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$
Terms of trade (TOT)
represents the ratio for the average prices aus receives our exports against the average price we pay for imports
> influences current account, AD, domestic macroeconomic conditions & overall LS
> more favourable when export prices rise faster relative to imports (rise in TOT), meaning we can purchase more imports
> less favourable when export prices fall more quickly than imports (fall in TOT), meaning we can purchase less imports
measurement of the TOT
(export price index/import price index) x 100
- a rise in the index means aus is receiving more for exports, a fall means we are receiving less and must export more G&S to maintain the same level of imports.
> the export price index comes from measuring changes in the avg prices received for a basket of exports, weighted according to importance, same for imports
factors that may affect the TOT
- changes in global conditions of demand, such as changes in production costs in trading partners
> when there is a decrease in demand for exports relative to imports, the prices we receive are lower, and vice versa - changes in global conditions of supply, such as an change in the supply of commodities & goods we export causes the prices we receive to rise/ fall, making TOT less/ more favourable
causes of an increase/decrease in global conditions of demand
> weaker/stronger levels of EG & production costs among trading partners **VCAA
fall/rise in consumer & business confidence
slower/faster rate of growth of disp. incomes
faster rates of inflation
increase or decrease in competitiveness
causes of an increase/decrease in global conditions of supply
increase:
> discovery of new minerals & opening new mines
> effect of technology on productivity & production
> ideal growing conditions for crops
> lower production costs & higher profitability
decrease:
> resource depletion
> decreased productivity
> severe climatic conditions & supply chain issues
> higher production costs & lower profitability
international competitiveness
means that australian businesses are relatively efficient in their use of resources, and can profitably produce & sell their g & s at a price equal to or less than that charged by foreign rivals in the international market
what makes a firm internationally competitive
- competitive selling price- firms must maximise efficiency in use of resources to keep costs & prices low
- attractive non-price factors-
> offering better quality g&s than o/s rivals
> satisfying changing needs better than rivals
> innovative to better satisfy wants
> superior customer service
factors that may affect international competitiveness
- productivity
> higher productivity = lower production costs = more competitive prices - production costs
> high price of resources and labour (wages) makes firms less competitive, as it means they have to increase prices - availability of natural resources
> land, coal, iron ore- means that we can produce commodities for cheaper & therefore sell for cheaper - exchange rates
> low exchange rate = cheaper exports = competitive
> high exchange rate = exports dearer relative to imports - relative rates of inflation
> low inflation makes prices more attractive both here & o/s
effect of movements in the TOT & exchange rate on domestic goals and LS
- lower TOT = lower value of exports & AD
> slow EG below 3% as sales decline and firms slow production
> higher unemployment, as firms cut production
> slow inflation as firms discount prices with low sales
> lowers LS due to lower incomes, purchasing power & consumption - rise in TOT = increased value of exports & AD
> EG will strengthen towards target, as firms lift production
> move towards full production as firms expand operations
> inflation may rise, but not above the target
> increase LS, more jobs, higher incomes, consumption, reduced stress
effect of changes in int competitiveness on domestic goals & LS
- low & stable inflation: low competitiveness = higher production costs = higher consumer prices = upward pressure on inflation
- SSEG: less competitive = selling less g & s = less output & business expansion = lower EG
- full employment: less competitive = higher production costs = less business expansion & firm closures = less jobs available = unemployment
> less competitive = lower LS due to higher prices, less jobs available & less incomes
> more competitive = higher LS due to more purchasing power and jobs and greater consumer choice
