Macroeconomics part 2

Question 1

What is the goal of external stability?

Answer 1

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.

Question 2

How do you measure External stability?

Answer 2

Current Account deficit

Question 3

What is the CAD?

Answer 3

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.

Question 4

Four Sub-account of the Current Account:

Net Goods

Answer 4

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)

Question 5

Four Sub-accounts of the CA: Net Services

Answer 5

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)

Question 6

Four Sub-accounts of the CA: Net Primary Incomes

Answer 6

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

Question 7

Four Sub-accounts of the CA: Secondary incomes

Answer 7

Credits minus debits

Pensions

Question 8

Credit

Answer 8

money received for exports sent overseas

Question 9

debit

Answer 9

imports to aus from overseas

Question 10

how do you calculate the CAD?

Answer 10

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

Question 11

Balance of payments: Capital Account

Answer 11

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)

Question 12

Balance of Payments: financial account

Answer 12

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.

Question 13

What is the Exchange rate

Answer 13

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.

Question 14

What is the Floating Exchange rate

Answer 14

Where the Aus dollar is decided in the foreign exchange market by currency buyers (demanders) and currency sellers (suppliers)

Question 15

What does it mean/ happens when the exchange rate appreciates?

Answer 15

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.

Question 16

What does it mean/ happens when the exchange rate depreciates?

Answer 16

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

Question 17

What is a consequence of a floating exchange rate?

Answer 17

the market forces can create instability and unpredictability in exchange rate for the AUD

Question 18

What are the two measures of the exchange rate?

Answer 18

• the TWI (trade weighted Index)

- Individual exchange rates

Question 19

What is the NFD

Answer 19

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.

Question 20

NFD - Public sector or official Government borrowing component

Answer 20

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.

Question 21

NFD - Private sector or non-official borrowing

Answer 21

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.

Question 22

Relationship between CAD and NFD

Answer 22

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.

Question 23

Relationship between AUD and CAD

Answer 23

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.

Question 24

Relationship between the NFD and the AUD

Answer 24

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.

Question 25

demand side factor impact on External Stability

Answer 25

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

Question 26

Supply side factors impact on External stability

Answer 26

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

Question 27

Government policies effecting External stability

Answer 27

Protectionist policies: - tariffs (tax on imports) - Quotas (limits on import numbers) - subsidies (payments to local producers)

Question 28

Government policies effecting External stability - Problems

Answer 28

1. Other countries respond with similar policies | 2. inefficient because promoting industries who cannot compete and needs to be administrated

Question 29

Government policies effecting External stability - benefits

Answer 29

1. we compete on an "even playing field" promoting efficiency 2. inefficient businesses leave the sector - automatically raises average efficiency 3. overseas markets open to Aus exports

Question 30

The Goal of equity in income distribution

Answer 30

Achieved when: every person has access to basic goods and services, enjoys a reasonable standard of living and absolute poverty is avoided

Question 31

The four types of Income - Earned Income

Answer 31

wages and salaries and represents a reward for work, personal effort and the sale of mental talents and physical power

Question 32

The four types of Income - unearned income

Answer 32

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

Question 33

The four types of Income - factor incomes

Answer 33

gained by those taking part in production or selling property/resources. Combination of earned and unearned

Question 34

The four types of Income - transfer incomes

Answer 34

government welfare assistance or direct cash benefits provided to needy families and individuals

Question 35

measuring income distribution

Answer 35

the ABS conducts a survey of households to determine the level of income distribution, measured at number of different stages: 1. private income all income from personal sources, wages, interest, profits PLUS direct gov. cash payments) 2. Gross income MINUS personal income tax 3. disposable household incomes PLUS indirect Gov. benefits (e.g. education, health) 4. Social wage MINUS indirect taes (eg GST) 5. Final incomes 1. = Less equity - to 5. more equity

Question 36

lorenz curve

Answer 36

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.

Question 37

Gini coefficient

Answer 37

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

Question 38

Measuring Poverty: Absolute Poverty

Answer 38

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

Question 39

Measuring Poverty: relative poverty

Answer 39

Where people's material living standards are low or sever relative to some changing level deemed acceptable by society

Question 40

Measuring Poverty: Henderson poverty line

Answer 40

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'

Question 41

Limitations of measuring personal income distribution

Answer 41

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

Question 42

Relationship between Equity and Full employment

Answer 42

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

Question 43

Relationship between Equity and Sustainable Economic Growth

Answer 43

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.

Question 44

Relationship between Equity and Low inflation

Answer 44

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

Question 45

Excise tax

Answer 45

taxes on items such as petrol, tobacco and alcohol. Usually used to try and reduce consumption. Sales taxes and especially excise taxes worse equity

Question 46

how does Excise taxes worsen Equity: Sales tax

Answer 46

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

Question 47

how does Excise taxes worsen Equity: Alcohol and cigarette Taxes

Answer 47

These will worsen equity because for people in bottom quintile, a greater % of weekly shop is likely to be spent on cigarettes

Question 48

how does Excise taxes worsen Equity: Petrol taxes

Answer 48

Worsen equity because poorer people have generally older cars, such as in outer suburbs and can't afford housing near public transport

Question 49

Balance on Financial Account: Net Direct Investment

Answer 49

purchase or expansion of companies and assets in Aus by foreigners, or similar investments overseas by Aus

Question 50

Balance on Financial Account: Net Portfolio Investment

Answer 50

transactions into and out of Aus involving shares, debt and securities

Question 51

Balance on Financial Account: other investment

Answer 51

credits or assets minus debits or liabilities for loans, deposits and trade credits

Question 52

Balance on Financial Account: Reserve assets

Answer 52

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.

Question 53

Balance on Financial Account: Net errors and omissions

Answer 53

reflects inaccuracies in the other calculations and estimations of transactions in the financial account.

Question 54

Balance on the Capital account: Capital transfers

Answer 54

involve net inflow of funds to Aus by permanent migrants

Question 55

Balance on the Capital Account: Net acquisition of non-produced, non-financial assets

Answer 55

covers the excess of credits over debits for the sale of copyright, patents, franchises and trademarks of a tangible nature.

Question 56

terms of trade

Answer 56

refers to the ratio of prices the world pays for Australian exports relative to the prices we pay the world for our imports

Question 57

RULC

Answer 57

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.

Question 58

What are the categories calculated in the Financial account?

Answer 58

``` Net direct Investment Net portfolio investment Other investments Reserve assets Net errors and omissions ```

Question 59

Balance of Payments account

Answer 59

An annual statistical record of the money value of different types of transactions between Aus and the rest of the world.

Question 60

Different types of Income

Answer 60

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.

Question 61

Equity and efficiency

Answer 61

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

Question 62

Equivalence scales

Answer 62

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

Question 63

International competitiveness

Answer 63

Local firms and producers being able to compete with rivals from overseas, with out government protection or special financial assistance