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Economics 1,2 > U2 extension > Flashcards

U2 extension Flashcards

1
Q

What is an open economy

A

= one that interacts freely with other economies in the world in the form of trade and finance

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2
Q

What is a closed economy

A

= one that does x interact freely with other economies in the world in the form of trade + finance

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3
Q

What are exports

A

= transactions b/n eco agents in AUS + the rest of the world in the process of purchasing g/s produced in AUS

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4
Q

What are imports

A

= transactions b/n eco agents in AUS + the rest of the world in the process of purchasing g/s produced by another nation

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5
Q

What are trade barriers

A

= impediments 2 free trade in the form of tariffs, subsidies, quotas, etc

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6
Q

What is trade liberalisation

A

= removal of trade barriers / reduction in trade protection

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7
Q

Why do countries engage in trade

A

1) lower prices 4 c’ers
2) greater choices 4 c’ers
3) ability 4 bus 2 increase economies of scale
4) access 2 more resources 4 bus + gov.t

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8
Q

What is economies of scale

A

= volume that a firm needs 2 produce so that it is able to effectively cover fixed costs + operate in a market at a competitive level

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9
Q

Consequences of international trade regarding access 2 more resources 4 bus + gov.t

A

-> AUS bus have inc access 2 physical, foreign human + foreign finance capital
-> inc qty + qual of resources inc ability of gov.t 2 inc L.S

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10
Q

How material living standards are impacted by international trade

A
  • bus have access 2 g/s allowing 2 inc production that inc jobs + dec prices = inc access 2 g/s via inc disposable income + purchasing power
  • gov.t have access 2 g/s allowing 2 inc infrastructure -> dec costs 4 bus b/c dec bottlenecks = dec prices = inc access 2 g/s
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11
Q

How non material living standards are impacted by international trade

A
  • inc jobs = dec financial stress + dec crime rates, etc
  • inc infrastructure = inc access 2 public transport = inc air quality = better quality of life
  • improved access 2 health + edu = inc quality of life through inc mental + physical health + literacy rates
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12
Q

What are the ultimate benefits of trade

A

1) boosts lvls of gdp growth
2) creates jobs t/f dec lvls of unemployment (h/r in S.T can -> structural unemployment)
3) ensures low prices

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13
Q

What is the structural component of current account deficit

A

= relates to aggregate supply side of economy

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14
Q

What are the structural component factors of the current account deficit and describe

A

1) saving /investment imbalance = due 2 being young + small country Aus x have lvl of savings required 2 fund investment in our economy that is required 2 max potential growth
2) Low lvl of international competitiveness relatively = due 2 low lvls of efficiency / productivity + high production costs (high min wage)

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15
Q

What is the cyclical component of Current account deficit

A

= movement in the CAD that is tied 2 changes in the economic cycle / lvls of economic activity in Australian economy
(AD side of economy)

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16
Q

What are the cyclical component factors of current account deficit

A

1) Lvls of disposable income impact spending on imports
2) Interest rates impact lvls of borrowing + spending on imports
3) C’er + bus confidence impacts spending on imports
4) The exchange rate impacts lvls of net exports (spending on both exports + imports)
5) Rates of economic growth overseas impacts spending on net exports (X-M)

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17
Q

What is the consequence of strong economic activity related to current account deficit

A

-> due 2 strong AD = gap b/n savings + investment grows + strong spending includes greater imports
- Net primary income = inc debits as we borrow more over seas
- Trade balance moves further into deficit (inc debits in BoGS)

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18
Q

What is the consequence of weak economic activity related to current account deficit

A

-> due 2 weak AD = gap b/n savings + investment shrinks + weak spending inc less imports
- Net primary income = dec debits as we borrow less from over seas
- Trade balance moves closer to surplus (dec debits in BoGS)

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19
Q

Exam tip-> Non negotiables when talking about the current account deficit

A

1) Define CAD
2) must reference whether there is an inc/dec in credits/debits in that account
3) subaccount that is likely to be affected

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20
Q

What can is a credit

A

= whenever money is received
(positive in the account)

21
Q

What is a debit

A

= whenever money is paid
(negative in the account)

22
Q

What is the balance of payments

A

= record of the financial transaction between residents of Australia and residents of the rest of the world

23
Q

What is the current account

A

= records all receipts + payments of a “current nature”
current -> x creating any future obligations

24
Q

What is the capital and financial account

A

= records all receipts +payments of a capital nature
capital- > creates future obligations from transactions

25
Q

Debits in the current account

A
  • Payment 4 imported g/s
  • Interest payment 4 foreign debt
  • Dividend payments 2 foreign equity
  • Other income payments 2 foreigners
  • Transfer payments 2 overseas residents
26
Q

Receipts in the current account

A
  • Export receipts
  • Interest repayments from foreigners
  • Dividend receipts from stakeholders / equity in foreign companies
  • Other income receipts from overseas
  • Transfer payments received by Australians
27
Q

Components of the current Account

A

1) Balance of merchandise trade (BoMT) (Net goods)
2) Net services
3) Net primary income
4) Net secondary income

note-> 1 + 2 = balance of trade

28
Q

What is the balance of merchandise trade

A

= value of export credits for goods sold overseas less value of import debits for goods purchased from abroad

29
Q

What are net services

A

= value of service credits received from overseas less value of service debits paid abroad

30
Q

What are net primary incomes

A

= difference in value b/n income credits received from overseas less income debits paid out abroad

31
Q

What are net secondary incomes

A

= difference b/n value of secondary income credits received by our residents less the value of secondary income debits paid abroad

32
Q

What is a current account deficit

A

= when total payments in current account of the balance of payments exceeds total receipts, often expressed as a % of GDP

33
Q

What is the capital account and its components

A

= capital transactions include net capital transfers + net acquisition of non-produced, non-financial assets. Made of…
1) Capital transfers -> generally involve net inflows of funds in Aus by permanent migrants
2) Net acquisition -> covers excess of credits over debits for the sale of copyright, patents, franchises, and trademark of a tangible nature

34
Q

What is the financial account

A

= shows how Australia funds / pays 4 its CAD. The balance of financial account records the value of total credits for investment and borrowings received by Australians from abroad minus total debits for investment + leading by Australians abroad

35
Q

What are components of the Financial account

A

1) Net direct investment
2) Net portfolio investment
3) Financial derivatives
4) Other investments
5 Net reserve assets

36
Q

What is net direct investment

A

= involves the purchase, setting up or expansion of companies + assets in Australia by foreigners classified as credits less similar investments overseas by Australian residents classified as debits

37
Q

What is net portfolio investment

A

= difference in value of transactions by foreign individuals purchasing Australian shares, debt + securities less the value of similar assets purchased by our residents. Portfolio investment flowing in from overseas is recorded as a credit while investment abroad is recorded as a debit on our financial account

38
Q

What are financial derivatives

A

= complex financial instruments that create assets / liabilities

39
Q

What are other investments

A

= credits less debits for loans and deposits

40
Q

What are net reserve assets

A

= contains both RBA + gov.t transactions involving dealings in reserves of foreign currencies, gold, special drawing rights + required contributions to the international monetary fund. Money received from overseas = credit, money paid to overseas = debit

41
Q

What is terms of trade

A

= a ratio of the average prices we receive for our exports relative to the average price paid for our imports

-> prices, x qty (assumes qty stays the same)

42
Q

What is the terms of trade formula

A

TOT=export price index / import price index x 100

43
Q

What is the export price index

A

= constructed by measuring changes in average prices of a basket of Australian exported goods, with items weighted according to their relative importance in trade

44
Q

What is the import price index

A

= constructed by measuring changes in the average prices of a basket of Aus imported goods, with items weighted according to the relative importance in trade

45
Q

How does demand impact terms of trade

A
  • inc demand -> inc prices = inc TOT
  • dec demand -> dec prices = dec TOT
46
Q

How does movements in the terms of trade impact CAD

A
  • Inc / fav movement in TOT usually results in a dec CAD b/c value of credits 4 exports inc +/ value of imports tends 2 dec = dec CAD
  • Dec / unfav movement in TOT usually results in an inc CAD b/c value of credits 4 our exports dec +/ value of debits 4 imports tend 2 inc = inc CAD
47
Q

How do movements in terms of trade impact goal of strong and sustainable growth

A
  • inc TOT -> inc X relative 2 M
    b/c inc AD -> inc prod -> inc eco growth
  • dec TOT -> dec X relative 2 M
    b/c dec AD -> dec prod
48
Q

How do movements in terms of trade impact unemployment

A
  • dec TOT -> inc unemployment
  • inc TOT -> dec unemployment
49
Q

How do movements in terms of trade impact inflation

A
  • inc TOT -> inc inflation
  • dec TOT -> dec inflation

Economics 1,2 (7 decks)

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