Macroeconomics: output, employment and income in the Australian Economy Chapter 2

Economic Activity Economic activity refers to the actions of individuals, firms or the government that help to generate the production of goods and services, income, employment and expenditure.

Participation in Production (current and capital goods and services) Generates Spent on Economic Activity Expenditure (consumption, investment, govt spending) Participation in Production (employment, resource use, managing) Provides funds for Rewarded by Income (wages, profits, rent, taxes)

The Economic Cycle The Economic Cycle refers to the changes or fluctuations in production economic activity that occur over time. The diagram below shows the rising and falling of economic activity over a period of time.

The Economic (Business) Cycle

Main Phases of the Economic Cycle Boom/Peak: An economic boom is considered the peak of the business cycle. At this time growth reaches its highest point, and unemployment reaches its lowest point. However, also at this stage of the cycle we can expect higher rates of inflation, wages rises, rising business profits and high demand for imports, leading to high Current Account Deficit

Main Phases of the Economic Cycle Contraction or slowdown: This phase will usually follow a peak or boom. At this time the rate of growth in GDP may fall. Usually after a time lag the unemployment rate will start to rise and inflation eases.

Main Phases of the Economic Cycle Trough: Lowest level of economic activity. Sometimes a trough is simply a slow down in the rate of economic growth causing a slight rise in unemployment. It may become a recession. A recession is a phase in which the rate of growth is seen to be negative for two consecutive quarters. During this phase of the business cycle few new jobs will be created, and therefore the unemployment rate will continue to increase, declining business profits, loss of consumer and business confidence, increase in bankruptcies.

Main Phases of the Economic Cycle Expansion or recovery: During a recession policies will be put in place to try and encourage economic expansion once again. Eventually confidence will return, and with it so will the level of investment. As this happens new jobs may be created, and the rate of growth will once again become positive. Unemployment falls and inflation starts to accelerate.

Ideal Level of Economic Activity The best possible situation for an economy to experience is the ideal situation of domestic economic stability. Domestic Economic Stability: is a desirable or ideal level of economic activity where, simultaneously, there is low inflation, a sustainable rate of GDP and low unemployment. Productive capacity: is the potential level of national production of goods and services that can be achieved when all resources are used efficiently and effectively. This determines the sustainable rate of economic growth in the long term.

Indicators of the Level of Economic Activity Measuring productive activity is difficult and inaccurate, partly because there are two types of productive activity: Economic Activity Non-market Activity

Indicators of the Level of Economic Activity Economic Activity: the indicator used to measure economic activity is the Gross Domestic Product (GDP). Gross Domestic Product: is a measure of the real value of final goods and services produced in Australia in a given time period.

Indicators of the Level of Economic Activity Non-market activity: consists of production that occurs mostly within individual households and is not included in GDP. E.g. Parents Transporting children to school, household chores such as washing, cleaning.

Indicators of Economic Activity Leading indicators: predict or forecast in advance the likely future level of economic activity.

Indicators of Economic Activity Coincident indicators: move closely with actual changes in the level of economic activity. They are published at short intervals and tell us what is happening right now.

Indicators of Economic Activity Lagging indicators: show changes in economic activity some time after the event has occurred because they take time to be processed and released.

Indicators of Economic Activity Not all economic activity is Cyclical, with peaks and trough. Economic activity in some sectors can be Seasonal (E.g sales of soft drinks, Ice creams) Economic activity can also be erratic (e.g. Fad products, video games, new technology products, hotel stays)