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Economics > Unit 3 AOS 3 > Flashcards

Unit 3 AOS 3 Flashcards

1
Q

2 types of international transactions

A

Trade: importing (buying) and exporting (selling) goods and services
Flows of capital: movements of money or capital between countries

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2
Q

Impact trade has on living standards

A
  • Boost GDP and incomes -> creates jobs -> access to more resources = increases material living standards
  • can have negative impact on environment, deplete resources, increase waste. = non-material living standards
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3
Q

Imports

A

are foreign produced goods and services that are purchased by Australians households, governments or other groups .

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4
Q

Exports

A

Australian-made goods and services that are purchased by foreign households, governments or other groups.

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5
Q

Economies of scale

A

are reductions in a firms average fixed costs per unit associated with an increase in its production level

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6
Q

Fixed Costs

A

like equipment, product design, research, advertising and (up to a point) management

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7
Q

Balance of payments

A

The balance of payments summarises the economic transactions of an economy with the rest of the world. It is split into 2 different accounts, Current Account and Capital and Financial Account.

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8
Q

Inflow/Credit

A

when economic value is provided by Australia, a credit entry is made

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9
Q

Outflow/Debit

A

When an economic value is received by Australia from another country a debit entry is made.

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10
Q

Balance on Current Account

A

The balance of current Accounts is the difference between the value of all receipts (credits) of a current nature and all the payments (debits) of a current nature.

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11
Q

Current Account Sub-accounts

A

Net Goods, Net services, Net primary incomes and Net secondary incomes.

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12
Q

Net Goods

A

export credits for goods sold overseas minus import debits for goods purchased from abroad.

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13
Q

Net Services

A

The difference between value of service credits received by Australians minus services debits paid abroad.

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14
Q

Trade Balance

A

Net Services+ Net Goods= trade balance.

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15
Q

Net Primary incomes

A

The income Australian residents earn from the rest of the world from working (wages, dividends, interest, rent, profit)

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16
Q

Net Secondary Incomes

A

Government Transfers- the income that Australian residents earn from the government (taxes, refunds, pensions)
Current Transfers- transactions between Australia and the rest of the world where one party provides something to be consumed by the other without receiving anything in return. (aid, gifts)

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17
Q

Deficit or Surplus

A

Deficit: where the total value of debits exceed the total value of credits overall.
Surplus: where total value of credits exceed total value of total value of debits overall.

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18
Q

Causes of Current Account Deficit

A
  • When total payments (debits) in the current account exceed total receipts (credits).
  • When Australia’s National expenditure (GNE) exceeds national income (GDP)
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19
Q

Structural Component of CAD

A

The CAD that exists when the economy is running a long term growth rate of approx 3%

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20
Q

Cyclical Component of CAD

A

The movements in CAD that is tied with changes in the economic cycle.

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21
Q

Cyclical Factors causing CAD

A
  • Lower overseas growth, lower demand for exports
  • Lower terms of trade
  • An appreciation of AUD, reducing demand for exports and increases demand for imports
  • Lower interest rates encourage spending on imported goods.
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22
Q

Structural Factors causing CAD

A
  • Lower national savings, higher foreign investment

- Poor international competitiveness; lower productivity, relatively high cost of production.

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23
Q

Balance on capital accounts

A

Capital accounts include net capital transfers (transfer of ownership where there is nothing in return) and the net acquisition of non-produced, non-financial assets (brand names, copy-rights, logos)

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24
Q

Balance on financial accounts

A

credits for investments and borrowing received by Australians from abroad minus debits for investment and lending by Australia’s abroad

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25
Q

5 financial sub-accoutns

A

Direct investment, portfolio investment, financial derivatives, other investments, Reserve assets.

26
Q

Direct Investment

A

Long-term capital investment in a business where the investor has significant voting power in the business (greater than 10% generally)

27
Q

Portfolio Investment

A

The purchase of equity or debt in a business (less than 10%)

28
Q

Financial Derivative

A

The purchase or sale of financial contracts between two parties where the value is derived from another financial instrument such as a bond, share or market value.

29
Q

Reserve Assets

A

The purchase or sale of assets held by the reserve bank.

30
Q

Other investments

A

Transactions that do not fit into other transactions such as; Trade Credit, Lending and borrowing, Currency and Deposits.

31
Q

Relationship between the two accounts

A

The relationship between the two accounts is that the current account is always offset by the capital and financial account, this means the balance of payments will always be zero. For example if one account is in surplus, credit. The other account must be in deficit.

32
Q

Key difference between cyclical and structural components of CAD

A

the key difference is whether the movement in CAD is tied to changes in the economic cycle.

33
Q

Net foreign debt (NFD)

A

Is the difference in the value between what Australia has borrowed from and owes overseas (our liabilities) minus what Australia has lent or invested abroad (our assets)

34
Q

Net foreign equity (NFE)

A

represents the excess value of foreign owed Australian assets and overseas assets owned by Australian residents.

35
Q

Causes of net foreign debt

A
  • lack of domestic savings
  • budget deficits
  • opportunities for foreign investment
36
Q

Terms of trade

A

The ratio of exported prices to import prices

37
Q

Measure terms of trade

A

export price index divided by import price index times by 100

38
Q

Favourable terms of trade

A

average prices for exports is relatively higher than average price received for imports

39
Q

ToT impact on CAD

A
  • A fall in ToT would lead to worsening the CAD.

- as there is an increase in debits relative to credits

40
Q

ToT impact on living standards

A
  • increase in ToT through rise of commodity prices
  • Increases profits and incomes of businesses and individuals who export
  • increases Real national incomes, increasing purchasing power
  • this then increases consumption and investment
  • increasing access to goods and services, decreasing unemployment and improving quality of life factors
41
Q

ToT impact on goals

A
  • increase in ToT, through a rise of commodity prices
  • increases profits and incomes for businesses and individuals who export.
  • This then increase Real National incomes, increasing purchasing power
  • increasing consumption and investment as well as increasing demand for exports.
  • This will increase Aggregate demand and GDP (boosting economic growth). With increases in growth it is likely to put downward pressure unemployments, as derived demand for labour also increases
42
Q

Exchange Rates

A

The value of the Australian dollar when it is swapped with another countries currency.

43
Q

Trade weighted index

A

TWI is not a price in terms of a single foreign currency, but a price in terms of weighted average of a basket of currencies

44
Q

Floating Exchange Rates

A

is a system where the currency is set by the foreign exchange market based on supply and demand with other currencies

45
Q

Factors that influence exchange rates: interest rates and capital flows

A

-An increase in interest rates,
-overseas investors are likely to invest in Australia as they will get a higher return,
-Australians are also more likely to invest domestically that abroad.
-The money coming in has to be changed to AUD increasing demand putting upward pressure on exchange rates cause an appreciation.
Opposite is true.

46
Q

Factors that influence exchange rates:

Terms of Trade

A

-As export prices rise relative to imports,
-exporters will receive more for goods and services.
-This higher level of income must be exchanged into AUD causing an increase in demand
-leading to an appreciation of AUD.
Opposite is true.

47
Q

Factors that influence exchange rates:

Relative rates of inflation

A

-High relative rates of inflation,
-lead to a decrease in international competitiveness as export prices will be relatively higher in global market,
-leading to a fall in demand for exports and increase in demand fo imports
- leading to more people trading out of AUD, increasing supple and leading to a depreciation.
Opposite is true

48
Q

Factors that influence exchange rates:

Demand for exports and imports

A
  • higher demand for exports
  • more people swapping into AUD
  • leads to increase demand for AUD
  • causing appreciation
  • increased demand for imports
  • leads to more people swapping out of AUD
  • increasing supply
  • causing a depreciation
49
Q

Effects of a movement in exchange rates:

Economic growth and full employment (AUD falls)

A
  • When AUD falls:
  • this will increase Aggregate demand through an increase in the demand for exports,
  • this leads to production of businesses to increase to keep up,
  • increasing in the derived demand for labour.
  • Thus increasing economic growth closer to the goal of 3-3.5% and decreasing unemployment closer to the target band of 4.5%
50
Q

Effects of a movement in exchange rates: Economic growth and full employment (AUD rises)

A
  • When AUD rises:
  • exports are now less attractive in global market,
  • decreasing demand for exported goods and services, -this leads to a decrease in AD - through (X),
  • decreasing derived demand for labour increasing unemployment
  • therefor moving the economy away from its goal of full employment (4.5%) and economic growth (3-3.5%)
51
Q

Effects of a movement in exchange rates:

goal of inflation (AUD falls)

A
  • AUD falls:
  • Lower dollar = demand inflation through increase in net exports.
  • leading higher incomes from exports sales
  • increase consumption and investment spending,
  • boosting AD and placing upward pressure on prices.
  • Will also cause cost of production to rise for those importing materials creating cost inflation.
52
Q

Effects of a movement in exchange rate:

goal of inflation (AUD rises)

A
  • AUD rises:
  • decrease in Net Exports decreasing demand inflation,
  • decreasing consumption and investment spending
  • decreasing AD and pressure on prices.
  • A higher dollar means the cost of production decreases as imported goods are now relatively cheaper, thus decreasing cost inflation
53
Q

Effects of a movement in exchange rates:

impact on CAD and CAS (opposites)

A

A depreciation: increase demand for exports, increasing balance on goods and services, credits in current account will rise relative to debits therefore decreasing the CAD/ increasing CAS.
opposite is true.

54
Q

International Competitiveness

A

measures a country’s ability to compete in global markets for goods and services, where competition is based on price and non-price factors.

55
Q

Factors that influence on international competitiveness

A

Productivity, Production costs, availability of natural resources, exchange rates, relative inflation rates.

56
Q

Trade Liberalisation

A

Trade liberalisation can be defined as any government policy initiative that is designed to promote free trade or reduce restrictions or barriers to trade with other countries.

57
Q

Effects of trade liberalisation on: international competitiveness and inflation

A
  • Increase competition forces local businesses to lower prices and improve quality.
  • encourages firms to specialise their products in areas of comparative cost advantage, decreasing opportunity cost making business more competitive.
  • Allows firms to gain economies of scale
58
Q

Effects of trade liberalisation on: Full employment

A

By boosting efficiency, slowing down inflation, trade liberalisation may make business more internationally competitive, enabling them to increase their sales in domestic and foreign markets. This can lead to higher production levels, increasing demand for resources such as labour and therefor decreasing unemployment closer to goal of 4.5%.

59
Q

Effects of trade liberalisation on: Economic Growth

A

Trade liberalisation leads to greater specialisation and more efficient allocation of resources, involving lower opportunity cost. This leads to increased productivity growth product possibility frontier and productive capacity, therefore increasing GDP.

60
Q

Effects of trade liberalisation on: living standards

A

Trade liberalisation leads to a more competitive market meaning consumers can access more goods and services at a lower price, resulting in increase in discretionary income.
However it can lead to higher structural unemployment in short term, this reduces incomes and consumption (access to goods and services) and non-material living standards such as mental and physical health, family tensions and potentially increased crime rates.

Economics (4 decks)

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