ECN

Question 1

What do the following letters represent in the Five-Sector Circular Flow Model of Income?

Y
C
S
T
M
O
I
G
X

Answer 1

Y = Income
C = Consumer Expenditure
S = Savings
T = Taxation
M = Imports
O = Value of Output Production
I = Investment Expenditure
G = Government Expenditure
X = Exports
X - M = Net Exports

Question 2

What is the formula for GDP and what else can it be used for?

Answer 2

GDP = C+ I + G + (X - M). It is also used to measure Aggregate Supply and Demand

Question 3

What is the difference between Aggregate S/D and regular S/D.

Answer 3

Aggregate S/D refers to the Supply and Demand of an entire economy, rather than just for a specific Good or Service

Question 4

What is a MNC?

Answer 4

MNCs, or Multinational Corporations, are companies that operate in several countries, but are managed from one country.

Question 5

How is Standard of Living impacted by the foreign sector?

Answer 5

When a country has more imports, there SoL increases. When they reduce their SoL decreases. This is for any non self-sufficient economy.

Question 6

What is Intra-Company Trade?

Answer 6

Trade between affliates of one large organisation. Eg Trade between a MNC’s subsidaries.

Question 7

What are economies of scale?

Answer 7

Cost efficiencies that are derived by producing a large volume of standarised products.

Question 8

Define External Stability

Answer 8

External Stability is the situation in which there are no unwanted movements of foreign reserves in the balance of payments.

Question 9

Define Absolute Advantage

Answer 9

Absolute Advantage is the ability of a nation to produce commodities more efficiently than another nation.

Question 10

What is Specialisation?

Answer 10

Specialisation is the specific use of a resource in narrowly defined economic activities.

Question 11

Define Comparative Advantage

Answer 11

The Ability of a nation to produce a product at a lower opportunity cost of production than another nation.

Question 12

Define Competitive Advantage

Answer 12

The trade advantage obtained through the capacity of a nation’s industries to innovate and upgrade

Question 13

What is the Law of One Price?

Answer 13

It is a measure of economic integration, based on the theory that prices of similar products traded in linked markets should converge to one price.

Question 14

What are the two types of the TWI, and what is the difference.

Answer 14

Nominal - focuses on trading currency per unit

Real - focuses on trading G&Ss per unit. Considered more accurate as it can measure inflation.

Question 15

What are Bilateral Exchange Rates

Answer 15

Average currency between 2 countries relative to trading.

Question 16

What are the types of Exchange Rates

Answer 16

Fixed / Pegged and Floating

Question 17

When is a fixed Exchange Rate better?

Answer 17

If the country believes their government or economic processes may fail.

Question 18

What can be the advantages of a floating exchange rate?

Answer 18

Changes in the global economic situation can make an individual economy more valuable and hence, gain significant value from a change in exchange rate.

Question 19

Define Internal Stability?

Answer 19

A state of the economy in which there is full employment and acceptable levels of inflation

Question 20

Define External Stability

Answer 20

There are no unwanted movements of foreign reserves in the balance of payments

Question 21

Define Balance of Payments:

Answer 21

A summary of a nation’s payments to, and receipts from, the rest of the world over a year

Question 22

Define Factor Endowment

Answer 22

The supply of the factors of production that exists in a country

Question 23

What are the 5 globalisation markets?

Answer 23

Consumer Markets, Production Markets, Labour Markets, Capital Mobility, Technology Transfers

Question 24

Define Capital Mobility?

Answer 24

Capital mobility refers to the ease with which financial assets or investments move across borders, allowing countries to attract foreign direct investment (FDI) and financial flows.

Question 25

Define exchange rate?

Answer 25

Exchange rate is the price of one currency in terms of another

Question 26

What is Terms of Trade?

Answer 26

TOT = Index of AVG Export Prices / Index of AVG Import Prices x 100

Question 27

What happens when TOT falls?

Answer 27

Exports become cheaper, imports more expensive (lower standard of living)

Question 28

What happens when TOT rises?

Answer 28

Exports more expensive, imports cheaper (higher standard of living)

Question 29

What is the TWI?

Answer 29

The Trade-Weighted Index (TWI), is the price of the Australian dollar in terms of a group (or ‘basket’) of foreign currencies based on their share of trade with Australia.

Question 30

What is the benefit of the TWI, over bilateral exchange rates?

Answer 30

While bilateral exchange rates are the most frequently quoted exchange rates, the TWI provides a broader measure of whether the Australian dollar is appreciating or depreciating against the currencies of its trading partners.

Question 31

What is the difference between Patterns vs Trends vs Relationships.

Answer 31

Patterns: data re-occurring or an ‘exception’ (out of the ordinary).

Trends: expected outcomes or predictions based on current sequence of events (increase, decrease, fluctuations, constant

Relationships: Why is the data like this? What happened in an economy to make this effect or what will happen based on this effect?

Question 32

What are the differences between direct and indirect effects on changes in exchange rate?

Answer 32

Direct Effect is the immediate change to the price of goods.

Indirect Effects are the changes due to inflation and changes in economic activity.

Question 33

What will happen if Demand for AUD increases?

Answer 33

Appreciation of AUD

Question 34

What will happen if Demand for AUD decreases?

Answer 34

Depreciation of AUD

Question 35

What will happen if supply of AUD decreases?

Answer 35

Appreciation of AUD

Question 36

What will happen if supply of AUD increases?

Answer 36

Depreciation of AUD

Question 37

What is the Export/Import price index?

Answer 37

A statistical measurement used by economists to proudice an index number used to monitor fluctuations in Export/Import prices.