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Economics 3/4 > 3.3 - Australia and the International Economy > Flashcards

3.3 - Australia and the International Economy Flashcards

1
Q

Open Economy

A

An economy that freely interacts with other economies in the form of trade and finance

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2
Q

Closed Economy

A

An economy that does not interact with other economies in the form of trade and finance

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3
Q

Exports

A

Goods or services produced in Australia that are sold to the world

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4
Q

Imports

A

Goods or services produced overseas and sold in Australia

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5
Q

Free Trade

A

When no restrictions are placed on the flow of goods, services and capital between nations

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6
Q

Barriers to Trade

A

Impediments to free trade in the form of tariffs, subsidies and quotas

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7
Q

Trade Liberalisation

A

The process of removing barriers to trade

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8
Q

Benefits of Trade

A
  • Lower prices for consumers – as producers can access the cheapest supplies and labour, higher wage competition and increased competition → improved access to goods and services → improved material living standards
  • Greater choice for consumers → improved consumers’ satisfaction → improved non material living standards
  • Economies of scale – as producers can produce greater volumes to minimise fixed costs → reduced costs → improved access to goods and services → improved material living standards
  • Access to more resources for business and government – in terms of physical, human and financial capital → increased ability for producers to produce → higher employment → higher incomes → improved material living standards
  • Increased competition and efficiency → reduced costs → improved access to goods and services → improved material living standards
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9
Q

Balance of Payments

A

An annual record of the money value of different types of financial transactions between Australia and the rest of the world

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10
Q

Credits in Balance of Payments

A

Money received by Australia from overseas

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11
Q

Debits in Balance of Payments

A

Money received by overseas from Australia

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12
Q

Current Account

A

Records financial transactions that do not create any future obligations

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13
Q

Current Account Sub-accounts

A
  • Balance of Merchandise Trade (Net Goods): value of export credits for goods sold overseas minus value of import debits for goods purchased from overseas
  • Net Services: value of service credits received from overseas minus value of service debits paid abroad
  • Net Primary Incomes: value of primary income credits received from overseas minus primary income debits paid abroad
  • Net Secondary Incomes: value of secondary income credits received from overseas minus the value of secondary income debits paid abroad
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14
Q

Capital and Financial Account

A

Records financial transactions that DO create future obligations

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15
Q

Capital and Financial Account Sub-accounts

A
  • Capital Account: includes net capital transfers and the net acquisition of non produced, non financial assets
  • Financial Account: value of total credits for investments and borrowings received by Australians from abroad minus total debits for investments and lending abroad
    o Financial Derivatives: complex financial instruments that create assets or liabilities
    o Net Direct Investment: credits from purchase, establishment and expansion of companies and assets in Australia by foreigners minus debits from similar assets overseas by Australians
    o Net Reserve Assets: credits from RBA and Government transactions involving reserves of foreign currencies, gold, special drawing rights and contributions to IMF minus debits from similar transactions
    o Other Investments: credits from funds or assets minus debits
    o Net Portfolio Investment: value of foreign individuals purchasing Australian shares, debt and securities minus the value of similar assets purchased by Australians
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16
Q

Structural Component of Current Account

A
  • Relates to the aggregate supply side of the economy
  • Causes:
    o Savings/investment imbalance – less savings that investments requires foreign borrowing to finance investments
    o Low levels of international competitiveness – due to low efficiency and high production costs
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17
Q

Cyclical Component of Current Account

A
  • Relates to the aggregate demand side of the economy
  • Strong economic activity → more imports
  • Weak economic activity → less imports
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18
Q

Net International Investment Position

A
  • The extent to which Australia is financially obligates to the rest of the world
  • Made up of Net Foreign Liabilities, which is made up of Net Foreign Debt and Net Foreign Equity
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19
Q

Net Foreign Debt + Causes

A
  • Calculated by total borrowing from overseas minus total lending to overseas
  • Causes:
    o Lack of domestic savings
    o Many budget deficits
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20
Q

Public Debt

A

Government borrowings to finance budget deficits

21
Q

Private Debt

A

Companies raising capital for financing business expansion and takeovers

22
Q

Net Foreign Equity

A
  • Calculated by the net equity obligation that results from foreign ownership of Australian assets minus Australian ownership of foreign assets
  • Includes property and shares
23
Q

Terms of Trade

A
  • Ratio of the average prices received for Australian exports relative to the average prices paid for our imports
24
Q

Terms of Trade Formula

A

Terms of Trade= (Export Price Index)/(Import Price Index) × 100

25
Q

Impacts of Changes to Terms of Trade on Current Account

A
  • Increase to the terms of trade → increased value of exports relative to imports → increased balance of trade → favourable movement to the current account
  • Decrease to the terms of trade → decreased value of exports relative to imports → decreased balance of trade → unfavourable movement to the current account
26
Q

Factors Affecting Terms of Trade

A
  • Commodity prices
    o Higher demand for commodities → higher prices → higher terms of trade
    o Lower demand for commodities → lower prices → lower terms of trade
  • Production costs in trading partners
    o Lower costs overseas → reduces Australia’s international competitiveness → lower terms of trade
    o Higher costs overseas → increases Australia’s international competitiveness → higher terms of trade
27
Q

Impact of Terms of Trade on Macroeconomic Goals

A

• Strong and Sustainable Economic Growth:
o Increased Terms of Trade → increased value of exports relative to imports → increased aggregate demand → increased production → increased economic activity → increased growth
o Decreased Terms of Trade → decreased value of exports relative to imports → decreased aggregate demand → decreased production → decreased economic activity → decreased growth
• Full Employment:
o Increased Terms of Trade → increased value of exports relative to imports → increased aggregate demand → increased production → increased economic activity → increased derived demand for labour → decreased unemployment
o Decreased Terms of Trade → decreased value of exports relative to imports → decreased aggregate demand → decreased production → decreased economic activity → decreased derived demand for labour → increased unemployment
• Low Inflation:
o Increased Terms of Trade → increased value of exports relative to imports → increased aggregate demand → moves economy closer to productive capacity → increased demand inflationary pressures → increased price inflation
o Decreased Terms of Trade → decreased value of exports relative to imports → decreased aggregate demand → moves economy further from productive capacity → decreased demand inflationary pressures → decreased price inflation

28
Q

Measures of Exchange Rates

A
  • Individual exchange rates
  • Trade Weighted Index – value of AUD when compared to currencies of our major trading partners
29
Q

Factors Affecting Exchange Rates

A
  • Relative Interest Rates:
    o If Australia has higher relative interest rates → increase demand for AUD
    o If Australia has lower relative interest rates → decrease demand for AUD
  • Foreign Investment / Capital flows:
    o Movement of money into Australia (capital inflow) → increase demand for AUD
    o Movement of money out of Australia (capital outflow) → decrease demand for AUD
  • Demand for Exports and Imports:
    o Increase demand for exports → increase demand for AUD
    o Decrease demand for exports → decrease demand for AUD
    o Increase demand for imports → increase supply of AUD
    o Decrease demand for imports → decrease supply of AUD
  • Terms of Trade:
    o Increased TOT = increased demand for Australian exports relative to imports → increase demand for AUD
    o Decrease TOT = decreased demand for Australian exports relative to imports → decrease demand for AUD
  • Relative Rates of Inflation:
    o If Australia has higher relative rates of inflation → decrease export demand and increase import demand → decrease demand and increase supply of AUD
    o If Australia has lower relative rates of inflation → increase export demand and decrease import demand → increase demand and decrease supply of AUD
  • Credit Ratings:
    o Higher relative credit ratings → safer investment → investors more wiling to invest → higher demand for AUD
    o Lower relative credit ratings → riskier investment → investors less willing to invest → lower demand for AUD
  • Speculation:
    o Expected that currency will appreciate in future → investors more wiling to invest → higher demand for AUD
    o Expected that currency will depreciate in future → investors less willing to invest → lower demand for AUD
30
Q

Impacts of Appreciation of AUD on Current Account

A
  • Australian exports become more expensive in foreign terms → decrease international competitiveness → decrease exports → decrease credits in BOMT / NS → deterioration in current account
  • Imports become less expensive in Australian terms → increase debits in BOMT / NS → deterioration in current account
  • Makes purchase of Australian shares and other assets less attractive to foreign residents → decrease debits in Net Primary Income → improvement in current account
  • Makes purchase of foreign shares and other assets more attractive to Australian residents → increase credits in Net Primary Income → improvement in current account
  • Debt in foreign currencies will require less AUD to service → decrease debits in Net Primary Income → improvement in current account
31
Q

Impacts of Depreciation of AUD on Current Account

A
  • Australian exports become less expensive in foreign terms → increase international competitiveness → increase exports → increase credits in BOMT / NS → improvement in current account
  • Imports become more expensive in Australian terms → decrease debits in BOMT / NS → improvement in current account
  • Makes purchase of Australian shares and other assets more attractive to foreign residents → increase debits in Net Primary Income → deterioration in current account
  • Makes purchase of foreign shares and other assets less attractive to Australian residents → decrease credits in Net Primary Income → deterioration in current account
  • Debt in foreign currencies will require more AUD to service → increase debits in Net Primary Income → deterioration in current account
32
Q

Impact of Exchange Rates on Goal of Strong and Sustainable Growth

A
  • Appreciation of AUD:
    o Demand side: Reduced international competitiveness → decreased exports → decreased aggregate demand → decreased economic activity → decreased growth
    o Supply side: Decreased cost of imports → decreased cost of production → increased production and growth
  • Depreciation of AUD:
    o Demand side: Increased international competitiveness → increased exports → increased aggregate demand → increased economic activity → increased growth
    o Supply side: Increased cost of imports → increased cost of production → decreased production and growth
33
Q

Impact of Exchange Rates on Goal of Full Employment

A
  • Appreciation of AUD: Decreased international competitiveness → decreased exports → decreased aggregate demand → decreased economic activity → decreased derived demand for labour → decreased employment
  • Depreciation of AUD: Increased international competitiveness → increased exports → increased aggregate demand → increased economic activity → increased derived demand for labour → increased employment
34
Q

Impact of Exchange Rates on Goal of Low Inflation

A
  • Appreciation of AUD:
    o Demand side: Reduced international competitiveness → decreased exports → decreased aggregate demand → moves economy away from productive capacity → decreased demand inflationary pressures
    o Supply side: Decreased cost of imports → decreased cost of production → increased productive capacity → decreased cost inflationary pressures
  • Depreciation of AUD:
    o Demand side: Increased international competitiveness → increased exports → increased aggregate demand → moves economy closer to productive capacity → increased demand inflationary pressures
    o Supply side: Increased cost of imports → increased cost of production → decreased productive capacity → increased cost inflationary pressures
35
Q

Impacts of Exchange Rates on Living Standards

A
  • Appreciation of AUD
    o Decreased employment → decreased access to goods and services and higher crime rates
    o Decreased employment → increased financial stress levels
    o Decreased inflationary pressures → increased access to goods and services
  • Depreciation of AUD
    o Increased employment → increased access to goods and services and lower crime rates
    o Increased employment → decreased financial stress levels
    o Increased inflationary pressures → decreased access to goods and services
36
Q

International Competitiveness

A
  • Measures a country’s ability to compete in global markets for goods and services on price
37
Q

Factors Affecting International Competitiveness

A
  • Productivity – output per unit of input
    o Increased productivity → increased international competitiveness
    o Decreased productivity → decreased international competitiveness
  • Production Cost – cost of labour, capital and raw materials
    o Increased production cost → decreased international competitiveness
    o Decreased production cost → increased international competitiveness
  • Availability of Natural Resources
    o Increased availability → increased ability to produce → increased international competitiveness
    o Decreased availability → decreased ability to produce → decreased international competitiveness
  • Exchange Rates
    o Appreciation of AUD → increased cost of Australian goods and services in foreign terms → decreased international competitiveness
    o Depreciation of AUD → decreased cost of Australian goods and services in foreign terms → increased international competitiveness
  • Relative Rates of Inflation
    o Lower relative rates of inflation → increased international competitiveness
    o Higher relative rates of inflation → decreased international competitiveness
38
Q

Impact of International Competitiveness on Goal of Strong and Sustainable Growth

A
  • Increased international competitiveness → increased exports → increased aggregate demand → increased production → increased economic growth
  • Decreased international competitiveness → decreased exports → decreased aggregate demand → decreased production → decreased economic growth
39
Q

Impact of International Competitiveness on Goal of Full Employment

A
  • Increased international competitiveness → increased exports → increased aggregate demand → increased production → increased derived demand for labour → increased employment
  • Decreased international competitiveness → decreased exports → decreased aggregate demand → decreased production → decreased derived demand for labour → decreased employment
40
Q

Impact of International Competitiveness on Goal of Low Inflation

A
  • Increased international competitiveness → increased exports → increased aggregate demand → increased production → moves economy closer to productive capacity → increased demand inflationary pressures
  • Decreased international competitiveness → decreased exports → decreased aggregate demand → decreased production → moved economy away from productive capacity → decreased demand inflationary pressures
41
Q

Impact of Net Foreign Debt on Current Account

A

o Increased NFD → decreased Net Primary Incomes due to higher interest repayments → deterioration in current account
o Decreased NFD → increased Net Primary Incomes due to lower interest repayments → improvement in current account

42
Q

Impact of Net Foreign Equity on Current Account

A

o Increased NFE → increased Net Primary Incomes due to higher dividends/profits → improvement in current account
o Decreased NFE → decreased Net Primary Incomes due to lower dividends/profits → deterioration in current account

43
Q

Reason for Expected Current Account deterioration

A

Increased global interest rates → increased debits in Net Primary Incomes

44
Q

Current Account balance…

A
  • Current Account Surplus
  • Current Account Deficit
45
Q

Net Foreign Debt and Exchange Rate

A
  • Appreciation of AUD → more able to service existing debt levels → reduced net foreign debt
  • Depreciation of AUD → less able to service existing debt levels → increased net foreign debt
46
Q

Supply of AUD

A

Money leaving Australia
Purchase of imports → increase supply of AUD

47
Q

Point of Difference between Net Foreign Debt and Net Foreign Equities

A

Borrowing and lending VS ownership of assets

48
Q

Impact of Change in Exchange Rate on Terms of Trade

A
  • DIRECT impact (price)
  • Appreciation → imports less expensive and exports more expensive → improve terms of trade
  • Depreciation → imports more expensive and exports less expensive → deteriorate terms of trade
49
Q

Relationship between Current Account and Capital and Financial Account

A
  • Must equal zero
  • CAFA transactions create opposite future impact on CA

Economics 3/4 (6 decks)

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