Preliminary Economics

Digital Text

2nd Edition

By

Anthony Stokes and Sarah Wright

Greenacre Educational Publications

2

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: gep@ihug.com.au

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

98

Oct

-19

99

Jan

-20

01

Ap

r-2

00

2

Jul-

20

03

Oct

-20

04

Jan

-20

06

Ap

r-2

00

7

Jul-

20

08

Oct

-20

09

Jan

-20

11

Ap

r-2

01

2

Jul-

20

13

Oct

-20

14

Jan

-20

16

Ap

r-2

01

7

Jul-

20

18

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

38

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

39

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

43

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

___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

44

_____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 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.