U3 AOS3 Australia's BOP

Question 1

Comparative advantage

Answer 1

A nation has a comparative advantage if it specialises in an area of production where its cost advantages are greatest, and the opportunity cost is minimised.

Question 2

Absolute advantage

Answer 2

An absolute cost advantage occurs if a nation is the cheapest or most efficient producer of a single good or service in the world.

Question 3

International trade

Answer 3

International trade is the buying and selling of products across international boundaries. International trade, everything else remaining constant, increases the number of mutually beneficial transactions

Question 4

Australia’s comparative advantage

Answer 4

Coal (15.3% of our exports) Iron ore and concentrates (14.4%) Natural gas (10%)

Question 5

Australia’s comparative disadvantage (imports)

Answer 5

personal travel [excluding education] (10.8%) Refined petroleum (6.1%)

Question 6

Advantages of international trade

Answer 6

When countries specialise in comparative advantage:
global output rises, prices are lower, there is increased access to a larger variety of products for consumers, and increased access to inputs for business and government
=
global improvement in the efficiency of resource allocation, increased output and increased consumption, and, everything else remaining constant, increased global material living standards.

Question 7

Disadvantages of international trade

Answer 7

In the short run, people can lose their jobs due to higher international competition, the environment suffers due to carbon emissions. Thus these may not be considered in market prices

Question 8

Australia’s top two-way trade partners

Answer 8

China (25%) Japan (10%) U.S.A (8.7%)

Question 9

tariffs, subsidies and import quotas

Answer 9

• a tax on imports,
• cash payments to producers or consumers to lower the cost of production or consumption
• limits on the number of imports allowed

Question 10

Free trade

Answer 10

trade without government restriction

Question 11

Trade protectionism

Answer 11

Government intervention to limit free trade. Such as tariffs, quotas.

Question 12

Arguments for trade protection

Answer 12

protects infant industry, national security (prevention of over-reliance), domestic employment

Question 13

Arguments against trade protection

Answer 13

Trade war, reduced efficiency of resource allocation, reduced innovation and productivity argument

Question 14

Trade liberalisation

Answer 14

The process of removing barriers to trade

Question 15

International competitiveness

Answer 15

measures the relative cost and quality of the products of nations.

Question 16

Australia’s Free Trade Agreements (FTA’s)

Answer 16

Free Trade Agreements (China 2015) can improve economies of scale and international competitiveness

Question 17

balance of payments (BOP)

Answer 17

The BOP is a country’s record of the value of all transactions (flows) between the residents of the country and residents of all other countries
The BOP = CA+CAFA
The BOP is a set of accounts that reports the residual value of payments received (credits) fewer payments made (debits), therefore the balance must be zero.

Question 18

Components of Balance of Payments

Answer 18

Current account and the capital and financial account (there is also a net errors and omissions account)

Question 19

Current account

Answer 19

Records transactions between Australian residents and overseas residents which are current (benefits that accrue within the quarter or year of the transaction date)

Question 20

Capital and Financial account

Answer 20

Records transactions of capital and financial nature between Australian and overseas residents. Capital transactions involve the transfer of ownership without a return. Financial transactions involve a change in the ownership of Australian residents’ assets or liabilities.

Question 21

Current account: subaccounts

Answer 21

Trade balance (sum of net goods and services), primary income (wages, interest, dividends), secondary income (tax refunds)

Question 22

Capital account: sub-accounts

Answer 22

Capital: net capital transfers (transfers of ownership without expected return), net acquisition of non-produced financial assets (trademark rights)

Question 23

Financial account: sub-accounts

Answer 23

Direct investment (>10% of ownership), portfolio investment (<10% of ownership), financial derivatives, reserve assets (held by the RBA), other investments

Question 24

Credits on current account

Answer 24

result from current transactions that are a source of foreign exchange for Australia.

Question 25

Debits on current account

Answer 25

result from current transactions that require the use of the foreign exchange.

Question 26

Credits on CAFA

Answer 26

result from the capital and financial transactions that either increase Australian residents’ liabilities or decrease their assets

Question 27

Debits on CAFA

Answer 27

result from financial transactions that either decrease Australian residents’ liabilities or increase their assets.

Question 28

Current account deficit

Answer 28

The CAD is when the total value of debits exceeds the total value of credits over a year. Australia has a historic deficit on the current account.

Question 29

Causes of Australia’s CAD

Answer 29

Cyclical - in periods of expansion, the demand for imports will rise and the CAD will increase. Vice versa

Structural - Savings-investment gap, if the savings of Australia are insufficient to fund the investment opportunities, CAD will increase