Macro (External Stability, Equity)

Question 1

Goal of Equity in Income Distribution

Answer 1

The goal of equity in income distribution is achieved when every person has access to basic goods and services, enjoys a reasonable standard of living and absolute poverty is avoided.

Question 2

Goal of External Stability

Answer 2

The goal of external stability is achieved if Australia is living within its means and able to meet its international financial obligations. Generally this is indicated by a low current account deficit (CAD) to gross domestic profit ratio (GDP) (some say around three to four percent), sustainable net foreign debt (NFD) and a stable exchange rate.

Question 3

CAD

Answer 3

The current account deficit is a statistical record of the financial transactions between Australia and the rest of the world, representing total credits - total debits.

Question 4

Calculating Balance of Payments

Answer 4

Net goods + Net Services + Net Primary Incomes + Net Secondary Incomes

Question 5

TWI

Answer 5

Trade weight Index is a general measure of Australia’s exchange rate. It represents the value of our dollar against a basket of foreign currencies weighted according to their relative importance to Australia’s trade.

Question 6

Measurement for equity in income distribution

Answer 6

ABS survey of household income and income distribution;

• Covers 0.2% of the population
• Results are sorted into ascending order to create the “spread of incomes”
• The spread is then divided into equal groups for comparisons (deciles and quintiles)
• Calculations are then made to determine the percentage received by each group
• The results are then represented in the Lorenz Curve

Question 7

Lorenz Curve

Answer 7

Towards the diagonal = Closer to total equity

Away from diagonal = Closer to total inequity

Question 8

Gini Coefficient

Answer 8

0 = Total Equity
1 = Total inequity

Question 9

NFD

Answer 9

NFD is the difference in value between what Australia has borrowed from and owes overseas minus what Australia has lent or invested abroad.
The two main types of overseas borrowers are public/government (13%) and private/companies (87%)

Question 10

Terms of Trade

Answer 10

Average price of exports compared to average price of imports.

Question 11

Australia’s Terms of Trade

Answer 11

• Record high TOT has been driven by strong demand from china and India as a result of their strong growth for iron and coal
• As these economies and growth rates have slowed, so too has the demand for Australia’s commodities
• Coupled with a slump in demand, the supply of iron ore has increased due to many new mines being opened, creating a surplus of iron ore.
• Falling demand and rising supply has the iron ore price fall over 50% in the past 12 months, contributing to this unfavorable movement in terms of trade.

Question 12

Excise Tax effect on equity

Answer 12

• Sales Tax, e.g GST impacts 10% of a persons spending but because poor people are likely to spend all their income to survive they pay a higher % of income in tax
• Alcohol/Cigarette taxes, equity decreases because people in the bottom quintile are more likely to smoke
• Petrol taxes, decreases equity as poorer people or more likely to have older less fuel efficent cars

Question 13

Levels of income

Answer 13

1. Private income
2. Gross income
3. Disposable household incomes
4. Social wage
5. Final Income

Question 14

Social wage

Answer 14

non cash benefits of gov provided services, public schools, hospitals, subsides, public transport

Question 15

Transfer income

Answer 15

direct cash benefits provided to needy families and individuals

Question 16

Unearned income

Answer 16

rent, interest, dividends (ownership of assets)

Question 17

Factor incomes

Answer 17

combination of earned and unearned income

Question 18

Earned income

Answer 18

wages and salaries

Question 19

Levels of income

Answer 19

1. Private Income
2. Gross Income
3. Disposable Household Incomes
4. Social Wage
5. Final Income

Question 20

TWI NFD

Answer 20

Increase in NFD lets to an increase in interest payments overseas, increasing the demand for Forex (foreign currencies) to pay for our interest. This increases foreign currency values which decrease $AUD in relative terms
A decrease in TWI will increase NFD as the burden becomes heavier when measured against overseas currencies.

Question 21

Floating Exchange Rate

Answer 21

Floating Exchange Rate is where the price of one nations currency against that of others is established by the forces of supply and demand for the currency in the international market for foreign exchange.

Question 22

Equity vs Efficiency Trade Offs

Answer 22

When the economy shifts towards efficiency there is a greater incentive to work and it is likely to achieve eco growth, low inflation and full employment, however a shift towards efficiency may cause social division crime which increases hardcore unemployment and undermines the other economic goals.

Question 23

Australia’s Permanent Adverse AS Factors

Answer 23

Adverse supply side conditions (e.g low productivity, high wage costs) tend to make Australian exports less competitive in the international market.
In recent history Australia as endured high costs and low efficiency compared to overseas competitors, resulting in approximately -3% permanent increase to the CAD:GDP ratio.

Question 24

CAD to GDP Ratio

Answer 24

• CAD represents total credits - total debits
• CAD measured against the economy should not be to large (-3 to -4%)
• Bigger CAD:GDP ratios (-6%+) show external instability which may jepadise material living standards and vise versa

Question 25

TWI CAD

Answer 25

An increase to TWI means out exports become less price attractive, leading to an increase in the CAD
An increase to the CAD indicates a decrease in demand for our exports, less nations are using $AUD to buy our products, leading to a decrease in the TWI
This is a correcting cycle

Question 26

CAD NFD

Answer 26

Increase to CAD means we might be borrowing to cover the gap, increasing our NFD.
An increase to NFD requires an increase in interest payments on the NFD, these interest payments are a debit on primary incomes, increase our CAD
This is an unfavorable cycle. (especially when buying goods such as weapons.)

Question 27

Calculating the balance of capital account

Answer 27

Net capital transfers + Net acquisition of non-produced financial assets

Question 28

Calculating the balance on financial account

Answer 28

Net investment + Net reserve assets

Question 29

Limitations of using NFD

Answer 29

No one can say with any certainty what represents a good outcome, what an acceptable level of debt is, and what is good debt.

Question 30

Absolute poverty

Answer 30

Absolute poverty is deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health and shelter.

Question 31

Relative poverty

Answer 31

Relative poverty is used to measure wealth in relationship to other members of a distinct population.

Question 32

Poverty Line

Answer 32

The poverty line represents a measure where people with incomes that fall below this benchmark would be living with material deprivation.