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Economics 3/4 > unit 3 aos 3 > Flashcards

unit 3 aos 3 Flashcards

1
Q

gains from international trade- increases access to resources

A

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

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2
Q

gains from international trade

A
  • lower prices
  • greater choice
  • access to resources
  • economies of large scale
  • increased competition
  • increased efficiency
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3
Q

gains from international trade- promotes greater economies of large scale production & LS

A
  • 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
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4
Q

gains from international trade- increases competition & efficiency

A

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

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5
Q

gains from international trade- increases consumer choice & LS

A
  • 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
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6
Q

gains from international trade- lower consumer prices, improving LS

A

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

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7
Q

balance of payments components

A

record of financial transactions between australia and the rest of the world
1. the current account (CA)
2. the capital and financial account (CAFA)

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8
Q

the current account

A
  • 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
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9
Q

debits (current account)

A

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)

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10
Q

credits (current account)

A

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

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11
Q

the capital and financial account (CAFA)

A

covers capital transfers such as migrants transfers & debt forgiveness & acquisition/disposal of non-produced, non-financial assets between residents & non-residents

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12
Q

parts that make up the financial account

A

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

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13
Q

parts that make up capital account

A

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.

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14
Q

balance on current account

A

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

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15
Q

balance on capital and financial account

A

overall balance on CAFA = net capital account + net financial account

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16
Q

structural influences on current account balance

A

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

17
Q

cyclical influences on current account balance

A

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

18
Q

net foreign debt

A

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

19
Q

composition of NFD & NFE

A
  1. public sector or official gov borrowing- federal, state & local govs borrowing from overseas to finance budget deficits- generate official debt
  2. private sector or non-official borrowing- large companies or banks who use foreign money to finance expansion or spending- generate non-official debt
20
Q

causes of NFD

A
  • 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
21
Q

net foreign equity

A

the difference between the value of foreign owned australian assets, such as property & shares, minus the value of overseas assets owned by australians

22
Q

meaning of the exchange rate

A
  • 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
23
Q

measuring exchange rate

A
  • 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
24
Q

Factors affecting the value of the australian dollar

A
  • 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$
25
Q

Terms of trade (TOT)

A

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

26
Q

measurement of the TOT

A

(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

27
Q

factors that may affect the TOT

A
  • 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
28
Q

causes of an increase/decrease in global conditions of demand

A

> 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

29
Q

causes of an increase/decrease in global conditions of supply

A

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

30
Q

international competitiveness

A

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

31
Q

what makes a firm internationally competitive

A
  1. competitive selling price- firms must maximise efficiency in use of resources to keep costs & prices low
  2. 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
32
Q

factors that may affect international competitiveness

A
  1. productivity
    > higher productivity = lower production costs = more competitive prices
  2. production costs
    > high price of resources and labour (wages) makes firms less competitive, as it means they have to increase prices
  3. availability of natural resources
    > land, coal, iron ore- means that we can produce commodities for cheaper & therefore sell for cheaper
  4. exchange rates
    > low exchange rate = cheaper exports = competitive
    > high exchange rate = exports dearer relative to imports
  5. relative rates of inflation
    > low inflation makes prices more attractive both here & o/s
33
Q

effect of movements in the TOT & exchange rate on domestic goals and LS

A
  • 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
34
Q

effect of changes in int competitiveness on domestic goals & LS

A
  • 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

Economics 3/4 (6 decks)

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