,
however this can be higher in times of high productivity growth
 The goal is also compared to other countries, as Australia's has been sub
three percent, which is comparatively strong to other countries
 Also, real GDP growth should be higher than population growth ---> Births
and immigration
 Also, should be larger than the growth in productivity
 
 
 
 measurement of the rate of economic growth using real Gross Domestic
Product (GDP)
 GDP is used to measure the amount of production taking place in an
economy
 GDP adds up the entire amount of value added during each stage of
production
 The chain volume measure of GDP is used by the ABS to provide an estimate
of real GDP, it involves using prices from the previous period and applying them to
current period volumes
  Seasonally adjusted adjusts for times such as the peak trading window in
December
 GDP growth is measured by GDP2-GDP divide GDP1
 
 
 the reasons for pursuing strong and sustainable economic growth including:
 lowering of the unemployment rate
 Economic growth has a positive relationship with employment growth
 Therefore, growth decreases unemployment
 Unemployment is expensive because of wealth fare, and also has a
negative affect on the physiological and psychological outcomes for people
 
 growth in real income
 This will have a positive impact on people's material living standards
 This may improve quality of life
 
 increased ability of government to provide essential services
 More GDP = More taxation
 
 
 the meaning of the goal of full employment and classifications within the
labour force:
 Full employment: There is a natural rate of unemployment, this is where
cyclical unemployment is reduced, without inflationary and external pressures, also known as
the Non Accelerating Inflation Rated of Unemployment (NAIRU)
 This is approximately 4.5%, or lower
 RBA governor saids we target an unemployment
 An decrease in unemployment below the NAIRU rate creates inflationary
pressure
 
 Employed: Over 15 years of age, working more than one hour per week in
return for some remuneration
 
 Unemployed: Over 15, looking for work, with under one hour per week
worked
 
 Hidden unemployment: Potential workers who are not classified as
members of the labour force, despite the fact they would like to work and would accept a job
offer, this is because they have become discouraged and are no longer looking for work. This is
approximately 90,700 people
 Not in the official statistics because they are not looking for work
 When someone leaves hidden and starts looking for job, this will increase
the unemployment rates
 If they were offered one they would take it
 
 disguised or under-employed: Underemployment is where the person is
looking for more work then they have
 If someone works more than 1 hour/week they are employed, despite how
much work they would like to receive
 
 measurement of the labour force including:
 Labour force: Employed + unemployed
 
 the participation rate
 Defined as the percentage of the total working age population who are
members of the labour force, which is actively looking for work
 People such as stay at home mums, who don't want a job, even if they are
offered one
 As the unemployment rate decreases, the participation rate increase
 Increased participation rate puts downward pressure on
 
 the unemployment rate
 The amount of people who are looking for work, over 15 and cannot find
work
 An increase in the participation rate will likely result in an increase to the
unemployment rate
 In the long term, however, an increase to the participation rate will result in
a decrease to the unemployment rate
 Unemployment rate = unemployed/ employed *100
 
 
 the labour force underutilisation rate
 Attempting to calculate the supply of labour
 
 
 
 
 
 Types and causes of unemployment:
 Cyclical
 Unemployment due to a lack of Aggregate demand
 AD causes cyclical unemployment
 When there is a fall in AD, then wages fall and number of people
employed falls
 This is due to the multiplier affect (positive feedback loop),
unemployment causes less AD, which causes more unemployment ---> Cattle panic,
start running around, causes more panic
 During recession, a slump in AD, employed people will save more
money, worsening the economy, due to less AD
 Lack of AD = Lack of employment
 AD is deceased through lack of consumer confidence
 Though lower lack of economic growth with major trading
partners
 Higher interest rates
 Exchange rate
 Economic growth has and inverse relationship with AD
 
 Structural (Mismatch of skills)
 There can still be a relatively high unemployment rate even when there is
strong demand
 Structural unemployment: Caused by a mismatch between the skills of the
unemployed and business
  This is caused by a variety of factors:
 The implementation of new capital and technology, over time, many
jobs have disappeared
 Changing patterns of demand occur as tastes and fashions change
 Outsourcing, such as jobs going to India
 Business restructuring, such as the choice to have consultants
instead of full time employees
 Microeconomic reform policies
 
 Frictional
 Economists do not worry about this
 This is when a person has left one job, and has yet to find a new one
 Contractors may experience this
 People Switching jobs
 
 
 
 seasonal
 This occurs for workers whose skills are not in demand at certain times of
the year
 This is workers like fruit pickers, ski-instructors and tourist operators
 At the end of the school year there is often a large influx of unemployed
people
 
 
 hard-core unemployment
 Caused by individual characteristics which make the person "unemployable"
 This is caused by criminal record, drug addiction, mental illness, physical
disability or lack of desire
 This may result in people applying for jobs which they have no chance to get
 
 
 Long term unemployment
 12 months or more
 The longer you're unemployed, the less likely you are going to get a job
 
 Youth unemployment
 15-24
 Much higher
 
 
 the consequences of unemployment including:
 Unused resource
 loss of GDP
 
 
 loss of tax revenue
 
 reductions in living standards
 
 greater income inequality
  
 aggregate demand and aggregate supply factors that have influenced
 Inflation
 economic growth
 The unemployment rate
 living standards in the past two years