Macroeconomics part 2 Flashcards
What is the goal of external stability?
The goal of external stability is achieved if Australia is living within its means and able meet its international financial obligations.
Generally this is indicated by low C.A.D to GDP ratio, sustainable in NFD and a stable exchange rate.
How do you measure External stability?
Current Account deficit
What is the CAD?
Current Account Deficit
- It is a statistical record of the financial transactions between Aus and the rest of the world.
- The CAD is one half of the Balance of Payments.
- When the Capital account is in surplus, the Current account is in deficit and approx by the same amount.
Four Sub-account of the Current Account:
Net Goods
It is the difference in total value between export credits for goods sold overseas, minus import debits for goods purchased abroad.
(credits for goods minus debits for goods)
Four Sub-accounts of the CA: Net Services
It is equal to the difference between the value of service credits received by Aus, minus service debits paid abroad.
(credits for services minus debits for services)
Four Sub-accounts of the CA: Net Primary Incomes
It is the difference in value between income credits received from overseas, minus income debits paid out abroad.
(credits for incomes minus debits for incomes)
Wages, interest, dividends, profits
Four Sub-accounts of the CA: Secondary incomes
Credits minus debits
Pensions
Credit
money received for exports sent overseas
debit
imports to aus from overseas
how do you calculate the CAD?
Net Goods + Net Services + Net Primary Incomes + Net Secondary Incomes = Overall balance on CA
note: in Aus’ case, the result turns out to be a large CAD
Balance of payments: Capital Account
capital transactions include
Net Capital Transfers (net inflow of funds to Aus by permanent migrants
and the
Net Acquisition Of Non-Produced, Non-Financial Assets (covers the excess of credits over debits for the sale of copyright, patents, franchises and trademarks of a tangible nature)
Balance of Payments: financial account
Records transactions involving foreign financial assets and liabilities.
Records excess total credits for investment funds received by Aus from abroad, minus total debits for investment by Aus abroad.
What is the Exchange rate
the exchange rate measures the price/value of Australian dollar when swapped for other currencies.
As previously had a fixed exchange rate system, now uses a floating exchange rate.
What is the Floating Exchange rate
Where the Aus dollar is decided in the foreign exchange market by currency buyers (demanders) and currency sellers (suppliers)
What does it mean/ happens when the exchange rate appreciates?
when there is less selling and more buying of the currency following:
- stronger than expected trade figures
- terms of trade improvements
- strong overseas eco activity
- rises in domestic interest rates
- improved price competitiveness of our economy against overseas.
What does it mean/ happens when the exchange rate depreciates?
when there is more selling and less buying of the dollar following:
- periods of rapid domestic economic growth.
- strong consumer and business local confidence
- local interest rate cuts
- global recession
- depressed commodity prices
- release of worse than expected trade figures
What is a consequence of a floating exchange rate?
the market forces can create instability and unpredictability in exchange rate for the AUD
What are the two measures of the exchange rate?
- the TWI (trade weighted Index)
- Individual exchange rates
What is the NFD
Net Foreign Debt
Indicates Aus’ external position.
The difference between what Aus has borrowed from and owes overseas minus what Aus has lent or invested abroad.
NFD - Public sector or official Government borrowing component
The net debt of the Federal and State Governments.
It is what taxpayers have to payback and is a burden on the economy.
As it increases it becomes a burden to future generations and large debt repayments.
NFD - Private sector or non-official borrowing
The net debt of companies and individuals.
This debt has been borrowed in the market place and usually for sound/smart economic and business reasons.
Relationship between CAD and NFD
A CAD rise means Aus has a greater reliance on overseas borrowing and foreign capital inflow.
Increased borrowing, makes income repayments heavier, causing CAD to increase.
Relationship between AUD and CAD
When the AUD rises, exports become less attractive abroad while to us, imports are more attractive. Thus, CAD tends to rise. The bigger the CAD, the greater downward pressure on the AUD , helping to reduce CAD as exports become more attractive against imports.
Relationship between the NFD and the AUD
Large and unsustainable rise in unproductive foreign debt depresses the exchange rate, means bigger interest repayments abroad.
Involves selling more AUD in the foreign exchange market.
A lower exchange rate causes burden of debt servicing to become heavier when measured in terms of overseas currencies.
demand side factor impact on External Stability
Generally any demand factor (C,I,G,G,X,M) that would cause an increase in AD will tend to cause an increase in consumption spending, a part of which must be imports.
therefore ^ in AD = ^ M = ^ CAD
Supply side factors impact on External stability
unfavourable supply side conditions (low productivity, high wage costs etc.) tend to make Aus exports less competitive in the international market.
therefore ^ RULC = ^uncompetitiveness = ^ CAD
Government policies effecting External stability
Protectionist policies:
- tariffs (tax on imports)
- Quotas (limits on import numbers)
- subsidies (payments to local producers)
Government policies effecting External stability - Problems
- Other countries respond with similar policies
2. inefficient because promoting industries who cannot compete and needs to be administrated
Government policies effecting External stability - benefits
- we compete on an “even playing field” promoting efficiency
- inefficient businesses leave the sector - automatically raises average efficiency
- overseas markets open to Aus exports
The Goal of equity in income distribution
Achieved when:
every person has access to basic goods and services, enjoys a reasonable standard of living and absolute poverty is avoided
The four types of Income - Earned Income
wages and salaries and represents a reward for work, personal effort and the sale of mental talents and physical power
The four types of Income - unearned income
might involve receiving interest, dividends, profit and rent, income arising from ownership of assets or wealth including property shares with little or no personal effort
The four types of Income - factor incomes
gained by those taking part in production or selling property/resources. Combination of earned and unearned
The four types of Income - transfer incomes
government welfare assistance or direct cash benefits provided to needy families and individuals
measuring income distribution
the ABS conducts a survey of households to determine the level of income distribution, measured at number of different stages:
- private income
all income from personal sources, wages, interest, profits PLUS direct gov. cash payments) - Gross income
MINUS personal income tax - disposable household incomes
PLUS indirect Gov. benefits (e.g. education, health) - Social wage
MINUS indirect taes (eg GST) - Final incomes
- = Less equity - to 5. more equity
lorenz curve
depicts the degree of income or wealth equality or inequality.
The greater the deviation of the income or wealth lines from the diagonal line of absolute equality, the greater the inequalities in income or wealth distribution in a country.
Gini coefficient
It is the numerical value given to the information shown in the lorenz curve.
GC= A/A=B
GC = 0 = perfect equality
GC = 0 = perfect inequality
As the GC moves between 0 and 1 it will become either more or less equitable
Measuring Poverty: Absolute Poverty
the absence of real necessities required to sustain life. Commonly found in third world countries and indigenous communities. Inadequate access to food, shelter and clothing
Measuring Poverty: relative poverty
Where people’s material living standards are low or sever relative to some changing level deemed acceptable by society
Measuring Poverty: Henderson poverty line
Those under the line are considered to be in poverty.
Using disposable income (after tax but before non-cash benefits) to determine if consumption level is bellow the certain bench mark ‘poverty line’
Limitations of measuring personal income distribution
Definitional problems
- equity in income distribution not defined one way
Statistical problems
- accuracy due to errors, false info, unreliability
subjectivity of measures
- accuracy debate of measurement
Relationship between Equity and Full employment
Full employment will help achieve the goal of Equity, this is because as people move from unemployment to paid work, this increases the income for the bottom quartile
Relationship between Equity and Sustainable Economic Growth
Sustainable eco growth will assist in achieving Full employment.
when there is overseas shock e.g. Collapse of China demand that decreases exports then decreases AD then increases unemployment then worsens equity.
Relationship between Equity and Low inflation
Low inflation helps achieve the goal of Equity.
As when we have high inflation, those in the lowest quintiles are least likely to negotiate wages which keep up with inflation.
Therefore all wages are likely to increase in an inflationary period, however, those in the top quintiles increase by a greater amount, increasing their share of total income, worsening equity
Excise tax
taxes on items such as petrol, tobacco and alcohol. Usually used to try and reduce consumption. Sales taxes and especially excise taxes worse equity
how does Excise taxes worsen Equity: Sales tax
example. GST impact 10% of a persons spending but because poorer people are likely to spend all their income to survive they therefore pay higher % of income on tax
how does Excise taxes worsen Equity: Alcohol and cigarette Taxes
These will worsen equity because for people in bottom quintile, a greater % of weekly shop is likely to be spent on cigarettes
how does Excise taxes worsen Equity: Petrol taxes
Worsen equity because poorer people have generally older cars, such as in outer suburbs and can’t afford housing near public transport
Balance on Financial Account: Net Direct Investment
purchase or expansion of companies and assets in Aus by foreigners, or similar investments overseas by Aus
Balance on Financial Account: Net Portfolio Investment
transactions into and out of Aus involving shares, debt and securities
Balance on Financial Account: other investment
credits or assets minus debits or liabilities for loans, deposits and trade credits
Balance on Financial Account: Reserve assets
RBA and Gov transactions involving dealings in reserves of foreign currencies, gold, special drawing rights and required contributions to the IMF. Money received from overseas are categorised as credits or assets, while overseas payments are categorised as debits or liabilities on Aus’ financial account.
Balance on Financial Account: Net errors and omissions
reflects inaccuracies in the other calculations and estimations of transactions in the financial account.
Balance on the Capital account: Capital transfers
involve net inflow of funds to Aus by permanent migrants
Balance on the Capital Account: Net acquisition of non-produced, non-financial assets
covers the excess of credits over debits for the sale of copyright, patents, franchises and trademarks of a tangible nature.
terms of trade
refers to the ratio of prices the world pays for Australian exports relative to the prices we pay the world for our imports
RULC
Real Unit Labour Costs
represent the average level of wages and ‘on costs’ per unit of output produced compared with trends in average prices received by businesses for output sold.
What are the categories calculated in the Financial account?
Net direct Investment Net portfolio investment Other investments Reserve assets Net errors and omissions
Balance of Payments account
An annual statistical record of the money value of different types of transactions between Aus and the rest of the world.
Different types of Income
Personal income
- personal incomes prior to government efforts to redistribute income evenly
Gross income
- income after the receipt of welfare benefits before tax
Disposable Household income
- income after the receipt of means-tested welfare payments and after the payment of progressive personal income taxes
Social wage
- income after taking into account welfare payments, progressive taxes and the value of gov services provided free or at subsidised price
Final incomes
- income after the payment of direct and indirect taxes, welfare benefits and provision of gov services.
Equity and efficiency
Equity = more equal income distribution and less efficiency (less incentive to work harder)
Efficiency = less equal income dist. And therefore greater incentives to work
When moving towards efficiency away from equity, economy is achieving: Eco growth, low inflation and full employment
If efficiency is too great, there can be social division, crime
Equivalence scales
A range of property lines for different combinations of individuals, to show the same degree of poverty.
Can create controversy
Used in some Henderson poverty lines
International competitiveness
Local firms and producers being able to compete with rivals from overseas, with out government protection or special financial assistance
