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Transcript
Preliminary Digital Economics Text TOPIC 1 - INTRODUCTION TO ECONOMICS What Economic Outcomes do we aim to achieve in this topic? You will demonstrate understanding of economic terms, concepts and relationships. You will be able to explain the economic role of individuals, firms and government in an economy. You will identify the nature and causes of economic problems and issues for individuals, firms and governments. What Economics Issues will be examined? You will identify the opportunity costs involved in economic decisions made by individuals, businesses and governments at local, state and national levels. You will examine the ways that the economic problem affects individuals at different income levels. You will examine the implications of unemployment and technological change using production possibility frontiers. You will compare and contrast the ways that different economies deal with specific problems or issues. What Economic Skills will you develop in this topic? You will construct and interpret graphs including production possibility frontiers. You will distinguish between equilibrium and disequilibrium situations in the circular flow of income model and understand the implications of this. You will identify key features of an economy through analysis of a variety of information types and sources. You will communicate in groups to investigate aspects of economics and economies. 1 Preliminary Digital Economics Text Preliminary Topic 1 - An Introduction to Economics Glossary of Terms TERM Business Cycle Capital goods Circular Flow of Income Consumer goods Consumer sovereignty Demand Economic Growth Enterprise Exports Factors of production Fair Work Commission Financial sector Firms sector Government Expenditure Government sector Gross Domestic Product Gross National Income DEFINITION The name given to the sequence of business fluctuations which occur over a period of years in a regular cyclical pattern. The phases of the cycle may be referred to as expansion (recovery), boom, recession, and contraction (downswing or slump). The produced means of production used in the production of other goods and services, such as factories and machinery. A theoretical model, based on certain assumptions, that describes the transfer of money, goods, and services between the major sectors of an economy. These are goods used by consumers to satisfy their wants. Occurs when it is the consumer who decides the production in the economy through casting dollar votes for goods and services in the market. The quantity a consumer is willing to buy at a certain price. A sustained increase in a nation's output over time, generally measured as real Gross Domestic Product per annum. The factor of production that an entrepreneur contributes to production. It consists of innovation, organisation, and risk taking. Goods sold to other countries. It is also an injection into the circular flow and has an economic symbol of X. See Resources. Fair Work Commission is the national workplace relations tribunal that manages Australia’s industrial relations. Intermediaries (or go betweens) who get funds in the form of savings and lend it out to businesses for investment. Businesses who employ resources, carry out production and sell goods and services. Money spent by the government. It is also an injection into the circular flow and has an economic symbol of G. The government who raise money through taxation and spend money to provide basic services and redistribute income. Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period of time. Y= C+I+G+(X-M). Gross National Income (GNI) equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world. 2 Preliminary Digital Economics Text TERM Household sector Imports Industrial Relations Injections Investment Labour Labour force Land Opportunity Cost Overseas sector Production Possibilities Frontier Productivity Public goods Quality of Life Recession Resources Savings Scarcity DEFINITION Consumers and households who supply labour and other resources and purchase goods and services. Goods produced overseas and bought for use in the Australian Economy. It is a withdrawal from the circular flow and has an economic symbol of M. The relationship between employers and employees and how they deal with each other. Expenditure (such as government expenditure, business investment or exports) that is not a direct function of income, but is ' injected ' into the circular flow of income. It increases the level of aggregate demand and expenditure in the economy. Investment is expenditure on goods not for current consumption. It is used to make additions to the stock of capital in the economy. It is also an injection into the circular flow and has an economic symbol of I. A factor of production, which is rewarded for mental or manual effort, by wages, salaries, and professional payments. Those people who are working or seeking work. The factor of production that consists of natural resources, including mineral deposits, timber, and water. The cost of the best alternative forgone or sacrificed. Other economies who buy our exports or from where we import goods and services. A curve showing the maximum production that can be achieved at a particular time given the existing resources and technology. The quantity of output per worker. This is measured by dividing the output produced by the number of workers or, for an hourly rate, by the number of hours workers worked. These are goods and services that are provided by the government for everyone’s use and no one can be excluded, such as parks, libraries and defence. The overall standard of living and wellbeing of the people. A period of negative economic growth (negative GDP) of at least six months duration. Anything that can be used to produce goods and services. Economic resources are made up of land (natural resources), labour, capital and enterprise The part of personal disposable income that is not used for the current purchase of consumption goods and services. It is a withdrawal from the circular flow and has an economic symbol of S. A shortage of something in relation to what is wanted. 3 Preliminary Digital Economics Text TERM Taxation Technological Change Underemployed workers Wants Welfare Withdrawals DEFINITION The main source of government revenue and an instrument of economic policy. The main functions of taxation are to release resources from the private sector and make these available to the public sector. It is a withdrawal from the circular flow and has an economic symbol of T. The introduction of new or improved products, new or modified production processes or improvements in the productivity of resources. Employed persons who express the desire to have additional hours of work in their present job or to have an additional job, or to have a new job with longer working hours are considered underemployed. Peoples' desires for those goods and services which give them satisfaction. A government payment to the needy or worthy without them providing anything in return, such as pensions, Austudy. Deductions or leakages from the circular flow. They include savings, net taxes, and imports. 4 Preliminary Digital Economics Text THE NATURE OF ECONOMICS 1. What is economics all about? Here is an introductory PowerPoint discussing the nature of economics and what economics is all about. So let’s start our study of economics here. N.B. Press on the control (ctrl) key and click on the link What is Economics? For the audio-PowerPoint 1.1 What is the economic problem? The economic problem is about the need to make choices. In any economy there is a limited supply of goods and services. This limited supply is a result of the scarce availability of resources. There is only a certain amount of natural resources, human resources, machinery and people who are willing and able to start businesses in any economy. On the other hand, there are many more things that we would like to have i.e. wants. As a result of many and in some cases unlimited wants and scarce resources the individual, businesses and the government have to make decisions to solve this economic problem. Economics is really about solving problems. The basic economic problem is due to scarcity. If we had an infinite supply of resources, there would be no reason to charge people to purchase goods and services. We would not have to pay tax to the government and we could have all that we wanted. Well let’s stop dreaming and return to the real world now! There are four basic economic questions that have to be answered in any economy. Different economies answer them in different ways but they all still have to decide: What goods and services are to be produced? How many of these goods and services will be produced? How will these goods and services be produced? 5 Preliminary Digital Economics Text How will these limited quantities of goods and services be allocated among the members of the economy? (1) What goods and services are to be produced? In Australia’s case, the decision of what goods and services are to be produced is determined by: Consumers – The more demand consumers have for a product the more likely that product will be produced. In market based economies the consumer is the dominant force in determining what goods and services will be produced. This is known as consumer sovereignty. The more demand there is for products then, generally, the more products that will be produced. Business - The profit motive drives business decisions. Businesses seek to maximise profit, i.e. where revenue minus expenses is greatest. Government – All economies have at least some government intervention in the market. In Australia the government is a consumer, an employer, a business and a regulator. The government can prohibit or limit the production of certain goods and services, if they are not in the best interests of society, such as drugs and under age drinking and smoking. The government also creates a demand for goods and services that they consider society should have, such as defence and art galleries. (2) How many goods and services will be produced? This involves deciding the quantity of goods and services to be produced. Over-supply means wasted scarce resources. More use of finite resources now means less availability of both resources and output in the future. Again the consumer is the main factor in this decision. Greater demand usually means more production by businesses. Again the government may decide to regulate the quantity that will be supplied. This may involve a quota, a limit on production, or limiting suppliers, such as Telstra’s control of the telephone lines that provide communication for homes in Australia. 6 Preliminary Digital Economics Text (3) How will these goods and services be produced? The decision process of how goods and services will be produced is really one for businesses to consider. While there may be some government regulation of hours of work or zoning of land for industrial and other purposes, businesses will base production decisions on the cost and production possibilities of the resources they will use. For example, relatively higher costs of labour will lead to greater use of capital in the production process. (4) How will these limited quantities of goods and services be allocated among the members of the economy? In a market economy the value of the resources that you contribute to the market largely determines the income that you have and as a result your share of goods and services. For example, if you earn a high wage then you can purchase goods and services with that. If you have no income or low income, then you will rely on the government to redistribute income through social security and welfare to allow you to purchase goods and services. The government also decides certain goods and services should be produced in the interests of society. As a result taxes are used to redistribute income and resources to these areas, such as defence, public housing, libraries and parks. APPLY YOUR LEARNING 1.1 Group Work - Stranded on a deserted island You are to break into groups of 3-4 students. You are to assume that you are stranded on a deserted tropical island, 500 kms off the coast of Queensland. You have the task of setting up an economic system on that island. You need to decide the basic economic questions of: What and how much to produce? How to produce it? Who will get it? What will be done to increase efficiency and economic growth? It is important to develop a system that will sustain economic development. The role of 7 Preliminary Digital Economics Text each person in the group should be clearly explained. The group will have 20 minutes to plan their economic system and each group will give a 3-5-minute report. REVIEWING AND APPLYING YOUR LEARNING 1.2 Now that you have an idea of what Economics is about, watch the following video and write your own definition incorporating the terms: resources, scarcity, needs and wants. http://www.youtube.com/watch?v=yoVc_S_gd_0 1.2 The need for choice by individuals and society As we have already seen, consumers, businesses and the government have to make choices due to the limited supply of resources available to any economy. You, as a student, have made choices about whether to go on to Year 11 or choose to go to TAFE or to go to work. You can not do all of these at the same time as time is also a scarce resource. 1.3 Opportunity cost and its application through production possibility frontiers In making this decision you have considered an economic principle that of opportunity cost. The decision to produce or consume a product involves giving up another product. The real cost of an action is the next best alternative forgone. Opportunity cost is the main alternative that you have given up. You can not be in school, at TAFE, at work and at the beach at the same time. You have to make a choice. The best alternative that you have given up is your opportunity cost. If you weren’t at school now, where would you be? That is your opportunity cost. If you would be at TAFE then that is your opportunity cost. Just as individuals make choices, businesses and society also have to consider opportunity cost. The business can not produce an unlimited quantity of output as resources are scarce. The business has to decide the goods and services that they will 8 Preliminary Digital Economics Text produce and the quantities with their limited resources. The business considers its production possibilities. With the resources it has a business has a number of alternative levels and types of output that it can produce. Let’s consider a farmer in Australia. They have a certain size farm which limits the amount that they can produce. The farmer has to decide between producing a number of products. Finally, the farmer decided to produce wheat and sheep. This is not the end of the problem the farmer needs to consider how much land will be allocated between the wheat and sheep production. This is shown in the production possibilities schedule below. Table 1.1: Wheat V Wool Production Wheat (tonnes) Wool (bales) 1000 800 600 400 200 0 0 200 300 350 380 400 If the farm only produces wheat, then 1000 tonnes can be produced. If the farmer wants to produce 200 bales of wool, land will have to be diverted from wheat production. This reduces the output of wheat to 800 tonnes. The opportunity cost is 200 tonnes of wheat to produce 200 bales of wool. Similarly, if the farmer only has sheep to produce wool on the farm then 400 bales of wool can be produced. To produce 200 tonnes of wheat, the transfer of resources leads to a loss of wool production of 20 bales. The opportunity cost of producing 200 tonnes of wheat is 20 bales of wool. 9 Preliminary Digital Economics Text These production possibilities for the farmer can be plotted on a graph as a production possibilities frontier. This is shown in the figure below. 1000 Wheat 800 600 400 200 0 100 200 300 400 Wool APPLYING YOUR LEARNING 1.3 Assume that you are the manager of a clothing factory. You have a limited quantity of workers and a set number of machines. With these resources and a certain quantity of cloth you can produce a certain quantity of full length pants or shorts. You calculate the following production possibilities schedule for your factory. Table 1.2 Pants or Shorts Pants 500 400 300 200 100 0 Shorts 0 250 450 600 720 800 Q1. What is the opportunity cost of making 500 pairs of pants? Q2. What is the opportunity cost of making 250 pairs of shorts? Q3. What happens to the opportunity cost, if you increase the production of shorts from 250 to 450? Q4. What is the opportunity cost of 200 pairs of pants? Q5. What factors would influence your decision about which combination of shorts and pants to produce? 10 Preliminary Digital Economics Text Plot your production schedule on a graph showing a production possibilities frontier. Remember to draw you graph to scale and label your axis. REVIEW YOUR ANSWERS Did you get the right answers? Click here to see the correct answers. There is a PowerPoint of the instructor showing you how to work out the correct answers and showing you how to draw a production possibilities frontier. The choices we make have future implications for the individual, businesses and society. By deciding to pursue further study in Years 11 and 12 you are giving up the opportunity to earn income in the present. However, you are increasing your chances of earning a higher income over your lifetime. The business that applies good environmental policies, such as adopting solar energy in production, may have increased costs in the present period, but this may ensure long term efficient resource use by the firm and higher profits over the long run for the firm. The government may decide to increase university fees to reduce their spending and increase the budget surplus. In the long run, though, this may lead to a less qualified workforce, leading to lower productivity and lower economic growth. This could lead to the government getting less revenue and paying more out in social welfare for those out of work. An important consideration for any economy is the proportion of scarce resources allocated between consumer goods and capital goods. Consumer goods are the goods and services that we consume that give us present satisfaction such as food and clothes. Capital goods are goods that are used in future production that may increase the quantity of goods and services we have in the future. As resources are scarce we need to limit our consumption of consumer goods in the present to allow for the production of capital goods that will supply the consumer goods and other capital goods in the future. In the case of Australia and many western economies we tend to have a high level of spending on consumer goods which leave few resources for producing capital. In turn many Asian economies have lower levels of consumer spending and as a result more 11 Preliminary Digital Economics Text savings that are diverted to investing in capital goods production. The effect of this has been that economies that divert a higher proportion of resources to capital goods production have higher rates of economic growth compared to those who do not. Let us look at the case of Australia and Singapore. In 1965, Singapore became an independent state. It was faced with a lack of physical resources, a small domestic market and a low standard of living compared to Australia. In response, the Singapore Government adopted a pro-business, pro-foreign investment, export-oriented economic policy framework, combined with state-directed investments in strategic governmentowned corporations. Singapore's economic strategy proved a success, producing real growth that averaged 8% from 1965 to 2015. In the same period Australia had lower levels of capital goods production and grew at a much slower rate so that by 2015 the value of Singapore’s production per person had overtaken that of Australia’s. This relationship is shown in Figure 1.1. REVIEW YOUR LEARNING 1.4 Click on the PowerPoint link of the instructor showing you the relationship between capital goods production and consumer goods production and economic growth in an economy. Capital Goods V Consumer Goods. APPLYING YOUR LEARNING 1.5 (a) Which country do you think will have the highest level of economic growth per person in 2025? (b) Would you reduce your spending on consumer goods in the present to increase Australia’s living standards in the future? 12 Preliminary Digital Economics Text Figure 1.1: Economic Growth in Australia and Singapore Singapore 2015 Capital Goods per person Australia 2015 Singapore 1965 Australia 1965 Consumer Goods per person There are a number of ways to shift the production possibilities frontier outwards. This is shown in Figure 1.2, by a movement in the frontier from the full line to the broken line. Apart from an increased use of capital, any increase in the quality or quantity of resources will increase the production possibilities frontier. For example this may occur as a result of finding new natural resources (land) by exploration or improving the quality of land such as soil by irrigation or fertiliser. Labour can be improved by increasing its supply or its quality, such as by having a more skilled and qualified workforce. Capital can increase production possibilities not only through an increase in the quantity but also its quality, such as through developing more efficient machinery. Even entrepreneurs, the people who decide to take a risk and set up a business, can improve their quality by having better training. Many Australian businesses, especially small businesses, fail in their first five years because of the lack of managerial ability of their owners. 13 Preliminary Digital Economics Text A firm or a nation will only be producing on the production possibilities frontier when all their resources are being used efficiently. If there is excess capacity or wasted resources, the firm or nation will operate inside their production possibilities frontier, point X in Figure 1.2. They are not being efficient and have unemployed resources. If there are unemployed workers in a nation, this is a sign of inefficiency. The nation is operating inside its production possibilities frontier. Reducing unemployment is a positive goal for an economy as it increases efficiency and not only increases the living standards of the unemployed but for the economy as a whole. Figure 1.2: Capital Goods or Consumer Goods Capital Goods X Consumer Goods 1.4 What are some of the economic factors underlying decision making? There are many economic factors that underlying decision making every day in Australia and all economies. These factors vary depending on whether you are an individual, a business or a government. (i) Decision making by individuals: The decisions of the individual are influenced by many factors. These include: 14 Preliminary Digital Economics Text i. Spending v saving: The individual is limited in their ability to spend or save by their level of disposable income (income after tax). A high income earner has greater choices than a low income earner. The individual can choose to spend or save their income. However, the low income earner needs to spend a higher proportion of their income for basic needs and survival. In many cases low income earners will have no savings and may even be in debt. The high income earner will generally save some of their income for the future and this accumulates as wealth. ii. Work, education and retirement: Once a person turns 15 years old in Australia they have to make decisions about work and school. By returning to school to start year 11 you have given up current income as a worker to pursue higher income as a result of greater qualifications. At the end of year 12 you will have to make the work v education decision again. Will you go to work or go to TAFE or university? Each of these factors affects your income level and purchasing ability in the present compared to your lifetime earnings. Eventually you will go to work as this will maximise your income and allow you to purchase goods and services. You still will have to make the decision of when you are going to give up work and retire. The longer you work the more income you receive and as a result the more wealth you accumulate to spend during your retirement. You may make the decision to retire yourself or it may be made for you by an employer or employers who decide that you are no longer required as a worker. Family and health factors also influence the work v retirement relationship. Many women quit work to have children and do not return to paid employment or only work part-time. In some cases, early retirement may occur due to ill health. All these decisions affect your lifetime income and spending capacity. People will make different decisions over their lifetime because they are individuals and have different wants, interests, capabilities and opportunities. iii. Voting and participation in the political process: Australian citizens and residents over the age of 18 are required to vote. This gives you the right to 15 Preliminary Digital Economics Text influence the selection of the politicians who will make many important decisions that will influence not only your life but also businesses, the nation and the economy. Decisions on areas such as health care, education, and taxation will all influence your quality of life and the choices you are able to make. For example, increases in the cost of university fees have led to a decline in the proportion of students from low income areas going to university and as a result affects their work v education decision. This may also reduce their lifetime earnings potential, as university graduates on average have higher lifetime earnings than students who only study till the end of Year 12. A government decision for a tax cut in the present has to be weighed up against a possible loss of services such as roads, hospitals, welfare and education in the future. Many short term decisions have much larger long term implications that may not always be considered but it is the job of an economist to consider these implications. (ii) Decision making by business: The decisions of business are influenced by such economic factors as: i. Pricing: Businesses seek to maximise profits. This is generally achieved by maximising revenue compared to costs. Profits are maximised where the gap between the business’ total revenue and total costs are greatest. If the market price for a product rises, such as oil or wheat, then this generally increases total revenue and as a result profits. Rising prices for a good or service in the market is an incentive for a firm to produce more of that product. ii. Production and resource use: Businesses have to decide their method of production. The aim will be to produce efficiently, that is at minimum cost. The firm considers the various methods of production and the various combinations of resources such as capital, land and labour to achieve their production target. The firm then considers the cost of those resources and finds the cheapest and most efficient way to achieve that production target. As technology and methods of production change so will the ways to 16 Preliminary Digital Economics Text produce. Changes in the costs of the resources such as wages and machinery will also change the most efficient combination of resources in production. iii. Industrial Relations: Industrial relations is the relationship between employers and employees. This relationship not only involves the determination of wages and conditions of work but also the way each deal with the other and their level of co-operation. A positive working environment leads to increased productivity but an unhappy workplace leads to lower productivity, absenteeism and staff turnover. (iii) Decision making by the government: The government also has limited resources and great demands on those resources. People ask for increased spending on schools, roads, health, social welfare and many other areas, while also demanding cuts to tax and government charges. The governments of Australia therefore have to make decisions about revenue and expenditure that influence the decisions of consumers and business. A change in the rate of personal income tax affects the spending behaviour of individuals. This change in spending will influence the production decisions of businesses. Greater spending by the government on child care will divert resources to that area and businesses will produce goods and services to meet that demand. The government also regulates the operation of the market and influences consumer and business decisions in that manner. For example, to limit environmental damage the government may have charges for cleaning up the environment or have requirements in place to prevent possible damage, such as pollution control devices on cars and phasing out leaded petrol. REVIEW YOUR LEARNING 1.6 5 Minute Pop up Quiz 1.1: The Nature of Economics. Click on the link below to take the 5-minute quiz to check how well you have understood this section. Quiz 1.1. 17 Preliminary Digital Economics Text THE OPERATION OF THE ECONOMY 1.5 Production of goods and services from resources The first stage of production is to decide what resources are required to produce the goods and services the firm aims to produce. These resources, or factors of production, can be grouped into four main areas: Land: The factor of production that consists of natural resources, including mineral deposits, timber, and water. Labour: The factor of production, which is rewarded for mental or manual effort, by wages, salaries, and professional payments. It includes the skill and effort of cleaners, carpenters and nurses. Capital: The produced means of production used in the production of other goods and services, such as factories and machinery. It is important to note that money is not capital in economics but money used by a business to purchase machinery is known as investment. Enterprise: The factor of production where an entrepreneur (the person who starts the business) organises production. It consists of innovation, organisation, and risk taking. The entrepreneur is responsible for coordinating the other three factors of production in the production process. In modern business practice, the entrepreneur may employ a manager (labour) to supervise the day to day operation of the business. To be a factor of production in economics the resource must be usable in the production process. As a result, reserves of oil and other natural resources that have been discovered and are usable are considered land. However, areas of property, for example, that have no use in production (at least at some point in time) such as a desert would not be considered land in economics. Let us look at the production process for steel manufacturing. The inputs are land, labour and capital, but there is also the need for an entrepreneur to take the risk to purchase these factors of production in order to carry out production. The risk is that the business 18 Preliminary Digital Economics Text may fail and the entrepreneur will lose their money and other contributions that they have made to the business. Figure 1.3: The production process REVIEWING AND APPLYING YOUR LEARNING 1.7 Complete the following Table: FACTOR OF PRODUCTION Land (Natural Resources) EXPLANATION RETURN Labour The produced means of production e.g. computers and machinery Profit 19 Preliminary Digital Economics Text Group activity: Form a group of three to four students and prepare a flow chart similar to that above (Figure 1.3) to show the production process of another good or service. What similarities and differences do you find between your flow chart and the one for steel and those of your other classmates? 1.6 Exchange of goods and services: The exchange or purchasing of goods and services vary. When a service is produced it is usually available directly to the consumer. When a train or a bus service is produced the consumer uses the service as they choose. It is directly available to them for purchase. With goods often there is another stage in the distribution process, that involving a retail outlet. Consumers do not buy steel products directly from the steel manufacturer. The steel products may go through another stage of processing to make them into a form that is usable by consumers such as a car or a stove. They are then sold to retailers who then sell them to consumers. Often factories will not be near consumers so that is why a retail sector is important. It would be difficult for us to buy a car directly from a car manufacturer in Germany or Japan but through a retail network this is easy and also more efficient. 1.7 Provision of income and distribution of goods and services: A person’s or family’s income largely determines their ability to purchase goods and services in the economy. The level of income one receives is largely determined by the value of the resources that they possess in the market and how much of those resources they sell to the market. For example, workers will generally be paid based on their level of skill, qualifications, productivity and the number of hours that they work. University graduates on average are paid 50% more than workers with no post-school qualifications. University graduates also have less than half the unemployment rate of those with no post-school qualifications. Apart from work, income can be gained by owning resources and receiving rent for them, by saving money and earning interest and by investing and earning dividends and profit. For those with limited sources of income the government provides support through the social security and welfare system, such as with pensions and public housing. The government also has decided that in Australia 20 Preliminary Digital Economics Text certain goods and services will be provided free to the community without any direct payment. These include public goods such as parks, libraries and defence. They also include goods and services that are provided free or at a very low cost such as public schooling and health care, through Medicare. These are funded through taxation revenue and the amount of tax that you pay does not affect your ability to use these goods and services. 1.8 The business cycle and its impact on the quality of life and employment The business cycle is the pattern of fluctuations in the level of economic growth in the economy. Economic growth in Australia is measured by the nation’s Gross Domestic Product (GDP) i.e. the total value of goods and services produced in the economy in a set period of time. The economy tends to go through a cycle of levels of growth as a result of changes in the level of spending and as a result the level of production over time. The pattern of these changes in spending and growth creates the business cycle. There are four main stages in the business cycle. They are: the upswing (expansion); boom (peak); the downswing (contraction); Trough (recession). Not all downswings and eventual troughs will lead to a recession. A recession is classified as two consecutive quarters of negative growth. This means that production in the economy declined over a period of six months. Sometimes economies go into depressions. This is a sustained long period of negative growth usually leading to very high levels of unemployment and increased poverty. The great depression of the 1930s lasted for more than 10 years and had an unemployment rate of over 25 %. 21 Preliminary Digital Economics Text Figure 1.4: The business cycle Boom GDP Upswing Downswing Trough Years APPLYING YOUR LEARNING 1.8 Use the information in the following table to plot the business cycle for economy X. On the graph mark in the stages of the business cycle. Table 1.3: Business cycle Economy X Year 1 GDP $billions 130 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 100 90 120 150 130 110 Fluctuations in the business cycle have a major impact on the level of unemployment and the quality of life. Economic growth increases the quantity of goods and services produced in the economy and, as a result, make more products available for consumers. Having more goods and services is one way of increasing living standards and the quality of one’s life. REVIEWING AND APPLYING YOUR LEARNING 1.9 Click on the PowerPoint link of the instructor showing you how the business cycle operates and the effect of different stages of the business cycle. Business Cycle link. 22 Preliminary Digital Economics Text In Australia, some economists consider that an economic growth rate of three percent is very significant. When economic growth rises above three percent then there is sufficient demand to lower the rate of unemployment. This view relates to Okun’s Law. So that an increase in labour productivity together with an increase in the size of the labour force can mean that output grows without the overall unemployment rate falling. For example, if labour productivity is 1.5% and the labour force grows by 1.5%, as a result of new workers entering the market, then GDP would need to increase by more than 3.0% to reduce the unemployment rate. In a country such as China with higher productivity and labour force growth, GDP may need to grow by as much as 7% before the unemployment rate is lowered. In the recession of the early 1990s, Australia’s unemployment rate peaked at 11.4% in 1993-94. This created a long-term unemployment rate of 36.6% in 1993. The long-term unemployment rate is the percentage of the unemployed who have been out of work for al least 12 months. The problem of the long-term unemployed has grown with each recession Australia has had since 1980. In 1980 the number of long-term unemployed was less than 80,000 people. Following the recession of 1982-83 the long-term unemployment level rose to over 200,000 and during the recession of 1992-93 exceeded 350,000. This created a major problem for the structure and employability of the labour force. Long-term unemployment was still high at 179,000 people in 2016 see Figure 1.6. Growth in the long-term unemployment rate leads to the loss of skill, experience and confidence for the unemployed. Many give up looking for work when they are unemployed for lengthy periods of time. This is a loss of human capital and a loss of potential output for the economy. Human capital is the value of a person’s education, skills and experience. 23 Preliminary Digital Economics Text Figure 1.6: Long-term unemployment in Australia, 1991-2016 Source: ABS, 6291.0.55.001 Labour Force, Australia The longer a person is out of work and not using or developing these skills the less productive they will be when they return to work. Many employers when they have a choice of selecting from many workers will select those with the most up-to-date skills and recent or current work experience. This increases the problem and the duration of long-term unemployment. Some of these workers have been unemployed for 5 years or more and would need retraining to re-enter the workforce. Even in 2016 when the general level of unemployment has declined to 6.0%, the long-term unemployment rate stood at 22%, with more than 71,000 unemployed for more than two years. So as you can see recessions and unemployment are not good for the economy or the individual. A steady growth path is desirable for all economies but difficult to achieve. Ways of achieving this will be consider later in this course. 1.9 The circular flow of income The circular flow of income is like a map that shows the paths that money, income and goods and services travel in the economy. The transfer of income takes place between five main groups or sectors in the economy. A simple model with only two sectors shows the transfer of income, resources and goods and services between the household 24 Preliminary Digital Economics Text sector (or consumers) and the firms sector (or businesses). By looking at these two sectors we can start to see the relationships that exist in the economy. The household sector is comprised of all individuals, groups and families who buy goods and services in the economy. The household sector also has another function as they also provide the factor of production labour to the firms sector to carry out production. The firms sector is made up of businesses that produce goods and services and employ the labour used in production. The firms sector includes small individual producers up to large transnational corporations, such as McDonalds and Coca-Cola. In the two-sector model the household sector buys the goods and services that businesses produce. In exchange the consumers pay money or income to the firms sector. The consumers earn that money that allows them to purchase goods and services by contributing their resources, mostly labour, to production. The household sector’s spending becomes the firms sector’s income. This income is then used to cover the costs of production, including labour. This relationship is shown in the simple circular flow model Figure 1.7. While the basic two sector model may not seem too complicated in the real world it does not always operate smoothly. Decisions that are made by one sector can have major effects on the other sector and lead to further consequences for itself. Let us consider a situation where the firms sector decides that they can increase profit by sacking workers and making all the other workers, who still have a job, work harder. The goal of greater profits may not be achieved as workers are also consumers. Unemployed workers have less income to spend. This leads to less demand for the firms’ production and fewer goods and services are sold. Lower sales may lead to less profit. The firm may decide that due to the fall in sales that they will sack more workers. This in turn means less consumer expenditure, reduced sales and a further lowering of profits. So as you can see the decisions made by these two sectors have major influences on each other. 25 Preliminary Digital Economics Text Figure 1.7: A basic two-sector circular flow of income model Wages, salaries and profits Goods and services Household Sector Firms sector Labour, enterprise Consumer expenditure In the full operation of the economy there are five main sectors. Apart from the households and firms sectors there are also the financial sector, the government sector and the overseas sector. In the basic two sector model it is assumed that households spend all their income. The introduction of the financial sector allows consumers to save part of their income and to deposit those savings in the financial sector. The financial sector in Australia is comprised of financial enterprises (such as banks) and financial markets (for example, the bond market or share market). The financial sector enables funds for investment to be made available from savings to other parts of the national or international economy. The financial sector acts as an intermediary or a ‘middle man’. They take savings (S) from the household sector and pay interest for the money and lend the money to businesses to carry out investment (I). The return from the investment is known as profit. Savings is a withdrawal of money from the circular flow. When the money is lent out to business this then becomes an injection of funds. An important issue to consider is that the level of savings does not have to equal the level of investment in the economy. Savings (S) is carried out by consumers to earn interest, to purchase things in the future and for security. High interest rates tend to increase the level of savings in the economy. Investment (I) on the other hand is used to purchase capital to increase production. Interest is a cost for the investor. It is the price they pay 26 Preliminary Digital Economics Text for borrowing money. High interest rates will tend to discourage investment. When the level of savings is equal to the level of investment i.e. S=I, then there is equilibrium in the financial sector (withdrawals = injections). If S>I (withdrawals > injections), then more money is being saved than being invested. Lower investment will mean less money in the circular flow and less production. This will lower economic growth and may increase unemployment in the economy. If I>S (injections > withdrawals), the extra spending on investment will increase production and economic growth. This will also lead to increased employment and income in the economy. The differences in the level of savings and investment are two of the factors that cause the business cycle to occur as when S>I, the level of economic growth declines (downswing). When I>S, spending increases and economic growth also rises in the economy (upswing). Figure 1.8: A three-sector circular flow of income model with savings and investment Wages, salaries and profits Goods and services Household sector Savings Interest Financial sector Investment Firms sector Profit Labour, enterprise Consumer expenditure The final two sectors of the economy are the government and the overseas sector. As you know in the real world your income is not only used for spending and saving. The government takes part of your income in the form of taxation. This includes income taxes, company tax, the goods and services tax and many other types of taxes that will be discussed in topic six, government and the economy. Taxation (T) is money taken out 27 Preliminary Digital Economics Text of the circular flow and like savings is a withdrawal. The government injects money into the circular flow when they engage in government expenditure (G). The government spends money to provide roads, education, health, defence and many other essential requirements for a modern economy. If the level of government revenue (T) equals the level of government expenditure (G), then the government budget is said to be balanced. A balanced budget is only one option for a government. The government may have a deficit budget where G>T. The excess government expenditure over taxation will increase spending in the economy and make the economy grow. This is often referred to as an expansionary budget. If T>G, then there will be more money withdrawn from the economy than injected. This is a surplus budget. This reduces spending levels and economic growth. This is also known as a contractionary budget. There are times when all three budget outcomes will be appropriate. If the economy is growing too quickly then a surplus budget will slow the level of spending. If there is high unemployment and low economic growth, then a deficit budget will increase spending and create jobs and economic growth. In the early years of the 1990s the Federal Government ran deficit budgets because of the high unemployment levels. However, in the period after 1998 the government had relative high economic growth and falling unemployment so ran surplus budgets up till 2007. As a result of the Global Financial Crisis, Australia has run budget deficits since 2008. If there is too much spending in the economy this may cause prices to rise (inflation) and a boom may occur. A boom generally means the economy has reached its capacity and prices have risen and the growth can not be sustained that is why we see a downswing following the boom in the business cycle. When the economy is growing at a steady rate then a balanced budget may be most appropriate. The final sector is the overseas sector. This involves transfers of money to and from overseas in exchange for goods and services. When we sell goods and services overseas (exports) we receive money in return. This money comes into the economy and is seen as an injection into the circular flow. When we buy goods and services from overseas (imports) we pay money for them and the money is withdrawn from the circular flow. The money is not being spent in Australia creating demand and economic growth but is being spent buying overseas 28 Preliminary Digital Economics Text production and as a result reduces income in Australia. Changes in our exports and imports also influence economic activity in Australia. If exports (X) are greater than imports (M), then the extra income being used to buy Australian goods and services will lead to increased demand and higher economic growth in Australia. If M>X, then more income is withdrawn from the circular flow and this slows the economy down (Figure 1.9). Figure 1.9: The five sector circular flow of income model It is not easy to control the level of exports and imports. Our export income is very dependent on the demand from countries overseas, which we have no control over. Our import levels often depend on whether we can buy the products in Australia and whether we are having increased incomes and want to buy more goods and services from 29 Preliminary Digital Economics Text overseas. In the period 2003 to 2012 Australia’s exports increased as a result of increased demand from Asia, especially China. Similarly, exports fall whenever we have droughts, as rural output declines. The difference between exports and imports i.e. X minus M is known as net exports. A positive level of net exports is expansionary and a negative value is contractionary. 1.10 Equilibrium in the five sector model The circular flow is in equilibrium when injections equal withdrawals. The injections into the circular flow are investment (I), government expenditure (G) and exports (X). The withdrawals are savings (S), taxation (T) and imports (M). The economy is stable at equilibrium, so there is no incentive to change the levels of spending and economic growth. Equilibrium occurs when I + G + X = S + T + M. This does not mean that at this time that I=S and T=G and X=M but rather that the total level of injections equals the total level of withdrawals from the circular flow. This is why many economists consider that changes to the budget (G and T) are important in bringing about equilibrium in the economy as the other factors, S, I, X and M are largely outside the control or influence of the government. Equilibrium in the circular flow does not occur very often as the levels of injections and withdrawals continually change over time and the decisions especially to save, invest, purchase exports and imports are done for different reasons by different groups both within and outside the Australian economy. When injections (I+G+X) are greater than withdrawals (S+T+M) more income is going into the circular flow and that leads to increased demand and subsequently production. The rise in production increases the economy’s economic growth and subsequently the demand for labour and other resources. The economy will expand until injections and leakages are equal. Economic growth in the economy is limited by the scarcity of resources. An economy can not expand its production past full employment of resources. 30 Preliminary Digital Economics Text When full employment is reached any increase in injections or demand creates inflation (a rise in the general price level) not economic growth. When injections are less than withdrawals less spending is taking place in the circular flow. This reduces demand for production. Workers and other resources are laid off. The unemployed workers reduce their spending as their income has declined. They may need to draw on their savings to survive. So demand falls further and production and economic growth continue to fall. The level of growth will decline until injections and withdrawals are again equal. This time there will be higher unemployment and a lower level of economic growth in the economy. REVIEW YOUR LEARNING 1.10 Click on the PowerPoint link of the instructor showing you how the Circular Flow of Income operates and the effect of different levels of injections and withdrawals on the Circular Flow and the economy. Circular Flow link. REVIEW YOUR LEARNING 1.11 Copy the following passages and fill in the gaps. The five main sectors of the economy, _________________, ___________________, ___________________, ___________________________, ____________________, transfer funds between each other in exchange for __________________ and ________________. In a simple model, firms pay money to households in the form of ____________________________________________________. These payments are made in return for the services of the factors of production, __________________, _______________ and _________________________. The households use this money to purchase __________________ produced goods and services. Not all of the income in the economy is spent on domestically produced goods and services. Some is withdrawn from the ________________ flow. The main withdrawals or ________________ are __________________, _________________, _________________. The economic symbols for these are S, T and M. 31 and Preliminary Digital Economics Text Demand in the economy does not only come from spending on domestically produced goods but also through the injection of funds. The three main types of injections are ____________________, _______________________________ and ____________. The economic symbols for these are _____, _____ and ______. If injections are greater than withdrawals, more income will enter the circular flow and the economy will ____________ and economic growth will occur. If injections are less than withdrawals, the economy will _____________ and economic growth will ______________ and unemployment will _______________________. If injections equal withdrawals, the economy will be ___________________. APPLY YOUR LEARNING 1.12 Consider the following statistics for a hypothetical economy. All amounts are in billions of dollars. S = 100 T = 80 M = 40 I = 90 G = 90 X = 60 The budget result would be a __________________ of $_______________________. Net exports would be a _________________of $____________________________. The circular flow would _______________ as leakages are ______________ than withdrawals by an amount of $_________________________. If there was a slowdown in the world economy and exports fell to 30, net exports would be a _________________of $____________________________. The circular flow would _______________ as leakages are ______________ than withdrawals by an amount of $__________________________. REVIEW YOUR LEARNING 1.13 5 Minute Pop Up Quiz 1.2: The Operation of the Economy. Click on the link below to take the 5-minute quiz to check how well you have understood this section. Quiz 1.2. 32 Preliminary Digital Economics Text ECONOMIES AND THEIR SIMILARITIES AND DIFFERENCES 1.11 Similarities and differences between Australia and our Asian neighbours While all economies have the same basic five sectors, the influence each sector has over the economy varies. Some countries such as Singapore have a large international sector, while other countries such as North Korea have a large government sector. Some countries have more people, some more land and some more capital and technology. All of these factors, as well as the country’s history and traditions impact on the type of economy that exists and the quality of life of its people. The quality of life for the majority of Australians is quite high compared to other economies. The 2014 Human Development Report (HDR) (based on 2013 data) ranks Australia’s quality of life as the second highest in the world, after Norway. The main factors that give Australia such a high ranking are our high life expectancy of 82.5 years and the amount of education we receive, where Australia is ranked first in the world. Australia’s economic growth as measured by Gross National Income (GNI) per capita (PPP) is ranked only 20th in the world. These three criteria are used to measure quality of life as it is believed that they will reflect a country’s overall standard of living. Education is seen as a source of productivity and growth and a high ranking for education is considered as an indicator of opportunity for the people in a country. In some countries in the world such as Niger, in Africa, less than 50 % of children finish primary school and the rate for female completions is below 25 %. Life expectancy also reflects your living standards. Countries with low living standards tend to have short life expectancies. For example, the life expectancy in Sierra Leone is less than 46 years. A long life expectancy usually reflects good quantities and quality of food, health and general living standards. The GNI per capita is measured in terms of purchasing power parity (PPP). This tells you how much people living in a country can buy with their 33 Preliminary Digital Economics Text money compared to someone in a different country. So a high GNI per capita (PPP) means that the average person’s ability to buy goods and services is high compared to the average person in a country with a low GNI per capita (PPP). For example, Australia’s GNI per capita (PPP) was $41,524 US in 2013 compared to only $588 US in the Central African Republic, and $444 US in Congo. There are countries with higher income than Australia who do not have as high a human development index. For example, the GNI of Qatar was $119,029 US and Kuwait $85,820 US. These nations are highly reliant on income from oil exports. So the fall in world oil prices in the period 2014-16 had a considerable impact on their GNI and the overall standard of living of their people. 1.12 Economic Growth and the Quality of Life in Asia If we compare our quality of life with our Asian neighbours, we find that inhabitants of East Asia and the Pacific have a life expectancy of 74.0 years and South Asia has a life expectancy of 67.2 years. Income levels are also lower with an average GNI per capita (PPP) of $10,499 US in East Asia and the Pacific and $5195 US in South Asia. Literacy rates are also much lower in these regions with 95% in East Asia and the Pacific and 63% in South Asia, compared to 100% in Australia. It is important to note that a person is measured as literate if they are over 15 years old and have completed Year 6 at school. Let us consider what life is like in one of our closest neighbours in Asia, the Philippines. The Philippines consists of 7107 islands. With a population of over 100 million people it is the 7th most populated country in Asia and the 12th most populated country in the world. The 2014 HDR ranked the Philippines 117 out of 187 nations. The life expectancy at birth in the Philippines is 68.7 years and the GDP per capita is $2765 US. The Philippines is considered a newly industrialised economy. It is moving from an economy based on agricultural production to one based on manufacturing and service industries. Since 2010, the Philippines’ Economic Growth Rate has averaged 6% per annum. 34 Preliminary Digital Economics Text 1.13 Employment and unemployment in the Philippines Despite rapid economic growth in the Philippines in recent years, unemployment remains a persistent problem. Under President Benigno Aquino, in office since 2010, unemployment has fallen. The latest figures show the rate at 5.6% in October 2015, down from 6% a year earlier. But progress has been uneven and the Philippines still has one of the highest rates of unemployment in the ASEAN region. One reason is that job creation has struggled to keep pace with an ever-expanding population. In many years, the number of people entering the job market has been greater than the number of jobs created. Table 1.4: Employment indicators in the Philippines Indicator Employment Rate Underemployment Rate Labor Force Participation Rate Unemployment Rate Oct 2015 Jul 2015 Oct 2014 94.4 93.5 94.0 17.7 21.0 18.7 63.3 62.9 64.3 5.6 6.5 6.0 In addition to the unemployment problem, there is also the issue of underemployed workers. The total number of underemployed in October 2015 was estimated at 8 million. This corresponds to an underemployment rate of 17.7%. 1.14 Distribution of income in the Philippines Despite the transition from agricultural production to one based on manufacturing and service industries and a 6% annual growth rate in the last 5 years, the daily income of 45% of the population of the Philippines is less than $2 a day. For those who have a job, the minimum wage is around 270 pesos1 a day but it varies between regions and occupations. The gap between the country’s rich and poor is widening, with highearning individuals enjoying significantly faster growth in incomes compared with people from the middle- and low-income classes. 1 There were approximately 33 pesos to an Australian dollar in 2016. 35 Preliminary Digital Economics Text Figure 1.9: Poverty in the Philippines: A child collecting trash for income on a dumpsite in the Philippines. Source: Photo by Nigel Dickinson. One of the main causes of income inequality in the Philippines can be traced to educational inequality. Inequalities in income, as well as inequalities in labour and education have provided barriers for Filipinos to participate in economic activities and achieve higher living standards. Table 1.5 demonstrates the relationship between the head of the household’s level of educational achievement and poverty level. Table 1.5: Poverty in 2009 by household head's educational attainment and their level of poverty Educational Poverty Distribution of the Distribution of the Attainment of Headcount Rate Poor Population Household Head At Most Primary 32.6 96.1 78.0 Graduate Some High School 7.5 3.3 11.7 Beyond High 1.6 0.6 10.3 School Total 26.5 100.0 100.0 Source: Albert, Ramon Jose; Dumagan, Jesus; Martinez, Arturo (January 2015). "Inequalities in Income, Labor, and Education: The Challenge of Inclusive Growth” 36 Preliminary Digital Economics Text 1.15 Environmental Sustainability in the Philippines Despite the general view that the Philippines has a beautiful natural environment, it does have considerable environmental issues. The Philippines suffers from human-caused environmental degradation aggravated by a high annual population growth rate, including loss of agricultural lands, deforestation, soil erosion, air and water pollution, improper disposal of solid and toxic wastes, mismanagement and abuse of coastal resources, and overfishing. The neglect of a coherent environmental policy, in the past, has led to the situation, where almost 60% of the groundwater is contaminated. The main source of pollution is untreated domestic and industrial wastewater. Only one third of Philippine river systems are considered suitable for public water supply. Many people rely on bottled water as their only source of safe water. Besides severe health concerns, water pollution also leads to problems in the fishing and tourism industries. In addition, only 5% of the total population is connected to a sewer network. The vast majority uses flush toilets connected to septic tanks. Since sludge treatment and disposal facilities are rare, most effluents are discharged without treatment. While the Philippines does have a Strategy for Sustainable Development (PSSD), the effects so far have been limited. Further environmental issues can be viewed at https://www.youtube.com/watch?v=2tPljjLHCc 1.15 Role of the Philippines’s Government in health care, education and social welfare. The Philippines has limited social welfare and financial support for health and education. The Philippine government through its Department of Social Welfare and Development (DSWD) is mandated to protect poor households. But given limited resources, the department has a limited scope for providing social welfare. 37 Preliminary Digital Economics Text i. Unemployment Benefits: The current situation in the Philippines is that workers, who lose their jobs, mostly (except GSIS-means public sector social insurance members) have no unemployment insurance. However, there is a variety of laws and benefits that give workers some kind of protection. Public employees can avail of a regular unemployment benefit from GSIS (50% of the average monthly compensation, maximum 6 months). To date, many public employees are on fixed term contracts, so they are not protected by this provision. ii Health Cover: The Philippine Health Insurance Corporation or Phil-Health, a government agency, implements the National Health Insurance Act of 1995 through the National Health Insurance Program (NHIP). Its mandate is to provide all citizens with the mechanism to gain financial access to health services, in combination with other government health programs. To date total coverage is estimated to be around 66% of the population. The biggest problem with the scheme is that it only pays part of the cost of health care and the patients have to pay the rest. People, who are not able to pay the part that exceeds PhilHelath reimbursement, get no treatment. iii Age Pension: The Philippines has a retirement benefit, which is a cash benefit either as a monthly pension or a lump sum paid to a person who can no longer work due to old age. The value of that benefit is around 1200 pesos a month. That is equivalent to less than $10 a week in Australian currency. Education: From 1945 until 2011, the basic education system was composed of six years of elementary education starting at the age of 6, and four years of high school education starting at the age of 12. Further education was provided by technical or vocational schools, or in higher education institutions such as universities. In 2011, the country started to move from its old 10-year basic educational system to a K–12 educational system, as mandated by the Department of Education. The new 12-year system is now compulsory. Higher Education in the Philippines is not available to everyone largely due to the cost. The cost of university education varies widely, depending on the public or private nature of the university or college. While some universities have tuition fees of around seven 38 Preliminary Digital Economics Text thousand pesos per semester (P 7,000), other universities have tuition fees ranging from P30,000 - P250,000 per semester. Many Filipinos can’t afford to send their children to college or university because of the high tuition fee and other miscellaneous fees that they need to pay. The government has recognised the importance of education and good health. To alleviate poverty and inequality, the Philippines has a conditional cash transfer (CCT) program called Pantawid Pamilya, where over 4 million families get cash from the government in exchange for keeping their children in school and taking them to regular medical check-ups. Click on the following youtube link to see what life is like in the Philippines: https://www.youtube.com/watch?v=zg7zva7HqS0 RESEARCHING AND APPLYING YOUR ECONOMIC LEARNING 1.14 Now let us consider life in the Philippines compared to that in Australia. Using the information above, for the Philippines, and Google, https://www.google.com.au for Australia, complete the following table comparing economic indicators in the two nations. Economic indicators Australia Philippines Economic Growth Rate (GDP) Unemployment rate Minimum wage per day ($) Percentage living in poverty (as measured by income of less than $2 a day) Weekly age pension ($) Percentage of the population with education above high school level (a) What are the people in the picture, Figure 1.9, doing? Why do you think that they are doing this? 39 Preliminary Digital Economics Text (b) Does this generally happen in Australia? What are some of the basic difference between the two countries? (c) How do the government’s provision of basic services like health care and education compare in the Philippines and Australia? (d) Do you think that you could live on the minimum wage in the Philippines? How do you think they manage to live? (e) How do the two countries compare in terms of environmental sustainability? (f) How would you compare the quality of life in Australia compared to that in the Philippines? (g) Do you think that the people in the Philippines are benefitting from the higher economic growth rate compared to Australia? Explain your answer. APPLYING YOUR LEARNING 1.15 Multiple Choice Questions 1. 2. Which of the following would apply in a world without scarcity? (a) It would still be necessary to choose among alternatives. (b) Opportunity costs would determine choices. (c) All goods would be free. (d) The market would determine all prices. Which of the following is an example of capital in economics? (a) The purchase of shares (b) Savings in a bank account (c) Stocks and bonds (d) A factory 40 Preliminary Digital Economics Text 3. Refer to the production possibilities frontier in the figure. Which point indicates that resources are not fully utilised? (a) 1 (b) 2 (c) 3 (d) 4 •1 •3 Capital Goods •4 •2 Consumption Goods 4. Which of the following concepts is NOT illustrated by a production possibility frontier? 5. 6. (a) Scarcity (b) Monetary exchange (c) Opportunity cost (d) Attainable and unattainable points What effect will a rise in real GDP have on the rate of unemployment? (a) It is generally associated with a decline in the employment rate. (b) It is generally associated with an increase in the unemployment rate. (c) It is generally associated with a decline in the unemployment rate. (d) It is not related to the unemployment rate. The market for labour is (a) A market for goods (b) A market for services (c) A factor market (d) A financial market 41 Preliminary Digital Economics Text 7. What does the circular flow model demonstrate? (a) It shows how nominal GDP is distinct from real GDP. (b) It shows the effects of inflation in a simple economy. (c) It shows the real flows and money flows between different sectors of the economy. (d) 8. It shows the stocks of various sectors of the economy. Which of the following is an example of an injection into the circular flow of income? 9. (a) Exports (b) Taxation (c) Saving (d) Imports Which of the following is an example of a leakage from the circular flow of income? 10. (a) Exports (b) Investment (c) Savings (d) Subsidies The phases of the business cycle, in order, are: (a) contraction, expansion, boom, recession. (b) expansion, boom, contraction, recession. (c) boom, upswing, recession, downswing. (d) recession, contraction, boom, expansion. 42 Preliminary Digital Economics Text 11. 12. 13. 14. 15. What does Australia's GDP measure? (a) It is the wealth owned by Australians. (b) It is the value of goods produced by Australian and overseas businesses. (c) It is the value of intermediate goods and services produced in Australia. (d) It is the value of final goods and services produced in Australia. Which of the following is NOT a major economic resource? (a) Land (b) Capital (c) Enterprise (d) Money What are the incomes received as payment for the four factors of production? (a) Money, profit, dividends, wages (b) Interest, wages, salaries, commissions (c) Wages, rent, interest, profit (d) Rent, capital, wages, shares At which stage of the business cycle will economic growth be highest? (a) Boom (b) Expansion (c) Contraction (d) Recession Which groups are directly involved in the industrial relations process? (a) Employers and financial organisations (b) Employees and employers (c) Governments and employees (d) Governments and employers 43 Preliminary Digital Economics Text 16. 17. 18. What is the purpose of Investment? (a) To earn interest. (b) To earn profit. (c) To purchase capital. (d) To increase the level of savings. What is production? (a) The transformation of inputs into outputs by firms. (b) The resources allocated by the government to industries. (c) The value of all goods and services produced in a country. (d) The provision of goods and services based on peoples' incomes. Refer to the production possibility frontier below. If 20 units of X are currently being produced, what would be the opportunity cost of producing 40 more units of X? (a) 40 units of X (b) 30 units of Y (c) 40 units of Y (d) 60 units of Y 44 Preliminary Digital Economics Text The following information relates to questions 19 and 20. S = 100, I = 80, G = 60, T = 50, X = 80, M = 80 19. 20. In what phase would this economy be? (a) Contracting (b) Expanding (c) In equilibrium (d) Highly inflationary What budget outcome would this economy have? (a) Balanced (b) A surplus (c) A deficit (d) Undefined 45 Preliminary Digital Economics Text Topic 1 Extension Activities Preparing for Economics Assessments Like all the subjects that you study in Years 11 and 12 you are required to complete assessments to measure your performance and your level of understanding of the topics. This section will help you prepare for those assessments. 1. Making a Summary of Your Topic 1 Notes Heading: INTRODUCTION TO ECONOMICS Activity: Using the following Core Headings and Sub Headings, review your notes and create a short summary (this can be used in preparation for tests, tasks and your final preliminary exam). You should aim for one A4 page on each section (1-3). Highlight any headings you do not feel confident with to discuss with your teacher. After completing Topic 1 introduction to Economics, you should have knowledge on the following: 1: The Nature of Economics The economic problem: wants, resources, scarcity The need for choice by individuals Opportunity cost; production possibility frontiers Future implications of current choices Economic factors underlying choices: individuals, business, governments 46 Preliminary Digital Economics Text 2: The Operation of an Economy Production of goods and services Distribution of goods and services Exchange of goods and services Provision of income Provision of employment and quality of life; the business cycle The circular flow of income 3: Economies: their similarities and differences Similarities and differences between Australia and one other economy in Asia in relation to: 1. economic growth and quality of life 2. employment and unemployment 3. distribution of income 4. environmental sustainability 5. the role of the government in health care, education and social welfare 47 Preliminary Digital Economics Text 2. Writing an Extended Response Focus on: Extended Response Writing Extended response writing is a major skill you will need to develop in Economics. This activity will help you build upon your skills in this area. A Glossary of Key Words that may be used in Economics Assessments or Exams It is important to understand what is expected by the key words that may be used in economics exams and other assessments. This glossary contains key words that appear frequently in economics assessments It is important to note that economics assessment questions will also use selfexplanatory terms such as 'how', or 'why' or 'to what extent' or verbs may be used such as ‘list’ that are not included in the Glossary of Key Words. TERM Account Analyse Apply Assess Calculate Compare Contrast Critically (analyse/evaluate) Define Demonstrate Describe Discuss Distinguish Evaluate Examine Explain Identify DEFINITION Account for: state reasons for, report on. Give an account of: narrate a series of events or transactions Identify components and the relationship between them; draw out and relate implications Use, utilise, employ in a particular situation Make a judgement of value, quality, outcomes, results or size Ascertain/determine from given facts, figures or information Show how things are similar or different Show how things are different or opposite Add a degree or level of accuracy depth, knowledge and understanding, logic, questioning, reflection and quality to (analyse/evaluate) State meaning and identify essential qualities Show by example Provide characteristics and features Identify issues and provide points for and/or against Recognise or note/indicate as being distinct or different from; to note differences between Make a judgement based on criteria; determine the value of Inquire into Relate cause and effect; make the relationships between things evident; provide why and/or how Recognise and name 48 Preliminary Digital Economics Text Sketch in general terms; indicate the main features of Outline Provide reasons in favour Recommend Express, concisely, the relevant details Summarise Putting together various elements to make a whole Synthesise Source: Adapted from BOS (NSW) Planning you response Once you know what the question is asking, you can start to plan your response. This should include a plan for your introduction, points you will include in your main body, conclusion and a list of any models/diagrams you can incorporate in your discussion. On the next couple of pages you will see 2 sample extended response scaffolds that you may find useful for extended response planning. Sample 1: Extended Response Scaffold Introduction _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Body _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 49 Preliminary Digital Economics Text _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Conclusion _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 50 Preliminary Digital Economics Text Diagrams/Models/Data that could be included Sample 2: Extended Response Scaffold Question: Introduction: Definitions Diagrams/Models/Data to be included: Topic Sentences 51 Preliminary Digital Economics Text Body: Paragraph 1 Paragraph 4 Paragraph 2 Paragraph 5 Paragraph 3 Paragraph 6 Conclusion: Activity Write a plan for the extended response question below. Use one of the above scaffolds to complete your plan. 52 Preliminary Digital Economics Text Respond to the following question. In your answer you will be assessed on how well you: _______________________________________________________________________ o Use your knowledge and understanding relevant to the question o Apply relevant economic information, terms, concepts, relationships and theory o Present a sustained, logical and cohesive response ______________________________________________________________________ Explain how knowledge of the five sector circular flow model can be used by a government to influence the level of economic activity. Extension Activity Complete the extended response using your essay plan as a guide. Handwrite your response. Extended Response Marking Criteria Criteria Marks o Integrates economic terms, concepts, issues and relationships in an appropriate context o Provides a sustained, logical and cohesive response o Uses knowledge to develop a logically-sequenced response that highlights extensive knowledge of the five-sector circular flow model o Demonstrates a clear and concise understanding of how the government can use the five-sector circular flow model to influence the level of economic activity o Uses relevant economic models and examples to support discussion throughout o Integrates economic terms, concepts, issues and relationships in an appropriate context o Provides concise definitions of economic terms and applies concepts in an appropriate context o Provides a logical and cohesive response o Uses knowledge to develop a logically-sequenced response that highlights an understanding of the five-sector circular flow model o Demonstrates factually precise and appropriate knowledge of how the government can use the five-sector circular flow model to influence the level of economic activity o Uses relevant economic models and examples to support discussion throughout 53 17-20 13-16 Preliminary Digital Economics Text o Provides clear definitions of economic terms and sound discussion of economic concepts and relationships o Develops a coherent response o Uses knowledge to develop an answer that provides a general outline of the five-sector circular flow model o Demonstrates correct and usually relevant knowledge that describes how the government can use the five-sector circular flow model to influence the level of economic activity o Uses some economic models and examples to support discussion o Provides basic definitions of some economic terms, concepts and relationships o Develops a generalised response o Uses generalised knowledge to develop an irrelevant answer concerning the five-sector circular flow model o Demonstrates minimal appropriate knowledge of the impact of how the government can use the five-sector circular flow model to influence the level of economic activity o Provides minimal examples to support discussion o Utilises some appropriate terminology to communicate economic issues o Develops no logical sequence in answer o Demonstrates a lack of knowledge five-sector circular flow model and how the government can use the five-sector circular flow model to influence the level of economic activity o No use of examples to support discussion 9-12 5-8 1-4 Suggested Answer Outline The answer could include: The five sectors are: households, firms, financial, government and overseas sectors; The 3 leakages are savings, imports and taxation; The 3 injections are investment, exports and government expenditure; The economy is in equilibrium when S + T + M = I + G + X; 54 Preliminary Digital Economics Text When the leakages are greater than the injections, the level of economic activity decreases; When leakages are less than the injections, the level of economic activity increases; Thus the government through its taxation and expenditure (through its annual budget) can impact on the overall outcome; In a downswing: the government can use a deficit budget to minimise the effects of the contraction in the economy; while in an upswing the government may use a surplus budget to reduce inflationary effects. Diagrams: the circular flow of income and the business cycle to illustrate the changes in the level of economic activity. 55 Preliminary Digital Economics Text 3. Who Wants to be an Economist Game? A fun way to revise economics is to play the who wants to be an economist game. The game is easy to organise. Each student in the class will prepare 2 economic statements that relate to the topic that you are studying. One statement is true and one is false. The teacher may also like to prepare 2 statements. Separate the 2 statements and give them to your teacher. When the teacher has all the statements, all the students will stand up. The teacher will read out one of the statements. If you think the statement is TRUE, then you put your hands on your HEAD. If you think the statement is FALSE, then you put your hands on your HIPS. If your selection is correct you continue to stand, otherwise you sit down. The teacher continues to read the statements till only one student is left standing. That student becomes the winner of the Who Wants to be an Economist Game and the Champion until the next unit. 56