PRELIMINARY DIGITAL Economics TEXTgreenacre-educational-publications.com.au/resources... · 2019....
Transcript of PRELIMINARY DIGITAL Economics TEXTgreenacre-educational-publications.com.au/resources... · 2019....
Preliminary Economics
Digital Text
2nd Edition
By
Anthony Stokes and Sarah Wright
Greenacre Educational Publications
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Preliminary Economics
Digital Textbook 2nd Edition
Anthony Stokes PhD (Economics), MEc (Soc Sc) (Hons), BA, Dip Ed
Sarah Wright PhD (Economics), BA (Hons), BT/BA
This digital textbook edition is copyright. No reproduction of the whole or part
without written permission of the publisher.
Greenacre Educational Publications.
Published in 2020 by Greenacre Educational Publications.
ISBN 978-1-921086-83-0
Inquiries and Sales: Greenacre Educational Publications, PO Box 7043, Mount Lewis,
NSW. 2190.
Telephone: 0414775046
Email: [email protected]
Front cover graphic by geobrava.wordpress.com
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CONTENTS
Page
Preliminary Topic 1 - An Introduction to Economics 6
Preliminary Topic 2 - Consumers and Business 50
Preliminary Topic 3 – Markets 98
Preliminary Topic 4 - Labour Markets 158
Preliminary Topic 5 - Financial Markets 210
Preliminary Topic 6 - Government and the Economy 265
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How to Use the Digital Text
The economics course that you are about to study will take you on a journey
through the Australian and Global economies. The aim of the digital text is
to provide you with an interesting and enjoyable experience learning about
economics. The Economics Digital Texts are designed to guide you, like a
map, on that journey. The Preliminary Economics Digital Text provides you
with
the digital edition with all the audio and visual displays, including pop-
up glossaries and quizzes, instructor audio visual explanations of the
concepts and topics, and videos providing real world examples and
explanations of concepts, and
the hardcopy of the digital text as a textbook but without some of the
audio video presentations. The hardcopy textbook only provides links to
some videos, requiring internet connectivity.
The content and activities in each chapter of the digital text help you
understand the different issues and aspects of studying economics. The
course is skills based. Through the digital text you learn the skills of an
economist.
The instructor audio-PowerPoints explain various concepts and include
movement in some graphs to help you understand the steps in the various
economics processes. Other videos include real world case studies and
further explanations of concepts. We even have a few stars helping us to
understand economics, including the team from Star Wars, Indiana Jones and
the Minions.
To help you develop these skills, learn new concepts and discover the
economy, the digital text has a number of activities for you to do in each
topic. These activities include group work, problem solving, research
activities, surveys, case studies and statistical and graphical interpretation of
important economic data. It also directs you to other sources of information,
especially on the internet.
There is also a glossary of terms that economists use when they are talking
about the various concepts that you will study. The glossary can be found at
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the beginning of each of the chapters or by clicking on a highlighted word in
the digital text to get a pop-up explanation of the concept.
There are 5 minute pop-up quizzes throughout each topic. This gives you a
chance to see how you are progressing as you go through the topic. The
instructor explains the answers to all the quiz questions. Finally, there are 20
multiple choice test questions at the end of each topic to assess how you are
progressing on your journey of discovery of the world of economics.
Well on with the journey of discovery. Economics is a very interesting
subject and it helps students to understand a lot of what is going on in the
world around them. I hope you enjoy those discoveries.
Good luck!
ABOUT THE AUTHORS Dr Tony Stokes is a former Head of the School of Arts and Sciences
(NSW&ACT) and senior lecturer in economics at the Australian
Catholic University at Strathfield. Tony previously had over 20 years
experience teaching economics in Catholic schools in Sydney. Tony is a
former member of the Economics Examination Committee and a former
Coordinating Senior Marker for Economics. Tony has been awarded
four university awards for teaching excellence, including two Australian
Government University Teaching Citations for Economics.
Dr. Sarah Wright is a former lecturer in economics at the Australian
Catholic University at Strathfield. Sarah was a Faculty and University
Medalist and more recently has been the recipient of numerous awards
for teaching and research and was the lead recipient of an Australian
Government Office of Learning and Teaching Citation for Economics in
2012. Sarah is currently teaching at Penrith Anglican College.
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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.
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Preliminary Topic 1 - An Introduction to Economics
Glossary of Terms
TERM DEFINITION
Business Cycle 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).
Capital goods The produced means of production used in the production of
other goods and services, such as factories and machinery.
Circular Flow of
Income
A theoretical model, based on certain assumptions, that
describes the transfer of money, goods, and services between
the major sectors of an economy.
Consumer goods These are goods used by consumers to satisfy their wants.
Consumer
sovereignty
Occurs when it is the consumer who decides the production in
the economy through casting dollar votes for goods and
services in the market.
Demand The quantity a consumer is willing to buy at a certain price.
Economic Growth A sustained increase in a nation's output over time, generally
measured as real Gross Domestic Product per annum.
Enterprise The factor of production that an entrepreneur contributes to
production. It consists of innovation, organisation, and risk
taking.
Exports Goods sold to other countries. It is also an injection into the
circular flow and has an economic symbol of X.
Factors of
production
See Resources.
Fair Work
Commission
Fair Work Commission is the national workplace relations
tribunal that manages Australia’s industrial relations.
Financial sector Intermediaries (or go betweens) who get funds in the form of
savings and lend it out to businesses for investment.
Firms sector Businesses who employ resources, carry out production and sell
goods and services.
Government
Expenditure
Money spent by the government. It is also an injection into the
circular flow and has an economic symbol of G.
Government
sector
The government who raise money through taxation and spend
money to provide basic services and redistribute income.
Gross Domestic
Product
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
Gross National Income (GNI) equals GDP plus income receipts
from the rest of the world minus income payments to the rest of
the world.
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TERM DEFINITION
Household sector Consumers and households who supply labour and other
resources and purchase goods and services.
Imports 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.
Industrial
Relations
The relationship between employers and employees and how
they deal with each other.
Injections 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 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.
Labour A factor of production, which is rewarded for mental or manual
effort, by wages, salaries, and professional payments.
Labour force Those people who are working or seeking work.
Land The factor of production that consists of natural resources,
including mineral deposits, timber, and water.
Opportunity Cost The cost of the best alternative forgone or sacrificed.
Overseas sector Other economies who buy our exports or from where we import
goods and services.
Production
Possibilities
Frontier
A curve showing the maximum production that can be achieved
at a particular time given the existing resources and technology.
Productivity 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.
Public goods 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.
Quality of Life The overall standard of living and wellbeing of the people.
Recession A period of negative economic growth (negative GDP) of at
least six months duration.
Resources Anything that can be used to produce goods and services.
Economic resources are made up of land (natural resources),
labour, capital and enterprise
Savings 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.
Scarcity A shortage of something in relation to what is wanted.
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TERM DEFINITION
Taxation 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.
Technological
Change
The introduction of new or improved products, new or modified
production processes or improvements in the productivity of
resources.
Underemployed
workers
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.
Wants Peoples' desires for those goods and services which give them
satisfaction.
Welfare A government payment to the needy or worthy without them
providing anything in return, such as pensions, Austudy.
Withdrawals Deductions or leakages from the circular flow. They include
savings, net taxes, and imports.
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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?
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.
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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.
(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?
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It is important to develop a system that will sustain economic development. The role of
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 cannot 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 cannot 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 cannot produce an unlimited quantity of output, as resources are scarce.
The business has to decide the goods and services that they will 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.
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Table 1.1: Wheat V Wool Production
Wheat (tonnes) 1000 800 600 400 200 0
Wool (bales) 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. 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
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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?
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.
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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
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 government-
owned 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
Refer to Figure 1.1 and answer the questions below.
(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?
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.
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Figure 1.1: Economic Growth in Australia and Singapore
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.
Figure 1.2: Capital Goods or Consumer Goods
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
Capital
Goods
per
person Singapore
1965 Australia
1965
Australia
2015
Consumer Goods per person
Singapore
2015
Capital
Goods
Consumer Goods
X
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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.
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:
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
influence the selection of the politicians who will make many important
decisions that will influence not only your life but also businesses, the nation
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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 until 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
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
childcare will divert resources to that area and businesses will produce goods and
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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.
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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 may
fail and the entrepreneur will lose their money and other contributions that they have made
to the business.
21
Figure 1.3: The production process
REVIEWING AND APPLYING YOUR LEARNING 1.7
Complete the following Table:
FACTOR OF
PRODUCTION
EXPLANATION RETURN
Land
(Natural Resources)
Labour
The produced means of production e.g.
computers and machinery
Profit
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
22
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 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
23
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 %.
Figure 1.4: The business cycle
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 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
GDP $billions 130 100 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
GDP Upswing
Boom
Downswing
Trough
Years
24
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.
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.
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 2019 when the general
level of unemployment declined to 5.0%, the long-term unemployment rate stood at 22%,
with more than 93,000 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.
25
Figure 1.6: Long-term unemployment in Australia, 1991-2019
Source: ABS, 6291.0.55.001 Labour Force, Australia
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 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
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
Jan
-19
91
Ap
r-1
99
2
Jul-
19
93
Oct
-19
94
Jan
-19
96
Ap
r-1
99
7
Jul-
19
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Oct
-19
99
Jan
-20
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Ap
r-2
00
2
Jul-
20
03
Oct
-20
04
Jan
-20
06
Ap
r-2
00
7
Jul-
20
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Oct
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Jan
-20
11
Ap
r-2
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2
Jul-
20
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Oct
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Jan
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Ap
r-2
01
7
Jul-
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Tho
usa
nd
sLong - Term Unemployment Rate
26
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. Therefore, as you can see the decisions
made by these two sectors have major influences on each other.
Figure 1.7: A basic two-sector circular flow of income model
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, 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 for borrowing money.
Household
Sector
Labour, enterprise
Consumer expenditure
Wages, salaries and profits
Goods and services
Firms
sector
27
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
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 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
Household
sector
Firms
sector
Labour, enterprise
Consumer expenditure
Wages, salaries and profits
Goods and services
Financial
sector
Savings
Interest
Investment
Profit
28
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 ran budget
deficits after 2008. It is projected that a budget surplus will be achieved in 2019-20.
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 cannot 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 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).
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 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.
29
Figure 1.9: The five sector circular flow of income model
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.
30
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 cannot expand its production past full employment of resources.
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 __________________, _________________, and
_________________. The economic symbols for these are S, T and M.
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 ______.
31
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
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 influence the type of economy that
exists and the quality of life of its people.
The 2018 Human Development Report (HDR) (based on 2017 data) ranks Australia’s
quality of life as the third highest in the world, after Norway and Switzerland. The main
factors that give Australia such a high ranking are our high life expectancy of 83.1 years
and the expected years of schooling that 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 21st 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 quantity of education
ranking 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 40 percent of children finish
primary school and the rate for female completions is only 15 percent. 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 only 52 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 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 $43,560 US in 2017 compared to only $663 US in the Central African
Republic, and $667 US in Liberia. 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
$116,818 US and Kuwait $70,425 US. These nations are highly reliant on income from
oil exports.
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 74.7 years and South Asia has a life
expectancy of 69.3 years. Income levels are also lower with an average GNI per capita
(PPP) of $13,688 US in East Asia and the Pacific and $6,473 US in South Asia. Literacy
33
rates are also much lower in these regions with 94.4% in East Asia and the Pacific and
68.7% 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 2018 HDR ranked the Philippines 113 out of 189 nations. The life expectancy at birth
in the Philippines is 69.2 years and the GDP per capita is $9,154 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. Despite this
transition, the daily income of 8% of the population is less than $1.90 a day, with 21%
living in poverty.
1.13 Employment and unemployment in the Philippines
Despite rapid economic growth in the Philippines in recent years, unemployment remains
a persistent problem. The latest figures show the rate at 5.1% in April 2019, down from
6% in 2014. Nevertheless, 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 2019 2014
Employment Rate 94.9 94.0
Underemployment Rate 15.6 18.7
Labor Force Participation Rate 60.2 64.3
Unemployment Rate 5.1 6.0
In addition to the unemployment problem, there is also the issue of underemployed
workers. The total number of underemployed in 2019 was estimated at 6.4 million. This
corresponds to an underemployment rate of 15.6%.
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. As a result, the
percentage of Filipinos living in poverty was estimated at 21% in 2018, lower than the
27.6% recorded during the same period in 2015.For those who have a job, the minimum
wage is around 466 pesos1 a day but it varies between regions and occupations. The gap
between the country’s rich and poor is widening, with high-earning individuals enjoying
1 There were approximately 36 pesos to an Australian dollar in 2019.
34
significantly faster growth in incomes compared with people from the middle- and low-
income classes.
Figure 1.10: 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. In the Philippines, 6 out of 10 families in 2016 and 5 out of 10 families
in 2017 were deprived of basic education. This also means that 6 out of 10 families in
2016 and 5 out of 10 families in 2017 had at least one family m ember aged 18 years old
and above who did not complete basic education. For primary education, the current
completion rate is 83.43%, and for junior high school, 78.48%. This lack of educational
attainment is heavily based on family income levels, with half the children not completing
primary education coming from the lowest income groups.
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
35
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 use 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=2tPl-
jjLHCc
1.16 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.
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 are 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. Despite this, approximately 40% of Filipino senior citizens still do not receive
a pension. 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.
36
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
thousand pesos per semester (P 7,000), other universities have tuition fees ranging from
P30,000 - P250,000 per semester. Many Filipinos cannot 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
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?
(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.
37
APPLYING YOUR LEARNING 1.15
Multiple Choice Questions
1. 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.
2. 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
3. Refer to the production possibilities frontier in the figure. Which point indicates
that resources are not fully utilised?
(a) 1 •1
(b) 2
(c) 3 •3
(d) 4
•4
• 2
Consumption Goods
4. Which of the following concepts is NOT illustrated by a production possibility
frontier?
(a) Scarcity
(b) Monetary exchange
(c) Opportunity cost
(d) Attainable and unattainable points
5. 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.
Capital
Goods
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6. The market for labour is
(a) A market for goods
(b) A market for services
(c) A factor market
(d) A financial market
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) It shows the stocks of various sectors of the economy.
8. Which of the following is an example of an injection into the circular flow of
income?
(a) Exports
(b) Taxation
(c) Saving
(d) Imports
9. Which of the following is an example of a leakage from the circular flow of
income?
(a) Exports
(b) Investment
(c) Savings
(d) Subsidies
10. 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.
11. 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.
12. Which of the following is NOT a major economic resource?
(a) Land
(b) Capital
(c) Enterprise
(d) Money
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13. 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
14. At which stage of the business cycle will economic growth be highest?
(a) Boom
(b) Expansion
(c) Contraction
(d) Recession
15. 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
16. 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.
17. 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.
18. 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
40
The following information relates to questions 19 and 20.
S = 100, I = 80, G = 60, T = 50, X = 80, M = 80
19. In what phase would this economy be?
(a) Contracting
(b) Expanding
(c) In equilibrium
(d) Highly inflationary
20. What budget outcome would this economy have?
(a) Balanced
(b) A surplus
(c) A deficit
(d) Undefined
41
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
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:
42
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
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 self-explanatory
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 DEFINITION
Account Account for: state reasons for, report on. Give an account
of: narrate a series of events or transactions
Analyse Identify components and the relationship between them;
draw out and relate implications
Apply Use, utilise, employ in a particular situation
Assess Make a judgement of value, quality, outcomes, results or
size
Calculate Ascertain/determine from given facts, figures or
information
Compare Show how things are similar or different
Contrast Show how things are different or opposite
Critically
(analyse/evaluate)
Add a degree or level of accuracy depth, knowledge and
understanding, logic, questioning, reflection and quality to
(analyse/evaluate)
Define State meaning and identify essential qualities
Demonstrate Show by example
Describe Provide characteristics and features
Discuss Identify issues and provide points for and/or against
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Distinguish Recognise or note/indicate as being distinct or different
from; to note differences between
Evaluate Make a judgement based on criteria; determine the value of
Examine Inquire into
Explain Relate cause and effect; make the relationships between
things evident; provide why and/or how
Identify Recognise and name
Outline Sketch in general terms; indicate the main features of
Recommend Provide reasons in favour
Summarise Express, concisely, the relevant details
Synthesise Putting together various elements to make a whole
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
___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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_____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Conclusion
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
45
Diagrams/Models/Data that could be included
Sample 2: Extended Response Scaffold
Question:
Introduction: Diagrams/Models/Data to be included:
Definitions
46
Topic Sentences
Body:
Paragraph 1 Paragraph 4
Paragraph 2 Paragraph 5
Paragraph 3 Paragraph 6
Conclusion:
47
Activity Write a plan for the extended response question below. Use one of the above scaffolds to
complete your plan.
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.
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
17-20
48
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
13-16
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
9-12
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
5-8
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
1-4
Suggested Answer Outline
The answer could include:
The five sectors are: households, firms, financial, government and overseas
sectors;
49
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;
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.
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 until 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.