HSC Economics cheat sheet

Opportunity cost: the value of the next best alternative forgone; every choice involving scarce resources carries one, including government spending financed by taxation.

Circular flow: households supply factors of production to firms and receive income (Y); firms produce output; injections (I, G, X) add to the flow and leakages (S, T, M) withdraw from it; equilibrium when injections = leakages.

AD = C + I + G + (X − M); a rise in any component shifts AD right, raising output and the price level in the short run when spare capacity exists.

Multiplier k = 1/(1 − MPC) = 1/MPS + MPT + MPM); change in equilibrium Y = k × change in autonomous spending.

Inflation measured by CPI: quarterly percentage change in the cost of a weighted basket of goods and services; headline CPI includes volatile items, underlying (trimmed mean) excludes them.

Unemployment rate = unemployed ÷ labour force × 100; labour force = employed + unemployed (aged 15+ actively seeking work); participation rate = labour force ÷ working-age population × 100.

Economic growth: real GDP annual percentage change; real GDP adjusts for inflation using a chain price index; GDP per capita = real GDP ÷ population.

Policy mix: monetary policy (RBA sets cash rate to target 2–3% inflation over the cycle) and fiscal policy (Commonwealth budget, automatic stabilisers plus discretionary measures).

Balance of payments identity: current account + capital and financial account + net errors and omissions = 0; a CAD must be financed by net inflows on the financial account.

Terms of trade = export price index ÷ import price index × 100; a rise improves national income (income effect) but may reduce export competitiveness (substitution effect).

Exchange rate: price of AUD in terms of another currency; determined by demand for and supply of AUD in the foreign exchange market; appreciation raises import purchasing power but harms export competitiveness.

CAD as % of GDP = (current account deficit ÷ nominal GDP) × 100; a persistent CAD reflects low national saving relative to investment or a structural trade imbalance.

Net foreign debt = gross foreign debt − foreign assets held abroad; net foreign liabilities = net foreign debt + net foreign equity; servicing costs depend on interest rates and the exchange rate.

Protection tools: tariffs (tax on imports), subsidies to domestic producers, quotas (quantity limits), and local content rules; each raises domestic prices and reduces consumer surplus.

Free trade benefits arise from comparative advantage and specialisation; costs include structural unemployment in import-competing industries and adjustment costs.

Trading bloc types in order of integration: free trade area, customs union, common market, monetary union; bilateral and multilateral agreements (e.g., WTO, ChAFTA) reduce barriers.

Globalisation indicators: trade as % of GDP, foreign direct investment flows, migration, and technology diffusion; global shocks transmit through trade, finance, and confidence channels.

Inflation targeting: RBA aims for 2–3% average inflation over the medium term; tightening raises the cash rate, raising borrowing costs and dampening C and I.

Demand-pull inflation arises from excess AD; cost-push inflation arises from rising input costs (wages, oil, imported inputs); policies differ accordingly.

Types of unemployment: cyclical (deficient demand), structural (skills/industry mismatch), frictional (job search), seasonal, and hidden (discouraged workers).

NAIRU is the non-accelerating inflation rate of unemployment; below it, labour shortages push wages and inflation upward.

Distribution of income and wealth measured by the Lorenz curve and Gini coefficient (0 = perfect equality, 1 = perfect inequality); progressive tax and transfers reduce inequality.

Environmental management: negative externalities are unpriced costs; policy instruments include carbon pricing, tradable permits, subsidies for renewables, and regulation.

External stability indicators: CAD as % of GDP, net foreign liabilities as % of GDP, terms of trade, and exchange rate volatility.

Policy conflicts: reducing unemployment may raise inflation (short-run Phillips curve); tightening monetary policy to curb inflation may slow growth and raise unemployment.

Microeconomic reform (competition policy, labour market flexibility, infrastructure pricing) raises productive capacity, shifting the aggregate supply curve right to allow non-inflationary growth.