Macro (External Stability, Equity) Flashcards
Goal of Equity in Income Distribution
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.
Goal of External Stability
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.
CAD
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.
Calculating Balance of Payments
Net goods + Net Services + Net Primary Incomes + Net Secondary Incomes
TWI
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.
Measurement for equity in income distribution
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
Lorenz Curve
Towards the diagonal = Closer to total equity
Away from diagonal = Closer to total inequity
Gini Coefficient
0 = Total Equity 1 = Total inequity
NFD
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%)
Terms of Trade
Average price of exports compared to average price of imports.
Australia’s Terms of Trade
- 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.
Excise Tax effect on equity
- 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
Levels of income
- Private income
- Gross income
- Disposable household incomes
- Social wage
- Final Income
Social wage
non cash benefits of gov provided services, public schools, hospitals, subsides, public transport
Transfer income
direct cash benefits provided to needy families and individuals
Unearned income
rent, interest, dividends (ownership of assets)
Factor incomes
combination of earned and unearned income
Earned income
wages and salaries
Levels of income
- Private Income
- Gross Income
- Disposable Household Incomes
- Social Wage
- Final Income
TWI NFD
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.
Floating Exchange Rate
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.
Equity vs Efficiency Trade Offs
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.
Australia’s Permanent Adverse AS Factors
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.
CAD to GDP Ratio
- 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
TWI CAD
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
CAD NFD
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.)
Calculating the balance of capital account
Net capital transfers + Net acquisition of non-produced financial assets
Calculating the balance on financial account
Net investment + Net reserve assets
Limitations of using NFD
No one can say with any certainty what represents a good outcome, what an acceptable level of debt is, and what is good debt.
Absolute poverty
Absolute poverty is deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health and shelter.
Relative poverty
Relative poverty is used to measure wealth in relationship to other members of a distinct population.
Poverty Line
The poverty line represents a measure where people with incomes that fall below this benchmark would be living with material deprivation.
