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Unit 1 & 2 Economics > Unit 2 Outcome 2 > Flashcards

Unit 2 Outcome 2 Flashcards

1
Q

What are International Transactions?

A

. These involve the buying of imports of goods and services from overseas, and the selling of exports of goods and services abroad.
. These transactions include the movement of finance or money capital between Australia and the rest of the world as nations undertake international investment.

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2
Q

What is Free Trade?

A

It is also known as trade liberalisation and is a policy initiative aimed at promoting free trade between nations or reducing restrictions to free trade.

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3
Q

What are some of the benefits of free trade?

A

. Encourages specialisation, raises efficiency and lifts living standards
. Encourages efficiency through economies of large-scale production
. Increases the rate of economic growth and GDP
. Grows employment and jobs
. Means higher incomes
. Lowers inflation rate
. Increases consumer choice

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4
Q

Explain the following benefit of free trade: Encourages specialisation, raises efficiency and lifts living standards

A

. International specialisation means that countries produce only a limited range of goods and services.
. Without tariffs and other restrictions, only the most efficient local firms that have a cost advantage over their international rivals will survive.
. Using resources more efficiently means more output is produced from the same input (should raise Australian incomes and material living)

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5
Q

What is absolute cost advantage?

A

. This is when a country can produce a good or service really cheaply or really efficiently.
. This absolute cost advantage means countries are able to be a leading producer of a good or service.
. Eg. Australia has an absolute cost advantage when it comes to the producing of iron ore because we can produce it cheaply.

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6
Q

What is comparative cost advantage?

A

. This is when a country concentrate or specialises in areas of production which are most efficient and cheap instead of focusing on less efficient areas of production.
. This is seen when countries aren’t able to have an absolute cost advantage in an area of production.

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7
Q

Explain the following benefit of free trade: Encourages efficiency through economies of large-scale production

A

. Mass-produced goods or services usually cost less to make than the same thing made on a smaller scale.
. International trade and exports help Australian firms to produce more efficiently and competitively on a bigger scale.
. This is because firms no longer have to cater for just Australia but also potentially billions of people around the world.
. Firms becoming more internationally competitive helps grow their sales and increase incomes.

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8
Q

Explain the following benefit of free trade: Increases the rate of economic growth

A

. Free trade has helped to increase the volume of global trade which has therefore meant our exports have grown more quickly too.
. This is because of the improved access to over-seas markets.
. Exports contribute to aggregate demand and firms respond by increasing output and lifting GDP. (This also helps to improve our incomes and material living standards).

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9
Q

Explain the following benefit of free trade: Grows employment and jobs

A

. Free trade grows the size of Australia’s overseas export market.
. In turn, increased sales of locally-made goods and services = creating more local jobs.

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10
Q

Explain the following benefit of free trade: Means higher incomes

A

. The rise in Australian export income and jobs due to freer inter- national trade, has caused our GDP and national income to grow more quickly.

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11
Q

Explain the following benefit of free trade: Lowers inflation rate

A

. No tariffs = domestic inflation rates should be lower due to stiffer competition from often cheaper imports.
. local firms are forced to become more efficient = cut production costs and lowering their prices in order to survive = our purchasing power rising = rising material living standards

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12
Q

Explain the following benefit of free trade: Increases consumer choice

A

. The range of goods and services is so wide that it would be impossible for one country’s producers to cater efficiently for all tastes.
. Having freer access to imports solves this problem and helps to raise living standards.

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13
Q

What are the claimed disadvantages of free trade?

A

. Limits the growth of infant industries
. Weakens our national defence
. Increases economic instability
. Causes unemployment and destroys jobs

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14
Q

Explain the following claimed disadvantage of free trade: Limits the growth if infant industries

A

. New industries that are just getting started will have higher production costs than those that are well established.
. Tariffs provide a helping hand for a few years, until new firms get established and become more efficient.
. Therefore without tariffs New or ‘infant’ firms cans struggle and fail.

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15
Q

Explain the following claimed disadvantage of free trade: Weakens out national defence

A

. During wartime, countries are often isolated without access to imports.
. The use of tariffs during peacetime can help maintain less efficient or uncompetitive industries which could assist during times of war.
. These industries would usually fail due to no tariffs but if there were tariffs it would mean that an assured supply of essential goods and services would be available in an emergency, even if they weren’t produced efficiently.

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16
Q

Explain the following claimed disadvantage of free trade: Increases economic stability

A

. Some critics of free trade argue that open, exporting economies are more likely to experience booms and recessions in the level of economic activity and AD caused by the ups and downs in overseas countries.
. While this is partly true, the same sort of reasoning could be used to stop or limit interstate trade and production — a suggestion that could not be taken seriously!

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17
Q

Why does Australia trade?

A

. Trade gives consumers and businesses the chance to chose from the most competitively priced goods and services from around the world.
. Trade allows Australians to specialise in the production of goods and services in which we have a comparative advantage, there by maximising economic growth.
. Australia’s exports are equivalent to more than 21% of our GDP building the nation’s wealth and prosperity.
. Foreign investment plays an important role in our economic development and provides capital ($) to fund business expansion.

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18
Q

Explain the following claimed disadvantage of free trade: Causes unemployment and destroys jobs

A

. Tariffs make imported goods more expensive for consumers - this lowers the purchasing power of our incomes and cuts our living standards
. Less efficient industries would be able to survive if tariffs were kept = more jobs

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19
Q

What is a Balance of Payments?

A

This is an annual record of a countries financial transactions with the rest of the world. These transactions are divided in two sections being, being the current account and the capital and financial accounts. Furthermore all transactions are recorded as either credits or debits. The balance of payments equals zero.

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20
Q

What are credits and debits?

A

CREDITS: money coming into Australia from the rest of the world
DEBITS: money flowing out of Australia to the rest of the world

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21
Q

What is a balance on current account?

A

Balance of the current account is equal to the total value of all credits minus the value of all debits for goods, services, incomes and current transfers measured over a period of time.

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22
Q

What is the Current Account made up of?

A

. Net Goods
. Net Services
. Net Primary Income/Net Incomes
. Net Secondary Income/Net Current Transfers

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23
Q

Explain the following factor of the current account: Net goods

A

. This records the value of credits for goods exported minus debits for goods imported from overseas.
. Eg, wool, minerals and manufactured items - oil, electronic equipment and machinery

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24
Q

Explain the following factor of the current account: Net services

A

. This records the value of credits for services exported minus debits for services imported from overseas.
. Eg. Education - tourism

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25
Q

Explain the following factor of the current account: Net current incomes

A

. This records the value of credits for income received overseas minus the value of debits for income paid to overseas.
. Eg. wages, interest, dividends on shares

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26
Q

Explain the following factor of the current account: Net current transfers

A

. This records the value of credits for current transfers received overseas minus the value of debits for current transfers to overseas.
. Eg. Taxes, gifts, pensions, non-capital types of foreign aid

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27
Q

What is the capital account made up of?

A

. Net capital transfers

. Net acquisition on non-produced, non-financial assets

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28
Q

Explain the following factor of the capital account: Net Capital Transfers

A

. This records the value of credits minus debits for capital transfers and other intangible assets.
. This comes from migration

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29
Q

Explain the following factor of the capital account: Net acquisition on non-produced, non-financial assets

A

. Credits minus debits

. Eg. Patents and copyrights

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30
Q

What is the financial account made up of?

A

. Net investment
. Net reserve assets
. Net error or omissions

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31
Q

Explain the following factor of the financial account: Net Investment

A

Direct investment: Involves the purchase or expansion of com- panies and assets. When foreigners invest in Australia, it is classified as a credit or asset, whereas similar investments overseas by Australian residents are regarded as debits or liabilities.

Portfolio investment: Has to do with transactions involving shares, debt and securities. Portfolio investment or capital inflow from overseas is recorded as a credit or asset, while this sort of investment abroad by Australian resi- dents is recorded as a debit or liability.

Other investment: Category includes credits or assets minus debits or liabilities for international loans, deposits and special trade credits.

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32
Q

Explain the following factor of the financial account: Net Reserve Assets

A

. Contains both RBA and government transactions involving foreign currencies, monetary gold and required contribu- tions to overseas governments and international agencies such as the International Monetary Fund and the United Nations.
. Moneys received from overseas = credits or assets
. while payments abroad = debits or liabilities on Australia’s financial account.

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33
Q

Explain the following factor of the financial account: Net Errors and Omissions

A

This is an item that reflects the inaccuracies in the recording of international transactions. This item may be either positive or negative.
(Inaccuracies in record to ensure balance of payments = 0)

34
Q

What is CAD and CAS?

A

Current Account Deficit - when the value of all current account debits exceeds the total value of all current account credits for goods, services, primary incomes and secondary incomes, measured over a period of time.

Current Account Surplus - when the total value
of all current account credits exceeds the total value of all current account debits for goods, services, primary incomes and secondary incomes, measured over a period of time.

35
Q

What are trends in the Current Account Deficit?

A

In all years, Australia has suffered a persistent and generally large current account deficit (CAD) because the total value of debits exceeds credits.

36
Q

What influences Australia’s CAD?

A

. Rises in Australian spending levels (stronger consumer confidence, businesses confidence, tax cuts, lower interest rates)
. Overseas events (recession experienced by trading partners, rise in $AUD exchange rate)
. fall in the level of world commodity prices paid for Australian goods
. competitiveness of Australian-made goods and services
. lack of local savings and heavy foreign borrowing or debt
. Climatic conditions affecting rural exports (unable to export and need more imports)

37
Q

What is the composition of international transactions?

A

This refers to the types of goods, services and other transactions that take place between Australia and the rest of the world.

38
Q

What is the direction of international transactions?

A

The direction of international transactions refers to the countries with whom Australia exchanges goods, services and money capital.

39
Q

Explain the changing ‘composition’ of exports and imports of goods.

A

EXPORTS:
. Over the years, rural exports of goods have fallen.
. At the same time, non-rural manufactured exports have risen.
. These trends are largely a reflection of the growing importance of mineral exports rather than the growth of manufacturing industry.

IMPORTS:
. The change in imports of goods has not been as dramatic as for exports.
. During the period 1989–90 to 2013–14, imports of consumer goods rose, perhaps indicating the decline in Australian manufacturing of consumer items.
. At the same time, imports of capital goods fell slightly with a dip in the middle years, and imports of intermediate goods fell too.

40
Q

Explain the changing ‘direction’ of Australia’s exports and imports.

A

. Over the years, the direction (i.e. the destination of our exports of goods and the origin of imports) of Australia’s merchandise trade has changed quite dramatically.
. In 1950–51, nearly 60 per cent of our exports were sold in Europe (especially the United Kingdom).
. However, by 2013–14, Europe took only around 5 per cent of our goods, while over 70 per cent went to Asia.

41
Q

What are causes of trends in Australia’s capital and financial account surplus?

A

. Good opportunities for investment in Australia money coming in)
. A long-term fall in Australia’s exchange rate (not as much money will go overseas)
. High Australian interest rates against those overseas

42
Q

Explain the changing ‘composition’ and ‘direction’
of Australia’s capital flows?

A

COMPOSITION:
. Each year, foreigners invest large sums of money in Australia and some of our residents also invest funds overseas.
. Both direct investment overseas to Aus. and investment abroad has fallen in relative importance
. Whilst portfolio and other investment grew in relative importance.
. Some large multination companies have been attracted to invest in Australia due to our abundant natural resources, and our economic political stability

DIRECTION:
. Most foreign investment in Australia used to arrive from the UK and US (1950’s and 60’s).
. Now China, Japan, Singapore and other parts of Asia have taken the lead.

43
Q

What is the exchange rate?

A

The ‘exchange rate’ measures the price of the A$ when it is swapped for other currencies.

44
Q

What is the foreign exchange market?

A

The foreign exchange market is a means for international currencies to be traced and valued against each other. Exchange rates are quoted in pairs when the value of on currency is compared to another. The $AUD is traditionally valued against the $USD as the US is one of the largest markets in the world.

45
Q

How is the exchange rate determined?

A

Floating Exchange Rate - This system means that the price of the A$ is normally decided in the foreign exchange market by currency buyers (D) and local currency sellers (S).

46
Q

What is appreciation?

A

When the currency’s value increases against other currencies.
Eg. $1 AUD = $0.70 USD then $1 AUD = $0.75 USD.

47
Q

What is depreciation?

A

when the currency’s value decreases against other currencies.

48
Q

What causes an appreciating exchange rate?

A

. rise in commodity prices received by local producers
. strong overseas economic activity within our main trading partners
. rises in domestic interest rates that encourage overseas investment in Australia to maximise returns
. speculation that the dollar will rise in the near future
. Australian export firms become more internationally competitive
. a lower inflation in our economy against a higher rate among
overseas trading competitors
. drought or flood conditions abroad that means overseas
countries have to buy more of our food exports
. stronger than expected trade figures
. drop in Australian imports due to pessimism among local
households and businesses leading to a recession

49
Q

What causes a depreciating exchange rate?

A

. a recession overseas that cuts the demand for our exports
. a drop in world commodity prices received by local firms for our
exports
. Australian producers become less internationally competitive or
efficient
. a fall in overseas investment in Australia
. rapid economic growth and periods of boom in Australia
. strong consumer and business confidence among Australian
households and firms that raises imports
. a worse than expected trade balance for Australia
. a belief that the A$ will fall sometime in the future
. rises in the level of income payments because of an increase in
our level of foreign debt
. a rise in the relative level of interest rates overseas

50
Q

How is Australia’s exchange rate measured?

A

There are two common ways of measuring Australia’s exchange rate. We could quote individual exchange rates or, alternatively, the trade weighted index.

51
Q

What is individual exchange rates?

A

The A$ has a separate exchange rate for every currency in the world These cross rates tell us how many currency units for each country can be purchased with one A$.

52
Q

What is the trade weighted index?

A

. This represents the ‘average’ exchange rate for a basket of foreign currencies weighted according to their relative importance for Australia’s trade.
. The weights used in the TWI are adjusted fairly frequently to reflect changes in the direction and pattern of trade between Australia and its major trading partners.

53
Q

What is net foreign debt?

A

. Debt arises from a countries borrowing exceeding it’s lending/investing. Net foreign (NFD) is the most common measure of debt.
. It represents the difference in value between what Australia has borrowed minus what Australia has lent.
. There are two main types of overseas borrowers, being Official government (public sector) debt and Non-official (private sector) debt.

54
Q

Explain the following type of overseas borrower: Official Government (public sector) debt

A

Official debt is borrowing by the government or public sector.
. This occurred a lot during and following the GFC.
. This added to Australia’s net foreign debt, and means future generations will need to share the burden of repaying this debt.

55
Q

Explain the following type of overseas borrower: Non-official (private sector) debt

A

Non-official debt is private sector borrowing.
. The main private sector borrowers are the large companies who need to raise money capital for financing business expansion and takeovers.

56
Q

How has Australia’s Net Foreign Debt grown significantly over the past few years?

A

Australia’s NFD has risen significantly over the past few years due to:
. Too many government budget deficits
. Aus. Interest rates are relatively high due to low national savings
. Opportunities for foreign investors
. A depreciating currency

57
Q

Explain the following cause of foreign debt: Too many government budget deficits

A

Governments run budget deficits in recessions when they want to boost spending in the economy. A deficit occurs when the annual value of budget outlays exceeds the value of budget revenues. In order to finance this deficit, governments need to borrow, perhaps overseas.

58
Q

Explain the following cause of foreign debt: Australian interest rates are relatively high due to low national savings

A

Australian interest rates have traditionally been higher than those in such countries as the US and Japan. This partly reflects an inadequate supply of household saving, relative to a strong demand for credit. In turn, high domestic interest rates encourage foreign borrowing by governments, banks and local businesses, adding to our net foreign debt.

59
Q

Explain the following cause of foreign debt: Opportunities for foreign investors

A

Because of Australia’s vast natural resources and stable pol- itical climate, there are many opportunities for foreign inves- tors to make high returns. Although this inflow of investment capital helps grow the economy’s productive capacity, it also adds to our indebtedness to the rest of the world.

60
Q

Explain the following cause of foreign debt:
A depreciating currency

A

The overall depreciation of the A$ since 1970 has made the purchase of local assets (e.g. shares, property, businesses) by foreigners very cheap. In turn, this adds to our overseas debt because it means that each year, Australia must pay incomes (e.g. profits, dividends and interest) abroad to foreign owners of our assets.

61
Q

What are the benefits of Australia’s foreign debt?

A

. It can make up for a deficiency in local savings needed to finance investment, business expansion and the creation of new jobs.
. It can provide access to cheaper credit than otherwise, given that Australian interest rates are often higher than rates overseas.

62
Q

What are the costs of Australia’s foreign debt?

A

. As with all debt, the main problem is meeting interest and other income repayments. As noted, if debt or borrowed money from abroad is used productively to finance investments that grow our productive capacity and incomes, it is sustainable.
• This burden of debt repayment is especially heavy if the value of the A$ falls against other currencies.
• The NFD is the major reason for Australia’s large net primary incomes deficit and big CAD.

63
Q

What is international competitiveness?

A

This is the ability of Australian firms to sell goods and services in various markets around the world. Businesses need to do this without government assistance or protection in order to fall under the classification of being internationally competitive.
Businesses also have to be able to:
. sell at relatively low prices against similar imports, through improved efficiency in production
. ensure that the quality of locally made items matches that of imports
. be flexible and cater better for the changing needs of customers at home and abroad
. provide superior customer service including prompt delivery
. Track Down, tap into and developing new markets

64
Q

What is the policy of trade liberalisation?

A

Trade liberalisation involves reducing tariffs and other forms of assistance to local indus- tries that compete against imports. In addition, expanding the number of free trade agreements has also been an important feature of trade liberalisation policies.

65
Q

What are tariffs?

A

An indirect tax added into the price of imports to make them dearer to local consumers and protect local industries from overseas competition.

66
Q

What is protectionism?

A

This is a term used in international trade where imported goods and services are excluded or their volume reduced using various devices such as tariffs or import quotas.

66
Q

What are the trends in Australia’s exchange rate?

A

The forces of demand for and supply of the currency in the foreign exchange market determine its value.
Several points can be made about the changes in the AUD:
- in 1970, the TWI was equal to 100 points
- between 2000-01 and 2006-07, the AUD had depreciated to average only 57 points
- more recently especially between 2010-11 and 2011-12, Australia’s TWI greatly appreciated to average around 74 points

67
Q

Australia’s international trade agreements and alliances.

A

The trade agreements the Australian government makes with other countries have a significant impact on inter- national trade. The Australian government participates internationally in a number of bilateral and multilateral trade agreements.

68
Q

What are bilateral trade agreements?

A

These are treaties signed by two countries involving the reduction and removal of industry protection.

69
Q

What are multilateral trade agreements?

A

These are signed by a number of countries, and are aimed at promoting trade and reducing industry protection.

70
Q

What do multilateral trade agreements include?

A

Multilateral trade agreements include our membership of the International Monetary Fund (IMF).

71
Q

What are some of the free trade agreements (FTA’s) Australia has?

A

. ASEAN–Australia–New Zealand FTA in 2009
. Malaysia–Australia FTA in 2012
. Korea–Australia FTA in 2014
. Australia–Japan FTA in 2014.

72
Q

Summarise one of Australia’s free trade agreements?

A

Australia - United States (FTA) - AUSFTA
. Terms of this agreement include that all tariffs for imported products from the United States into Australia have been eliminated.
. Whilst most tariffs have been eliminated for exported products from Australia to the United States.
. Both the US and Australian tariffs on textiles and apparel have been removed.
. It came into effect in the 1st of January 2005 and ensures greater access to the United States market for Australia’s
- services
- trade and investment
- improves the regularity and investment environment between the two countries
- and promoted increased business mobility.

73
Q

What is the Asia–Pacific Economic Cooperation (APEC)?

A

This is a regional forum aimed at promoting ‘freer trade’ among 21 member countries.

74
Q

Overview of the economic relationship between the Australian economy and the economy of an Asian trading partner.

A

The Japan-Australia Economic Partnership Agreement (JAEPA)
. This is the most significant bilateral economic agreement since the 1957 Agreement of Commerce.
. It will help make Australia a more attractive place for Japanese investment.
. More than 97% of Australia’s exports to Japan will receive preferential access or enter duty free.

75
Q

JAEPA EXTRA

A 
Major Aus. exports, 2014 (A$m) 
. Coal 
. Beef 
. Iron ores and concentrates
. Copper ore and concentrates 
Major Aus. imports, 2014 (A$m)
. Passenger motor vehicles
. Refined petroleum
. Goods vehicles
. Tubes and pipes of iron or steel

Major Aus. service exports, 2014 (A$m)
. Personal travel excluding eduction
. Transport

Major Aus. service imports, 2014 (A$m)
. Personal travel excluding eduction
. Transport

76
Q

What is an export promotion?

A

Trade promotion is an umbrella term for economic policies, development interventions and private initiatives to improve the trade performance of an economic area or enterprises. These include deregulation and reform of the labour market, cuts in company tax rate, national infrastructure projects and education and training policies

77
Q

How has globalisation impacted the car industry?

A

. Greater competition/greater choice for consumers
. Must consider whether to make cars in Australia or import them from other countries with cheaper labour
. Australian car makers can now seek their products around the world
. They can also source the parts and components for their vehicles from around the world
.

78
Q

What are export subsidiaries and embargoes?

A

Export subsidiaries are grants to exporters which encourage them to produce for the export market.
Embargoes are bans on trade, often for political reasons, to prevent the flow of trade with a particular country.

78
Q

What are the trends in our foreign debt?

A

. Australia’s NFD has grown at a staggering rate, from a mere $2.4 billion in 1976, to $856 billion for 2013–14.
. The vast majority of the NFD is non-official or private-sector borrowing.
. Since the GFC the level of private sector debt fallen temporarily due to uncertainty.

79
Q

What are regional trade agreements?

A

They are trade agreements made with neighbouring countries. These could be bilateral or multilateral trade agreements.

Unit 1 & 2 Economics (7 decks)

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