unit 3 aos 3 Flashcards
gains from international trade- increases access to resources
international trade allows countries to access a wider variety of resources, goods and services that it lacks. this allows firms to expand production, employment & incomes, expanding the economy & improving LS
gains from international trade
- lower prices
- greater choice
- access to resources
- economies of large scale
- increased competition
- increased efficiency
gains from international trade- promotes greater economies of large scale production & LS
- reductions in a firms average cost per unit, associated with an increase in its annual production level.
- costs include high tech equipment, product design, raw materials, borrowing credit from banks, marketing & advertising.
- these costs can be spread more thinly when businesses have a larger production run.
- lowers average unit costs, increases incomes & boosts MLS
gains from international trade- increases competition & efficiency
international trade makes o/s producers more attractive to aus consumers
- local firms have to reallocate resources in order to lower prices to remain competitive
- makes domestic firms more efficient in their resource allocation and allows them to expand production
- greater efficiency boosting potential GDP
- greater innovation
- imports of capital equipment allows firms to become more efficient
gains from international trade- increases consumer choice & LS
- increases the extent to which wants can be satisfied
- the range of g&s is so wide that it would be impossible for one country’s producers to cater for all tastes- solved by freer access to imports
gains from international trade- lower consumer prices, improving LS
growth in international trade generally leads to lower inflation because:
- access to cheaper suppliers
- increased efficiency in resource allocation
- reduced domestic market power
- increased wage competition
- economies of large scale prodcution
balance of payments components
record of financial transactions between australia and the rest of the world
1. the current account (CA)
2. the capital and financial account (CAFA)
the current account
- all receipts (credits) & payments (debits)
- deficit = payments to foreigners exceed receipts owed from foreigners
made up of:
1. net goods: exports minus imports of goods
2. net services: exports minus imports of services
3. net primary incomes: credits for primary incomes received minus debits for primary incomes paid overseas.
4. net secondary incomes: one way transaction with nothing gained
debits (current account)
payments owed to other countries
- payments from imported g&s
- interest payments on foreign debt
- dividend payments for foreign equity (overseas shareholders)
- other payments to foreigners (wages, property incomes)
- transfer payments to overseas residents (foreign aid)
credits (current account)
receipts from other countries owed to aus
- export receipts
- interest repayments from foreigners
- dividend receipts from shareholdings in foreign companies
- other receipts from overseas property incomes (wages)
- transfer payments received by australians
the capital and financial account (CAFA)
covers capital transfers such as migrants transfers & debt forgiveness & acquisition/disposal of non-produced, non-financial assets between residents & non-residents
parts that make up the financial account
value of credits of investments & borrowing received by aus from abroad minus debits for investments & lending by australians abroad
1. net direct investment- expansion of companies & assets in aus by foreigners minus similar investments overseas by aus
2. net portfolio investment- transactions in & out involving shares
3. net reserve assets- RBA and gov transactions involving foreign currencies, gold, contributions to IMF
4. net errors & omissions- inaccuracies in the above calculations
parts that make up capital account
includes:
1. capital transfers- inflow of funds into aus by permanent migrants
2. net acquisition/ disposal of non produced, non financial assets- excess of credits over debits for sale of copyright, franchises & trademarks.
balance on current account
overall balance= net goods + net services + net primary incomes + net secondary incomes
> CAS if credits exceed debits (CAS in december 2023 quarter)
> CAD if debits exceed credits
balance on capital and financial account
overall balance on CAFA = net capital account + net financial account
structural influences on current account balance
AS side factors
- less favourable conditions = CAD
- more favourable conditions = CAS
> changes production costs (wages, resources, tax)
> int. competitiveness
> savings-investment gap
- low level of international competitiveness due to lowered efficiency and increased costs
cyclical influences on current account balance
AD side factors, short term, volatile influences on the CAD or CAS.
- stronger cyclical domestic spending = CAD
- weaker cyclical domestic spending = CAS
- stronger EA abroad = CAS
- weaker EA abroad = CAD
> changes in economic activity in aus and o/s (specifically china- increased construction spending in 2023)
> lower consumer confidence has increased savings, reducing spending on imports and improving out CA balance
> lower exchange rate makes exports more attractive, increasing credits
- CAD will grow during strong AD & economic growth, as the gap between investment & savings gets bigger & strong spending spills over into import spending
net foreign debt
difference in value between funds borrowed by Australia from overseas nations (liabilities), minus what Australia lent or invested abroad (assets)
> consequence of a lack of savings to finance investment by the public and private sector
- helps finance expansion with cheaper credit
- economic hardship (increased tax, less outlays)
- burden of debt repayment
- loss of AAA credit rating
composition of NFD & NFE
- public sector or official gov borrowing- federal, state & local govs borrowing from overseas to finance budget deficits- generate official debt
- private sector or non-official borrowing- large companies or banks who use foreign money to finance expansion or spending- generate non-official debt
causes of NFD
- lack of domestic savings–> national savings-investment gap, where savings are not sufficient to finance our investment spending
- many budget deficits–> often financed from borrowing abroad
- opportunities for foreign investors–> opportunities for foreign investors to make high returns off our natural resources
- sound economic, political & social climate–> aus offers foreign investors stable economic & political enviro
- lower value for the A$–> makes purchase of aus assets cheaper
- financial sector deregulation & globalisation–> increases o/s capital inflow & foreign ownership of assets
net foreign equity
the difference between the value of foreign owned australian assets, such as property & shares, minus the value of overseas assets owned by australians
meaning of the exchange rate
- the exchange rate measures the price or value of the A$ when it is swapped for other currencies.
- it is necessary because a nations residents want to be paid in their countries currency
- aus has a floating exchange rate, meaning that the value of the A$ is determined in the foreign exchange market by buyers and sellers
- it appreciates when demand exceeds supply for our currency, depreciates when supply exceeds demand
measuring exchange rate
- individual exchange rates: the A$ has a seperate exchange rate for every currency in the world–> rates express how many currency units for each country can be purchased with one aus dollar
- TWI: overall guide to the value of the A$ measured against a basket of other currencies, each weighted according to its importance in aus trade (eg. USD weighted more heavily than indonesian rupiah). a rise from one year to the next means that its value has appreciated against most others in the basket
Factors affecting the value of the australian dollar
- changes in relative rates of inflation
> higher inflation in aus means more import spending, appreciation of A$ - changes in our credit rating relative to other countries
- changes in relative interest rates
> can affect decisions about lending & investment overseas - commodity prices
- speculation about future changes in the exchange rate
- changes in foreign investment coming into aus
- changes in the terms of trade & commodity prices
- demand for exports & imports
> more exports relative to imports = depreciation, more attractive A$
