Task 2 - Australia's Place in the Global Economy

Question 1

define ‘appreciation’

Answer 1

An increase in the value of an economy’s currency in terms of another.

Question 2

define ‘balance of payments’

Answer 2

The record of the transactions between Australia and the rest of the world given a certain period.

Question 3

define ‘bilateral trade agrrement’

Answer 3

An agreement between two economies to lower tariff levels

Question 4

define ‘bilateral trade agrrement’

Answer 4

An agreement between two economies to lower protection levels to increase trade flows.

Question 5

define ‘capital and financial account’

Answer 5

Records the borrowing, lending, sales and purchases of assets between Australia and the rest of the world.

Question 6

define ‘commodity’

Answer 6

A raw material or primary agricultural product that can be bought and sold.

Question 7

define ‘composition of trade’

Answer 7

What is being traded between two countries.

Question 8

define ‘depreciation’

Answer 8

A decrease in the value of an economy’s currency in terms of another.

Question 9

define ‘deregulation’

Answer 9

The removal of government controls over an industry that is intended to make business more responsive to market forces.

Question 10

define ‘current transfers’

Answer 10

Transactions where goods, services or financial items are traded without something of economic value being received in return.

Question 11

define ‘exchange rate’

Answer 11

The price of one currency in terms of another economy’s currency.

Question 12

define ‘exports’

Answer 12

Goods or services that are produced domestically and purchased by overseas.

Question 13

define ‘derivatives’

Answer 13

A product which value is dependant on the value of an underlying asset (e.g. commodity or currency).

Question 14

define ‘floating exchange rate’

Answer 14

The value of an economy’s currency is determined by the forces of demand and supply in foreign exchange markets.

Question 15

define ‘direction of trade’

Answer 15

The countries in which another country chooses to trade with.

Question 16

define ‘foreign exchange market’

Answer 16

Market in which currencies are traded.

Question 17

define ‘free trade’

Answer 17

A situation where there are no artificial barriers to trade imposed by governments for the purpose of shielding domestic producers from foreign competitors.

Question 18

define ‘gross domestic product (GDP)’

Answer 18

The total market value of all final goods and services produced in an economy over a period of time.

Question 19

define ‘floating exchange rate’

Answer 19

The value of an economy’s currency is determined by the forces of demand and supply in foreign exchange markets.

Australia has had a floating exchange rate since December 1983.

Question 20

define ‘managed exchange rate’

Answer 20

An exchange rate system where the value of the currency is determined or substantially influenced by central bank intervention in the foreign exchange market, but where the level of exchange is not held at a permanently fixed level.

Question 21

define ‘foreign exchange market’

Answer 21

Market in which currencies are traded.

Question 22

Assess the impact of recent changes in the global economy on Australia’s trade and financial flows.

Answer 22

2000-2010 → sustained $A appreciation

2010-2020 → depreciation (US $0.70 - $0.80)

2001 → USD $0.47

2003 → appreciation (↑ commodity prices)

2008 → depreciation GFC

2009 → AUS government sold $3.4bn $A as the currency recovered

2011 → peak: US$1.10 and 79 on TWI

COVID (march 2020) → US $0.55

commodity prices = critical role in volatility of exchange rate

2000s (resource boom) → 40% ↑ commodity prices and 5% ↑ $A

**look also at trade weights for China, US and Europe from 2018-2020.

Question 23

Examine the effects of changes in trade and financial flows on Australia’s economic performance

BOGS

Answer 23

**already established depreciation

Exports/Imports and CAD:
   - increase exports (more 
     price competitive)
   - decrease imports (non- 
      competitive)
   - worsen CAD

Importing Competing Industries:
   - become more price- 
     competitive
   - increase domestic 
      employment in the 
      traded G&S industry
   -increased econ. growth

Economic Growth:
   - decreased imports
   - increased exports
         - together = increased          
           economic growth

Living Standards:
   - lost purchasing power
   - lost variety of G&S 
      (imports)
          - lower standard of 
             living

Inflation:
   - import inflation 
      increases
   - cost-push inflation 
      increases

Question 24

Examine the effects of changes in trade and financial flows on Australia’s economic performance

NET PRIMARY INCOME

Answer 24

Overseas Earnings/Payments:
- increased
payments/servicing
- increased dividends/ROI

Question 25

Examine the effects of changes in trade and financial flows on Australia's economic performance NET PRIMARY INCOME

Answer 25

Overseas Earnings/Payments: - increased payments/servicing - increased dividends/ROI

Question 26

Examine the effects of changes in trade and financial flows on Australia's economic performance NET SECONDARY INCOME

Answer 26

Insurance payouts, Workers remittance, Overseas Pensions and Unconditional Aid: - increased inflow value - increased outflow value

Question 27

Examine the effects of changes in trade and financial flows on Australia's economic performance CAPITAL ACCOUNT

Answer 27

Conditional Foreign Aid, Intellectual Property: - both more expensive → increased outflow value

Question 28

Examine the effects of changes in trade and financial flows on Australia's economic performance FINANCIAL ACCOUNT

Answer 28

``` Debt/Equity and Reserve Assets: - cheaper for foreign investors - increased inflows - AUS on ‘sale’ - more expensive for domestic investors ```

Question 29

Examine the effects of changes in trade and financial flows on Australia's economic performance FINANCIAL ACCOUNT

Answer 29

``` Debt/Equity and Reserve Assets: - cheaper for foreign investors - increased inflows - AUS on ‘sale’ - more expensive for domestic investors ```

Question 30

Analyse the effects of changes in the value of the Australian dollar on the Australian economy DEMAND

Answer 30

1. Foreign Investors - interest rates - investment opportunities 2. Speculators 3. Export Markets - ToT and commodity price - international competition of Australian exporters and the Australian inflation rate relative to overseas - economic conditions - tastes and preferences 4. Governments

Question 31

Analyse the effects of changes in the value of the Australian dollar on the Australian economy SUPPLY

Answer 31

1. Foreign Investors - investment opportunities - interest rates 2. Speculators 3. Import Markets - levels of domestic income - economic conditions - domestic inflation and international competitiveness of domestic firms - tastes and preferences 4. Governments

Question 32

Analyse the effects of changes in the value of the Australian dollar on the Australian economy SUPPLY

Answer 32

1. Foreign Investors - investment opportunities - interest rates 2. Speculators 3. Import Markets - levels of domestic income - economic conditions - domestic inflation and international competitiveness of domestic firms - tastes and preferences 4. Governments

Question 33

Discuss the impact of free trade and protection policies on the quality of life in Australia ADVANTAGES

Answer 33

``` FIRMS - restructure operations to remain operational - domestic inclination to innovate and become more efficient - higher investment - more efficient allocation of resources for surviving businesses (increased GDP) - cheaper imports - reducing costs - diversification of export base - growth in export volumes - benefit from reduced input costs and increased R&D ``` ``` INDIVIDUALS - long-term employment growth - result of structural change - consumer income increase - consumer higher standard of living - better variety/quality G&S because of ↑ intern. comp. - encouraged innovation in competitive environment - customer service is improved - greater recognition of importance of training and education - more highly paid export sector - reduced protection = more skilled workers and training - consumers can benefit from alliances from globalisation ``` ``` GOVERNMENTS - increased income - efficient resource allocation = increased tax. revenue = higher income and company tax - political relations economic ties are stronger ```

Question 34

Discuss the impact of free trade and protection policies on the quality of life in Australia DISADVANTAGES

Answer 34

``` FIRMS - Shrinking marginal. import-competing industries if international comp. does not improve - cannot compete with economies of scale (low cost, high volumes) ``` ``` INDIVIDUALS - loss of employment - geographic dislocation of workers - import-competing industries usual regional - structural change - job losses (limited skills) ``` ``` GOVERNMENTS - reduction in gov. revenue - increased gov. spending - political costs ```

Question 35

Discuss the impact of free trade and protection policies on the quality of life in Australia OTHER EFFECTS

Answer 35

``` STANDARDS OF LIVING short term: - decreased protection = increased imports - decreased employment/national income long term: - efficient resource allocation = increased productivity - increased econ. growth and living standards ``` ``` TRADE PERFORMANCE AND THE CAD short term: - CAD worsen - imports increase (cheaper or increased quality) long term: - increased international competitiveness - reduced CAD ```

Question 36

Discuss the impact of free trade and protection policies on the quality of life in Australia OTHER EFFECTS

Answer 36

``` STANDARDS OF LIVING short term: - decreased protection = increased imports - decreased employment/national income long term: - efficient resource allocation = increased productivity - increased econ. growth and living standards ``` ``` TRADE PERFORMANCE AND THE CAD short term: - CAD worsen - imports increase (cheaper or increased quality) long term: - increased international competitiveness - reduced CAD - both = increased exports ```

Question 37

Propose likely changes to the structure of industry within Australia as a result of current trends in the global economy

Answer 37

As we become more commodity orientated and open up to other countries (economies of scale) manufacturing firms become less internationally competitive and Australia must rely on natural resources that we can compete within the export market. The decline of agricultural exports in recent decades (due to): - large fluctuations in world prices - trade protection influenced export revenue - agricultural trade involves commodity items (almost no value-adding) - extreme weather patterns (floods and fire) reducing output and productivity Share of manufactured exports fell in the mining boom: - cannot compete with importers agricultural exports - 1989-1990 (23%), and 2019-2020 (10%)