Topic 3 - Economic Issues Flashcards
State the general trend of Australias:
1) CA
2) NFE
3) TOT
1) CA - Historically in deficit for the past 3 decades, averaging -3% of GDP. After 2019, CA entered a surplus of 5% of GDP in 2021.
2) NFE is in deficit since Australia owes more foreign assets than overseas owes Australian assets.
3) TOT below 100 since 1950, only rising above 100 since COVID-19.
Explain the Savings-Investment Gap.
State Australia’s S-I Gap trends recently. (Hint: How and when has it been narrowed?)
S-I Gap = Excess domestic investment over domestic savings, requiring foreign investment/borrowing to close the gap.
- Narrowed since 2013 due to low global interest rates, a fall in investment, assisted by $3 trillion superannuation to narrow it.
Assess the stability of Australia’s NFL/NFE and E/R, in relation to the ‘Valuation Effect’.
NFL = L-T Debt increases while S-T Debt decreases in the long-run, reducing volatility of Australia’s FI.
E/R = Rising trend since 2000 due to increasing IC & appreciation of AUD. Hence, high volatility is due to speculation and reduced foreign investment.
The valuation effect reveals that AUD fluctuations directly change the value of Aus. assets and debt-servicing costs.
State and Discuss the 4 Government Policies that Australia uses to achieve External Stability.
1) Contractionary Monetary Policy - Higher I/R improves BOGS by reducing import spending and debt-servicing costs, however, ineffective in long run due to increased capital outflow.
2) Fiscal Consolidation Policy - Reduces Gov. debt and addressed low national savings, but public debt levels remained high.
3) Compulsory Superannuation - Increased national savings reduced the S-I gap, and increased foreign investments, but restricted innovation due to reduced spending.
4) Structural Microeconomic Reform - Improved IC and productivity, but shifted resources away from infrastructure and skill shortages.
State Australia’s method of measuring external stability and the factors they maintain.
Measurement = Economy’s ability to service its NFL whilst reducing currency volatility.
Factors: Maintains inflation, budget surplus, and microeconomic reforms.
Define CPI and explain why some G&S are weighted more than others
Consumer Price Index = Measures inflation movements in the price of G&S sold, weighted according to its overall demand from Australian households and volatility in price.
Distinguish between Headline and Underlying Inflation.
Which one is more accurate/preferred?
Headline inflation is more volatile as it includes all household G&S and international G&S. However, underlying removes these seasonal price changes, government-impacted items, price shocks and volatile G&S such as oil, gas, electricity, etc.
State the formula for:
1) Real GDP 2) Inflation Rate 3) Economic Growth
1) (Nominal GDP / CPI) x 100 = Real GDP
2) [ CPI (Y2) - CPI (Y1) ] / CPI (Y1) = Inflation Rate
3) [ EG = EG (Y2) - EG (Y1) ] / EG (Y1) x 100 = EG Rate
Define and Explain:
1) Demand-Pull Inflation
2) Cost-Push Inflation
1) D-P I = When AD exceeds the productive capacity of an economy
- Prices rise while the firm output cannot expand in the short term. ( Price ↑, Supply = Same )
2) C-P I = Increases in the costs of Factors of Production
- When FoP costs ↑, firms push it onto consumers or employees. ( Price ↑, Supply ↓ )
Define and Explain:
1) Inflationary Expectations
2) Imported Inflation
1) IE = Prices of G&S / Employee Wages expected to increase.
- AD increases in the short term.
2) II = Increases in prices of international transactions, typically through imported goods.
- Depreciation of AUD increases M prices as consumers must pay more.
State the general Inflation trend leading up to and during the Covid-19 Recession (2 Rebound Periods)
State the G&S and/or industries that drove these rates.
Before COVID: CPI cyclically averaged 2-3% for the past 2 decades.
During COVID: CPI dropped to -0.3% due to weak economic activity of reduced consumption, deflationary expectations, and lower import inflation.
After Covid: CPI first rebounded to 3.1% in 2021, then rebounded again to 5.5% in June 2022. Caused by the removal of free child-care, and rising mortgages, petrol prices, medical services and labour shortages.
State the positive and negative effects of rising inflation levels.
Positives: Appreciates AUD, increasing TOT and I/R which attracts greater investment.
Negatives: Constrains future economic growth, Wage-Price Spiral, widening I/W gap.
Identify the roles of Monetary, Fiscal and Microeconomic policies that impact Inflationary pressures.
(Hint: Micro has 3 factors
MP: Contractionary lowers Inflation as increasing I/R dampen C + I.
- Used before inflation reaches its peak, accounting for policy time lag and reducing inflationary expectations
FP: Contractionary reduces G and increases taxation to remove money circulating the economy.
- By decreasing AD, D-P inflation reduces while firms raise I/R to combat this.
Micro: 1) Reduced Protection Levels: ↓ M Prices = ↑ IC
2) Labour Market Reform: ↑ Wages = ↑ Productivity
3) Government Investment: ↑ Infrastructure (Road, transport, etc.) protects Australia from external shocks
Distinguish between Structural and Cyclical factors, in terms of government policies.
Structural (Aggregate Supply) = Underlying, mid-to-long-term factors that require microeconomic policies to alter.
Cyclical (Aggregate Demand) = Short-term transactions that fluctuate with the business cycle.
- Requires macroeconomic policies to alter.
State the formulas for AD, AS, and Income (Y)
AS = AD –> C + S + T = C + I + G + (X-M)
S + T + M = G + I + X
Y = C + I
