ECONOMICS AOS3 UNIT 3 Flashcards
open vs closed economy
open economy -interacts freely with other economies in the world in the form of trade (exports and imports) and finance.
A closed economy-does not interact with other economies in the world in the form of trade and finance.
Exports
transactions between economic agents in Australia & the rest of the world in process of purchasing goods and services produced in Australia.
Imports
transactions between economic agents in Australia & the rest of the world in process of purchasing goods and services produced by another nation overseas.
Trade balance
Net Exports (X – M)
Australia’s trade balance is the difference between what we export and what we import.
If balance is negative (i.e., M > X),=Trade Deficit
If balance is positive (i.e., X > M), =Trade Surplus
Trade barriers
&
Trade liberalisation
Trade barriers= impediments to free trade in form of tariffs, subsidies, quotas etc.
Trade liberalisation = removal of trade barriers / reduction in trade protection.
Why do countries engage in trade?
- Lower prices for consumers.
- Greater choice for consumers.
- Access to more resources for business & government.
- ability of businesses to achieve economies of scale.
- Increased competition & efficiency
Economies of scale
the volume that a firm needs to produce so that it is able to effectively cover its fixed costs and operate in market at a competitive level.
International competitiveness
involves local firms and producers being able to sell their comparable quality goods and services at price that are relatively low and relatively attractive against those charged by overseas rivals.
Factors that may affect International competitiveness
- Productivity
- Costs of Production – e.g. wages
- Availability of natural resources
- Exchange rates –( depreciation of the AUD, increases cost of imports and an appreciation of the AUD, decreases cost of imports)
- Relative rates of inflation
What it the link between improving levels of international competitiveness and:
Strong and sustainable economic growth?
Impr. levels of I.C = Px cheaper F.C terms = ↑ vol. of X and ↓ vol. of M = ↑ AD = ↑ production / met demand = ↑ eco act. & gro. (real GDP) / d. infl. Pres.
What it the link between improving levels of international competitiveness and:
Full Employment?
Impr. levels of I.C = Px cheaper F.C terms = ↑ vol. of X and ↓ vol. of M = ↑ AD = ↑ production / met demand = ↑ eco act. & gro. (real GDP) = ↑ DD4L = lower levels of cyclical unemployment / N.A.I.R.U – 4 – 5%.
What it the link between improving levels of international competitiveness and:
Low inflation (price stability)?
Impr. levels of I.C = Px cheaper F.C terms = ↑ vol. of X and ↓ vol. of M = ↑ AD = ↑ production / met demand = econ. closer to prod. Capac. / d. infl. Pres.
Balance of Payments graph
see graph
Balance of payments
a record of the financial transactions between economic agents of Australia and economic agents of the rest of the world.
Credit and debit
Credit: whenever money is received (movement of money from foreign countries to Australia - inflow). shown as positive in the accounts.
Debit: whenever money is paid (movement of money from Australia to foreign countries - outflow). shown as negative in the accounts.
Current Account
Records all receipts and payments of a “current” nature. ones that do not create any future obligations (i.e. a repayment on a loan)
Capital and Financial Account
Records all receipts and payments of a “capital” nature. ones that create a future obligation (i.e. repayment of debt + interest or a payment of a share of profits =dividend) & represent net change in ownership of assets and liabilities.
Current account sub accounts
1.Balance of Merchandise Trade (BoMT)
2. Net services
3. Net primary incomes
4. Net secondary incomes
Balance of Goods and Services (BoGS)
BoMT + Net Services is referred to as Balance of Goods and Services (BoGS) & represents the ‘TRADE BALANCE’.
Balance of Merchandise Trade (BoMT)
sometimes referred to as Net goods.
Value of export credits for goods or merchandise sold overseas (i.e. wool, minerals, manufactured items) minus value of import debits for goods purchased from abroad (i.e. oil, electronic equipment, and machinery).
Net services
Value of service credits received from overseas (i.e. tourism, education, transportation, construction) minus value of service debits paid aboard (i.e. for transportation, tourism and education).
Net primary incomes
Value of income credits received from overseas (i.e., wages, salaries, interest, dividends and profits) minus income debits paid out aboard (i.e. wages, salaries, interest, rent, dividends ).
Net secondary incomes
Value of secondary income credits received by our residents (i.e. non-life insurance transfers such as pensions) minus the value of secondary income debits paid aboard (such as gifts, taxes and some foreign aid donated by our residents).
Capital Account
capital transactions include net capital transfers and the net acquisition of non-produced, non-financial assets.
Capital account sub accounts
Capital transfers -generally involve net inflow of funds into Australia by permanent migrants.
Net acquisition/disposal of non–produced, non-financial assets– covers the excess of credits over debits for the sale of copyright, patents, overseas franchises (such as KFC and McDonald’s) and trademarks of a tangible nature.
Financial Account
shows how Australia funds or pays for its CAD. The balance on financial account records the value of total credits for investments and borrowings received by Australian’s from aboard (the inflow of funds) minus total debits for investments and leading by Australians abroad (the outflow of funds).
Financial accounts sub accounts
- Net direct investment (defined as 10% or above of ownership of shares)
- Net Portfolio investment
- Financial derivatives
- Other investments
- Net reserve assets
Net direct investment
(defined as 10% or above of ownership of shares)
involves recording the purchase, setting up or expansion of companies & assets in Australia by foreigners classified as credits minus similar investments overseas by Australia residents classified as debits.
Net Portfolio investment
recording value of transactions by foreign individuals purchasing Australian shares, debt and securities (credits) minus the value of similar assets purchased by our residents (debits).
Transactions involving less than 10% investment in a company.
Financial derivatives
complex financial instruments that create assets or liabilities.
Other investments
records credits (the inflow of funds or assets) minus debits (the outflow of funds or liabilities) for loans and deposits s(e.g. Deposits by ANZ in Swiss Bank accounts)
Net reserve assets
contains both RBA and government transactions involving dealings in reserves of foreign currencies, gold, special drawing rights and required contributions to the International Monetary Fund (IMF). Money received from overseas are categorised as credits on Australia’s financial account.
CAD AND CAS
Deficit: When a country is sending more money out than is coming in.
Surplus: When a country is receiving more money than it is spending
Structural influences of the Current Account Balance
Relates to AS side of economy.
1. Savings/Investment imbalance:
——Net Foreign Liabilities = Net Foreign Debt + Net Foreign Equities
2. Low level of international competitiveness due to:
a. low levels of efficiency/productivity
b. high production costs
Cyclical influences of the Current Account Balance
Relates AD side of economy:
1. Levels of disposable income impacts on spending on M.
2. Interest rates impacts on levels of borrowing & spending on M.
3. Consumer and business confidence impacts on spending on M.
4. The exchange rate impacts on levels of net exports (spending on both X and M)
5. Rates of economic growth overseas impacts on spending on net exports (i.e. X – M)
Net international investment position (NIIP)
describes extent to which Australia is financially obligated to rest of world.
made of Australia’s Net Foreign Liabilities (NFL), which is made up of Net Foreign Debt (NFD) and Net Foreign Equity (NFE).
Net Foreign debt (NFD)
calculated by looking at the net debt obligations that flow from our ‘total borrowing’ from overseas and subtracting our ‘total lending’ to overseas.
Net foreign equity (NFE)
is equal to the net equity obligation that results from foreign ownership of Australia assets (e.g. property and shares), minus the Australian ownership of foreign assets.
Composition of Net Foreign Debt (NFD)
- Private debt – result of private corporations borrowing from overseas sources, often in the form of issuing bonds. E.g., Mining companies to fund building of mines
- Public or Government Debt – results from government funding budget deficits by issuing bonds to foreign investors in international money markets
Composition of Net Foreign Equity (NFE)
Foreign investors purchasing shares in Australian companies and Domestic investors purchasing shares in Foreign companies, both looking for a return from dividends or capital gains.
Service in the form of profits or dividends
Net International Investment Position =
Net Foreign Liabilities
Net Foreign Liabilities = Net Foreign Debt + Net Foreign Equities.
Terms of Trade (TOT)
a ratio of the average prices received for Australian exports relative to the average prices paid for our imports.
↓TOT on AD
↓TOT lower national income / profits for bus &, Y & investment returns for H/H (particularly from the mining sector) = ↓ C & I due to ↓ spending on non-essential items (H/H) & ↓ spending on cap. equip (bus) = ↓ in AD
↑TOT on AD
↑TOT higher national income / profits for bus &, Y & investment returns for H/H (particularly from the mining sector) = ↑ C & I due to ↑ spending on non-essential items (H/H) & ↑ spending on cap. equip (bus) = ↑ in AD
Impact of Movements in the TOT on the CAS.
A rise or favourable movement in the TOT usually results in a(n) increase in the CAS
This is because the value of credits (Price x Quantity) for our exports increases and/or value of debits (Price x Quantity) for imports tend to decrease (BoMT + Net Services) = improving the Current Account Surplus.
Market
the main instrument for allocating scarce resources in Australia and method of answering the three basic economic questions.
Exchange rate
-measures the price or value of the Australian dollar when it is swapped for other currencies.
Trade Weighted Index:
the value of the AUD when compared to a basket of currencies of our major trading partners.
Factors that influence the Exchange rate for the AUD
- Relative interest rates
- Commodity prices
- Terms of Trade
- Demand for exports and imports
- Foreign Investment
- Relative rates of inflation
- Credit ratings
8.Speculation
Relative interest rates code
If Aust Int Rates > Foreign Int. Rates ↑ demand for AUD appreciation of AUD
If Aust Int Rates < Foreign Int. Rates ↑ supply of AUD depreciation of AUD
Demand for exports due to overseas growth code
Demand for exports due to overseas growth
↑ O/s growth ↑ spending on X ↑ demand for AUD appreciation of AUD
↓ O/s growth ↓ spending on X ↓ demand for AUD depreciation of AUD
Commodity prices and Terms of Trade code
↑ Com. Prices / ↑ TOT ↑ demand for AUD appreciation of AUD
↓ Com. Prices / ↓ TOT ↓ demand for AUD depreciation of AUD
Relative rates of inflation code
If Aust. Infl. Rate > Rest of World ↓ Int’l comp. ↓ X & ↑ M ↓ demand for AUD & ↑ supply of AUD depreciation of AUD
If Aust. Infl. Rate < Rest of World ↑ Int’l comp. ↑ X & ↓ M ↑ demand for AUD & ↓ supply of AUD appreciation of AUD
Foreign Investment
code
↑ for. Invest ↑ financial capital inflow demand for AUD appreciation of AUD
↓ for. Invest ↓ financial capital inflow demand for AUD depreciation of AUD
Currency Speculation
code
If AUD undervalued investors / currency speculators ↑ demand of AUD appreciation of AUD
If AUD overvalued investors / currency speculators ↑ supply of AUD depreciation of AUD
Credit rating
code
High or rising Cred. Rat. ↑ investment in Aust ↑ demand for AUD appreciation of AUD
Low or falling Cred. Rat. ↓ investment in Aust ↓ demand for AUD depreciation of AUD
Effect of an appreciation on CAS
↓ in Int’l Comp = X more expensive in FC terms & M cheaper in AUD terms = ↓ in value of credits (due to ↓X) and ↑ value of debits (due to ↑M) in BoMT and Net Services deterioration in CAS.
Effect of a depreciation on CAS
↑ in Int’l Comp = X cheaper in FC terms & M more expensive in AUD terms = ↑ in value of credits (due to ↑X) and ↓ value of debits (due to ↓ M) in BoMT and Net Services improvement in CAS.
Effect of an appreciation on SSEG
↓ in Int’l Comp = X more expensive in FC terms & M cheaper in AUD terms = ↓X and ↑ M = ↓ net exports = ↓AD = ↓ volume of production as p’ers ↓ output = lower levels of eco act and growth h/ever reduced demand infl. pressures.
Effect of a depreciation on SSEG
↑ in Int’l Comp = X cheaper in FC terms & M more expensive in AUD terms = ↑ X and ↓ M = ↑ net exports = ↑ AD = ↑ volume of production as p’ers ↑ output = higher levels of eco act and growth & upward demand infl. pressures.
Effect of an appreciation on FE
↓ in Int’l Comp = X more expensive in FC terms & M cheaper in AUD terms = ↓X and ↑ M = ↓ net exports = ↓AD = ↓ volume of production as p’ers ↓ output = lower DD4L = higher cyclical unemployment.
Effect of a depreciation on FE
↑ in Int’l Comp = X cheaper in FC terms & M more expensive in AUD terms = ↑ X and ↓ M = ↑ net exports = ↑ AD = ↑ volume of production as p’ers ↑ output = = higher DD4L = lower cyclical unemployment.
Effect of an appreciation on Low and stable Inflation
↓ in Int’l Comp = X more expensive in FC terms & M cheaper in AUD terms = ↓X and ↑ M = ↓ net exports = ↓AD = ↓ volume of production as p’ers ↓ output and reduced demand infl. pressures.
Effect of a depreciation on Low and stable Inflation
↑ in Int’l Comp = X cheaper in FC terms & M more expensive in AUD terms = ↑ X and ↓ M = ↑ net exports = ↑ AD = ↑ volume of production as p’ers ↑ output and increased demand infl. pressures.
Key economic indicators contemporary
eco. growth- 1.5%
inflation- 3.6%
unemployment rate- 3.8%
Factors that influence terms of trade
- Changes in Global demand for Australia’s exports:
- Commodity prices (top three exports – Iron Ore, Coal, Natural Gas)
- Production costs in trading partners.
