Circular flow model
Economic model of the economy illustrating the interdependent relationship between the sectors of the economy (households, firms, government, financial institutions & overseas)
Goods used to satisfy needs and wants of households.
Consumer spending (C)
Spending by households on goods and services
Cost push inflation
Inflation caused by an increase in aggregate supply
ie. inflation caused by rising production costs.
Term coined by Joseph Schumpeter to describe the economic impact of technological change. goods and services being brought to market, and cost-saving. The creative aspect refers to the new and improved technologies being used in production. The destructive aspect refers to the displacement of obsolete goods, services and technologies
Inflation caused by an increase in aggregate demand
eg. C due to household confidence.
The demand for resources is dependent on the level of demand for the final goods and service they will be used to produce.
Direct tax (DT)
Tax that is taken straight off income and paid to IRD e.g. PAYE income tax
Direct value added expenditure
Changes in real spending directly related to an eventeg demand for NZ dairy exports causes increased
dairy export receipts
Disposable income (HDI)
The income of households that is available to spend
occurs when the total level of production and real income in an economy rises.This means that people living in that economy are able to satisfy more of their needs and want
Someone who attempts to earn profit by taking risks and using initiative.
The same. If a primary school teacher and a secondary school teacher earn the same amount of money, then they have equality of income.
Fairness. A doctor will be paid more than a labourer because that is as being fair due to the amount of training involved (and other issues).
Export Receipts (X)
Payment received for goods and services sold overseas
The cost of resources used to produce goods and services
Factors of production
Classical economics distinguishes between three factors of production which are used in the production of goods:
Financial institutions - banks and other organisations, that help channel money (as intermediaries) from savers to borrowers
Includes Parliament and many organisations such as government departments, ministries, and state owned enterprises
Government spending (G)
Spending by the government sector on goods and services
eg. Money spent on building roads
Gross Domestic Product
Gross Domestic product( GDP)
Total market value of all final goods and services produced by an economy in a year
The sector that provides resources for productions (factor inputs) and buys final goods and services (consumer g+s)
The quality or skill level of human resources which can improved by better education or workplace training.
Import Payments (M)
Payment made for goods and services purchased from other countries
A FLOW of money earned by the owners of resources
Indirect tax (IT)
Tax that is paid to the government via a third party, eg. GST goes from the consumer to the shop to the government. Or taxes on goods and services
Indirect value added expenditure
Flow on changes in spending to industries supplying resources (indirectly relate) to an industry affected by an eventeg increased demand for dairying will increase
Induced value added expenditure
Flow on changes in spending to industries unrelated relate to an industry affected by an event due to changes in income that eg. increased demand for dairying will increase dairy farmers income who will then buy proportionately more luxury products so for example firms supplying spa pools may have increased demand / spending on their products
it causes in the economy
Not the same. If there are two lawyers and one gets paid more than the other, then they have unequal incomes
Unfair. An accountant with ten more years experience gets paid the same amount of money as another accountant even though she has more responsibility.
Inflation occurs if there is a rise in the general level of prices
. If products rise on average by 10%, then there is 10% inflation.
Occur if investment, government spending or spending on exports increases.If injections > withdrawals in a period income will increase and economic growth will occur
Investment / Capital formation
The production/purchase of capital goods / man-made resources to be used in the production process
Payments for goods and services purchased
eg. money payment for goods bought and wages for labour supplied
The balance between receipts from exports and payments for imports.
Net social welfare
Refers to a countries overall well-being. It includes both economic (or material) as well as non-economic (quality of life) indicators of performance
the total market (money)value of all final goods and services produced by an economy in a year
The cost of one good or service measured in terms of the cost of the next best alternative foregone.ie. it is the second ranked item you missed out on when you make a decision [obviously, the first ranked the one is the you choose]
The difference between the economy's actual output and the level of production it can achieve with existing labour, capital, and technology without putting sustained upward pressure on inflation.
The sector containing overseas buyers of exports and suppliers of imports
Physical capital / Productive investment
Purchasing capital resources to assist in the production of goods and services
The inability of poor to become better off by earning more income
The sector responsible for the production of goods and services
The process of turning inputs into outputs.ie. it is the total output of a firm /country
Production possibility curve (frontier)
A line on the production possibility curve model showing the various output options that are possible is all resources and technology are fully utilised.
the maximum possible output of an economy with current resources and technology ie. an economy's PPC
The amount of output per unit of input (labour, equipment, and capital).
Movements of actual goods and serviceseg. goods purchased by households and labour purchased by producers
real GDP per capita
Real GDP divided by the population of the country
Real income (real GDP)
nominal GDP divided by a price deflator and so a measure of output changes in an economy in a year
Nominal GDP = P x Q
Real GDP = nominal GDP / P= PxQ / P = Q
These are the natural resources or 'gifts of nature' available to an individual / economy.
The portion of income that is not spent
Buying and selling existing assets in order to make capital gains
Standard of living
The overall quality of life that people enjoy. Usually refers to a individuals / country's per capita income, but also account also of additional conditions that matter for a person's or household's well-being such as leisure or the quality of the environment.
A new industry that is expected to be a strong sector in the future.
The sectors that sunrise industries replace are sometimes referred to as sunset industries.
Development that ensures that the use of resources and the environment today does not damage prospects for use by future generations.
Trade (business) cycle
The trade cycle is the fluctuations in the rate of economic growth that take place in the economy .
These fluctuations appear to occur around every three to five years
Payments by the government for which no exchange is required, including benefit payments
Withdrawals (from the circular flow)
Occur if savings, taxes or spending on imports increase.
If withdrawals > injections in as period income will fall and economic growth decreases