Download Year 12 Economics Definition Booklet File - moodle@kkc

Katikati College
Economics – Year 12
Name:
DEFINITIONS BOOKLET
TOPIC ONE - Achievement Standard 2.1 – Describe inflation and its causes and
effects using economic models. (External)
Achievement Standard 2.4 – Process, present and analyse
statistical data in
relation to given issues. (Internal)
Achievement Standard 2.5 – Describe government policies in
relation to economics issues. (External)
TOPIC TWO - Achievement Standard 2.2 – Describe international trade and its
causes and
effects using economic models. (External)
Achievement Standard 2.4 – Process, present and analyse
statistical data in
relation to given issues. (Internal)
Achievement Standard 2.5 – Describe government policies in
relation to economics issues. (External)
TOPIC THREE - Achievement Standard 2.3 –Describe economic growth and its
causes and effects using economic models. (External)
Achievement Standard 2.4 – Process, present and analyse
statistical data in
relation to given issues. (Internal)
Achievement Standard 2.5 – Describe government policies in
relation to economics issues. (External)
1
Topic One
Definitions from AS 2.1 (external)
Key Concepts
Definitions
Individual price rise
Occurs when the price of a particular product rises.
Causes of an increase in
price of a product.
Changes in conditions of demand that cause an increase in demand
(e.g. price rise of a substitute, or price decrease of a complement) or
changes in condition of supply that cause a decrease in supply (e.g.
increase in costs of production, increase in indirect tax).
Rate of inflation %
(or change in general
price level)
=
Change in index numbers x 100
original index number
Rise in the general price
level
A general price rise occurs when the average level of prices increases,
for example, the CPI rises for 1 000 to 1 035, the average level of
prices has risen by 3.50%.
Consumer Price Index
(CPI)
A weighted index which measures the movements in price of a typical
basket of household good and services that represent the expenditure
pattern of the average household. It is used as a measure of inflation
(or a change in the general price level).
Inflation
A rise in the general level of prices of a period of time.
Disinflation
Occurs where the rate of inflation is falling, i.e. the price level is rising
but by a smaller percentage than before
Deflation
Occurs when there is a fall in the general price level.
Creeping inflation
A constant, slow, annual increase in the rate of inflation.
Hyperinflation
(Galloping or runaway
inflation)
A situation in which the price level rises at a very rapid rate. The value
of money declines rapidly and people lose confidence in the currency.
Equation of exchange
MV = PQ is an expression that is used in the quantity theory of money,
where
M = money supply
V = velocity of circulation
P = value or price of each transaction/price level in an economy
Q = real output/volume of transactions/number of goods purchased
Quantity theory
Asserts that if the money supply increases, the inflation will increase
assuming that V and Q are unchanged (constant).
Limitations of the
quantity theory of
money
The equation assumes that V and Q are unchanged but this can change,
e.g. if V and Q change then increases in M may cause an increase in Q
while P remains unchanged, so increases in M do not necessarily lead
to increases in P.
Aggregate demand
Total demand in the economy. Equivalent to national income:
AD = C + I + G + (X –M)
2
Aggregate supply
Total production of al firms in the economy.
The AD curve shows the
relationship between
total goods/services
demanded and the PL.
As the price level
increases, AD for all
goods/services will
decrease.
Shifts of the AD curve depend on the level of ‘spending’ by the major
sectors of the economy. This includes changes in income tax rates,
savings or expectations about future inflation levels. Decisions about
levels of government spending and transfer payments will also shift
the AD curve. Interest rate changes have a major impact on the ADF
curve because they influence the level of spending by households and
investment by firms.
A shift of AS curve is
mainly related to ‘costs’
of production.
Especially nominal wages; imported raw materials, e.g. oil; sales
tax/GST or company tax; new technology and levels of productivity;
the level of capital stock and the level of the labour force.
YF or long-run AS curve
(drawn as a vertical line)
Shows each firm is producing its capacity output and there is full
employment. New technology or the discovery of new resources will
cause the YF curve to shift outwards.
The AS curve shows the
real output firms are
willing to supply at each
PL. The slope of the AS
curve depends on which
part of the AS curve you
are working on.
AS
PL
At low levels of
output firms are
willing to increase
output with a small
increase in PL
because they have
ideal capacity in the
short-run.
At high levels of ouput
(closer to YF the curve
reflects: the need to bid
scarce resources away
from other industries, pay
overtime and diminishing
returns.
Real output (GDP)
YF
The AD/AS model
showing deflationary
(recessionary) gap, i.e.
AD and AS curves
intersect below YF.
AS
PL
(price
level)
The axis shows
changes in inflation
Deflationary
(or recessionary) gap
YF
Real output (GDP)
This axis shows changes in employment output.
3
Cost-push inflation
Describes a situation where the process of rising prices is initiated and
sustained by increasing costs which push up the general price level.
Demand-pull inflation
Demand-pull inflation is a situation where demand exceeds supply at
current prices, so prices are pulled up by aggregate demand.
Savings
The part of disposable income not spent on current goods and services,
e.g. buying shares, putting funds aside into term deposits or putting
goods aside for future use.
Investment
When firms purhcase capital goods.
Impact if the New
Zealand dollar
appreciates
Exporters’ incomes are likely to fall because they are less price
competitive and sell less or they exchange their foreign currency for
fewer New Zealand dollars, so their incomes decrease. The overall
result is less demand-pull inflation. Imports will also be cheaper as the
New Zeqaland dollar appreciates, so there will be less cost-push
inflation.
Interest rates and
economic activity
A fall in interest rates will encourage households to borrow and
increase the level of consumption and businesses are more likely to
carry out their investment plans. Overall economic activity is likely to
increase and put pressure on price levels to increase.
Trade (business) cycle
The recurring fluctuations in economic activity tht an economy
experiences over a number of years from boom to depression to
recovery again.
The business cycle
Positive
Boom
(Peak)
Boom
(Peak)
Recession
Downswing
Contration
Real
GDP %
change
Expansion
Upswing
Recovery
Time
Trough
(Depressions)
Negative
Boom
A phase of the business cycle characterised by a peak in economic
activity with unemployment falling and possible inflationary pressure.
Recession
A falling-off in economic activity characterised by decreasing levels of
investment and output and rising levels of unemployment.
4
Depression
A phase of the business cycle characterised by a severe decline in the
level of economic activity. Output and investment will be at very low
levels and there is a high rate of unemployment.
Impact of inflation on
savings
Inflation increases the price of goods and services requiring a greater
portion of household income, this will reduce level of savings. As the
future purchasing power of savings may fall, households will be less
inclined to save.
Impact of inflation on
fixed incomes e.g.
beneficiaries, pensioners
The purchasing power of the income of households whose income
fails to keep pace with increasing prices will fall.
Impact of inflation on
firms
Risings prices can make it more difficult for firms to plan or budget
and this creates uncertainty about the future prospects for firms, so
investment is likely to fall. If firms are unable to pass on the increase
in costs to consumers, profits may fall and cause business to close
down.
Impact of inflation on
trade
Inflation in New Zealand at higher rates than our trading partners can
resuce the quantity of exports sold as they become less price
competitive. Local firms may struggle to compete against cheaper
imported products. If export receipts are less than import payments
then the current account is likely to be a greater deficit or smaller
surplus.
Definitions from AS 2.4 (internal)
Key Concepts
Definitions
Inflation
See page 2
Disinflation
See page 2
Deflation
See page 2
Consumer Price Index
(CPI)
See page 2
Definitions from AS 2.5 (External)
Key Concepts
Definitions
Fiscal policy
The government’s budgetary policy in which it alters its spending and
revenue to achieve its economic objectives.
Government budget
surplus
The government raises more in revenue than it spends. This will cause
the economy to contract and reduce inflationary pressures.
Monetary policy
Action taken by the Reserve Bank to influence interest rates, the
money supply and the availability of credit. Influences the level of
economic activity in order to achieve price stability.
5
Tight monetary policy
Used when the level of economic activity is too great and there is
inflationary pressure in the economy, e.g. increasing the OCR.
Official Cash Rate
(OCR)
The Office Cash Rate (OCR) is the main monetary policy used by the
Reserve Bank. The OCR is the interest rate set by the Reserve Bank; it
will pay interest at 0.25% lower than the OCR to registered banks for
their settlement cash deposits and the Reserve Bank is prepared to lend
to registered banks at 0.25% above the OCR if registered banks
borrow from the Reserve Bank to fund their settlement cash deposits.
Therefore, the OCR will influence the level of interest rates and is the
current key tool used by the Reserve Bank to maintain price stability.
Interest Rates and the
AD/AS model
Higher interest rates affect private sector consumption because they
mean individuals pay more on mortgages and credit cards. People have
less to spend. AD will shift inwards. Private sector investment is when
firms buy capital goods, often requiring a loan. When interest rates rise
these increased costs will mean less investment spending on new
capital by firms. AD will shift inwards.
Topic Two
Definitions from AS 2.2 (external)
Key Concepts
Definitions
Regional trade
Trade between region in the same country under the same government
using the same currency.
International trade
Trade across national borders.
Onshore service
A service provided by the exporting country to foreign buyers on its
own shore, e.g. tourism, education to foreign students.
Offshore services
A service provided by the exporting country to users overseas, e.g.
international air travel, insurance.
Changes in New
Zealand’s trading
pattern
New Zealand has developed a wider variety of products to meet the
demand of overseas’ markets and found a greater range of markets to
sell to.
Balance on goods
Export of goods minus import of goods, e.g. meat, wool, chemicals,
machinery, oil, coffee.
Balance on services
Export of services minus import of services, e.g. education, tourists,
transport, insurance.
Balance on income
Includes dividends, interest, profit transmitted between countries.
Balance on current
transfers
Gifts, foreign aid.
Balance on current
account
Balance on goods, services, income and current transfers.
Balance on capital
Capital account inflow minus capital account outflow.
6
account
Balance on financial
account
Foreign investment in New Zealand minus New Zealand investment
abroad.
Comparative advantage
A trade theory which states that a country should specialize in the
production of those goods that it is relatively more efficient at
producing (in terms of costs and/or resources used). The theory is
based on the following assumptions: two goods only, no transport
costs, free trade, mobility of resources within a country and constant
costs – no diminishing returns; i.e. a straight-line production
possibility curve.
Why New Zealand has a
comparative advantage
in the production of
primary goods
We have good growing conditions, suitable climate and soils
compared with other countries. New Zealand has greater technical
expertise, especially in the production of primary products (dairy,
forestry) than many other countries. The closeness of our major cities
to ports, good transport links and lower production costs add to New
Zealand’s comparative advantage.
Basis of trade using a
production possibility
curve
Given favourable trading terms a country can consumer goods and
services beyond its current production possibilities. The following
analysis demonstrates this.
By specializing entirely on the production of capital goods, the
quantity OX is produced.
The economy retains the quantity OB for its own use and exports the
rest BX.
In return, it imports the quantity of OA of consumer goods.
This trade position shows that the consumption of point D is
achievable. This allows a country to consume a greater quantity of
consumer goods and capital goods than would have been possible
without trade.
Production possibility curve for a country
Consumer
Goods
A
a
pi
Importsta
l
g
o
o
O
da
s
pi
ta
l
g
Reasonso why, on the
two-country
model,
o
d
s
D
a
A possible combination of
pi
capital goods and consumer
ta
goods available to a country
l
with trade.
g
o
o
d
s
B
X
Capital goods
a Exports a
pi
pi
ta
ta
l
So the relative prices in each lcountry can be compared.
g
g
o
o
o
o
d
d
s
s
7
prices are measured in
the same currency.
The two-country model
is useful for illustrating
changes to these items.
Prices in either country, quantities exported and imported, quantities
demanded and supplied in either country.
Factors not shown by the Trade barriers, exchange rates, political influences and economic
disasters, the effects of other countries trading or changes in transport
two-country model
costs.
Whether the twocountry model is
appropriate for
illustrating international
trade.
The two-country model simplifies international trade, it is useful for
illustrating the impact of changes in supply and demand on world
prices, exports and imports. OR, the two-country model as shown is
inappropriate because New Zealand is too small to influence the
world price in mot commodities.
Firm
A single business.
Industry
The sum of all firms which produce one type of product.
Sunrise industry
A growth (expanding) industry where prospects and profits are likely
to be improving.
Sunset industry
A declining industry where resources will be shifted away into other
industries where their prospects are better and the returns to the
owners are higher.
Definitions from AS 2.4 (internal)
Key Concepts
Definitions
Exchange rate
Price at which one currency exchanges for another.
The trade-weighted
index (TWI)
A measure of the value of New Zealand dollar in terms of a weighted
average of the currencies of our major trading partners.
Appreciation
Price of New Zealand dollar rises in terms of another currency.
Depreciation
Price of New Zealand dollar falls in terms of another currency.
Impact of appreciation
on export/import and
why the reaction
The New Zealand dollar is worth more so that New Zealand-made
goods and services cost more and become less competitive overseas.
Exports are likely to decrease. Imports will cost less so are likely to
increase.
Terms of trade
Ratio of export price index to import price index, expressed as an
index relative to a base year.
Terms of trade formula
Export price index x 100
Import price index
Changes in terms of
trade
Depends on relative movements of export prices to import prices. A
numerical increase is deemed favourable. A numerical decrease is
deemed unfavourable.
8
Definitions from AS 2.5 (external)
Key Concepts
Definitions
Free trade
Trade between countries without government intervention.
Protectionism
Government measures that limit trade between countries.
Arguments for free trade Allows producers to gain access to a wider range of markets and
consumers a wider range of products at lower prices.
Arguments for
protectionism
Allow infant industry to develop, strategic (essential) industry that
need to be preserved in the interests of national security.
Government policy on
trade
The New Zealand government has liberalized trade phasing out and
lowering tariffs and removing subsidies.
9
Topic Three
Definitions from AS 2.3 (external)
Key Concepts
Definitions
GDP
The value of all goods/services produced for sale within a country in a
year.
Nominal GDP
The value of output at current market prices.
Real GDP
Refers to nominal GDP adjusted for price changes relative to some
base year. It is the changes in Real GDP that allow us to measure
growth in real terms or increases in the standard of living.
Measures of economic
growth
Real income, productive capacity and net social welfare.
Real income
Refers to actual economic output, i.e. the total number of goods and
services produced by an economy.
Productive capacity
Measures an economy’s economic potential, rather than looking at the
actual output of an economy.
Net social welfare
Focuses on economic factors (output of goods and services) as well as
non-economic factors such as quality of life factors.
Leakages
A withdrawal within the circular flow model, e.g. savings, taxes and
import payments.
Injections
An addition to money in the circular flow model, e.g. consumption
spending, investment, government spending, and export receipts.
Savings
That part of disposable income not spent on current goods and
services, e.g. buying shares or putting funds aside into superannuation
schemes.
Investment
The creation or purchase of new capital by firms or government, e.g.
building a new factory or constructing a new motorway.
Transfer payment
A payment made by government with no exchange (nothing is
received in return) e.g. income support or the domestic purposes
benefit.
Expenditure method
formula
Private final consumption plus government final consumption plus
gross fixed capital formation plus changes in inventories plus exports
minus imports plus statistical discrepancy.
Final government
consumption
expenditure
Covers services provided by government which are not sold on the
market, e.g. defence, police, education. It does not include transfer
payments or investment spending.
Final household
consumption
expenditure
Spending by households on goods and services.
Gross fixed capital
Investment in fixed assets by firms (e.g. on factories or new
10
formation
equipment) and government (e.g. on works like the building of dams
and universities).
Net exports (exports –
imports)
Much of production has an imported component and some of what is
produced in New Zealand is sold overseas.
Income method formula
Gross operating surplus plus compensation of employees plus taxes on
production and imports minus subsidies.
Gross operating surplus
Operating surplus plus consumption of fixed capital.
Operating surplus
Profit before deducting taxes, dividends; it can be taken to be net
profit.
Compensation of
employees
Financial compensation for labour supplied, e.g. wages, salaries and
taxable allowances.
Consumption of fixed
capital (depreciation)
Measure the decline in value of fixed assets used in production, as a
result of physical deterioration and normal obsolescence. It is a cost of
production, valued at replacement cost.
Production Possibility
curve (PPC)
Shows maximum output combinations using resources efficiently, best
possible use with a given existing level of technology and resources. It
is not possible to produce enough to satisfy all wants so the PPC
reflects scarcity.
Any point inside the curve is under-utiisation or inefficient use of
resources. There is also no opportunity cost as you move from a point
inside the curve to a point on the curve.
A point outside the curve is impossible with existing
resources/technology.
New technology or the discovery of new resources will shift a PPC
outward.
Capital
goods
Consumer goods
Capital goods (or
producer goods)
Man-made goods to produce other goods and services. Production of
these will increase future production but means fewer consumer goods
now.
Consumer goods
Goods that households or individuals use in order to satisfy needs and
wants. Production of these now mean fewer capital goods now and
may lower future productive capacity of an economy.
Straight line production
possibility curve
Illustrates the principle of constant costs. As the production of a good
increases, the opportunity cost of producing additional units is
unchanged. The resources are equally efficient in the production of
either good.
Shoe a’’
Shoe ‘b’
11
Bowed outwards
(concave) production
possibility curve
Illustrates the principle of increasing costs. As the production of a
good expands, the opportunity cost of producing additional units
increases. Some of the resources used are better suited to the
production of one good, and some to the production of the other good.
Causes of growth
The discovery of new resources or investment.
Positive effects of growth Lower levels of unemployment and more job opportunities.
Government tax revenue should increase. Household incomes should
increase and should lead to an increase in the material standard of
living.
Negative effects of
growth
Accelerated use of resources and the detrimental effect on the
environment. New technology used to achieve growth may result in
job losses and disruption of family life as individuals seek
employment in other regions. Possible health problems as individuals
over-indulge due to higher incomes e.g. obesity.
Definitions from AS 2.4 (internal)
Key Concepts
Definitions
Real GDP per capita
Real GDP
Total population
Shows what one individual in an economy could have access to,
provided real GDP was evenly distributed. For a country with an
increase in Real DDP per capita this indicates that there has been
economic growth in excess of population growth.
Exclusions from DGP or
why DFP might
understate true value of
economic activity.
Insufficient information – illegal activities or payments in kind (no
records kept) which form part of the black or informal or underground
economy are excluded.
Non-market activities have no value attached to these activities
because they do not pass through a market so are excluded, e.g. do-ityourself work, unpaid work done by a houseperson.
Definitions from AS 2.5 (external)
Key Concepts
Definitions
Resource Management
Act 1991
The purpose of the Resource Management Act 1991 (RMA), was to
promote sustainable management of natural and physical resources, so
they would not be jeopardized or their use would not have adverse
effects on the environment.
12
Supply-side policies
The application of microeconomic policies intended to increase
aggregate supply.
13