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).