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eco 3/4 > unit 3 aos 3 > Flashcards

unit 3 aos 3 Flashcards

1
Q

define economies of scale

A

volume that a firm needs to produce so that its able to effectively cover its fixed costs and operate at the minimum efficient scale

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2
Q

define international specialisation

A

countries focus on producing those g/s that they have the greatest cost advantage in. by putting resources to work in their most productive use, a nation can generate more GDP from the same resources

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3
Q

types of advantage (2)

A

absolute cost advantage (if a nation is the cheapest/most efficient producer of a single g/s in the world) or comparative cost advantage (when a country specialises in a few key areas of production where its cost advantages are greatest or disadvantages are lowest)

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4
Q

trade & impact on living standards

A

boosts GDP, creates jobs, lower price for consumers, greater choice for consumers, access to more resources for businesses

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5
Q

define the balance of payments

A

summarises the economic transactions of an economy with the rest of the world. transactions include export/import of goods, services and financial assets, along with transfer payments. the bop is a zero balance account(overall balance of payments account always balances and the total value of credits is equal to the total value of debits.

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6
Q

define credit

A

money is received from foreign countries to aus. positive entries into the account

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7
Q

define debit

A

money is outlaid from aus to foreign countries. negative entries into the account

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8
Q

define the current account

A

captures the net flow of money as a result of aus engaging in international trade. the difference between value of all credits within the quarter and all debts within the quarter. broken into 4 sub accounts

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9
Q

define net goods (balance on merchandise trade)

A

difference in total value between exports credits for goods sold overseas minus import debits for goods purchased from abroad.

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10
Q

define net services

A

difference between value of service credits received by aus minus service debits paid abroad

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11
Q

what is the trade balance / balance on goods and services

A

net goods + net services

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12
Q

define net primary income

A

payments of incomes to australians from overseas less payments to overseas people from aus (wages, interest, rent, profit, dividends)

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13
Q

define net secondary income

A

a one way movement of money where nothing is expected in return, from one country to another.

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14
Q

current account surplus

A

total value of credits exceeds total value of debits

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15
Q

current account deficit

A

total value of debits exceeds totally value of credits

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16
Q

define capital account

A

capital transactions include net capital transfers and the net acquisition of non produced, non financial assets

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17
Q

define financial account

A

shows how aus funds its cad. records the value of total credits for investments and borrowing received by aus from abroad minus total debits for investment and lending by australians abroad

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18
Q

state the types of investment in the financial account (5)

A

direct investment, portfolio investment, financial derivatives, reserve assets, other investment

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19
Q

define direct investment

A

financial transactions related to long term capital investment in a business where the investor has significant voting power in the business (10% or above ownership of shares)

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20
Q

define portfolio investment

A

the purchase of equity or debt in a business. involving less than 10% investment in the company

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21
Q

define financial derivatives

A

the purchase or sale of financial contracts between 2 parties where the value is derived from another financial instrument (bond/share). these transactions involve the exchange of risk between parties rather than funds

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22
Q

define reserve assets

A

purchase/sale of reserve assets held by the RBA. These are assets controlled by the RBA to meet policy objectives such as intervention in the foreign exchange market and to assist the aus government in meeting commitments to the IMF.

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23
Q

define other investments

A

transactions that dont fit into the other categories. includes lending & borrowing.

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24
Q

relationship between CA & CAFA

A

the value of whatever is traded recorded in the CA, is offset by a movement of some form of asset to pay for it, recorded in the CAFA so the sum of these accounts is always 0. when the balance of one account is in surplus, the balance of the other must be in deficit.

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25
Q

define CA deficit

A

when total debits inn the CA exceed total credits, expressed as a % of GDP. when australias gross national expenditure exceeds national income (GDP)

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26
Q

2 causes of CA deficit

A

structural and cyclical

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27
Q

structural component of CA deficit

A

CAD that exists when economy is running at its long term growth rate of approx 3%. this balance remains in deficit largely because of the build up of australias net foreign debt over time that requires large outflows of money

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28
Q

cyclical component of CA deficit

A

tied to changes in the economic cycle

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29
Q

AD factors that worsen cyclical CAD

A

low overseas growth, low TOT, higher AUD, low interest rates, increase in foreign aid, high consumer/business confidence & disposable income increases spending on imports

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30
Q

AD factors that improve cyclical CAD

A

high overseas growth, high TOT, low AUD, high interest rates, decrease in foreign aid, low consumer/business confidence & disposable income decreases import spending

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31
Q

define net foreign debt

A

difference in value between what aus has borrowed from and owes overseas minus what aus has lent or invested abroad

32
Q

define net foreign equity

A

excess value of foreign owned aus assets (property/shares) over overseas assets owned by aus residents

33
Q

2 types of overseas borrowers

A

official (public, government) borrowers who generate official debt, 25% of NFD and non official (private sector) borrowers who generate non official debt, 75% of NFD

34
Q

state the causes of NFD (4)

A

lack of domestic savings, many budget deficits, opportunities for foreign investors, sound/economic/political/social climate

35
Q

benefits of NFD

A

access to cheaper credit (aus interest rates are usually higher than overseas), finance for expansion (can make up for a deficiency in local savings)

36
Q

disadvantages of NFD

A

creation of economic hardship(forces government to lift taxes), burden of debt repayment, adds to CAD (weakens the currency and diminishes purchasing power)

37
Q

define terms of trade

A

the ratio of export prices to import prices. amount of imported goods that can be purchased with a unit of exported goods. if index increases aus is receiving more for exports, if index decreases aus is receiving less

38
Q

measurement of TOT

A

export price index divided by import price index multiplied by 100

39
Q

define export price index

A

measures changes in the average prices of a basket of aus exported goods

40
Q

define import price index

A

measures changes inn average prices of a basket of our i imported goods

41
Q

define favourable terms of trade

A

where the average prices received for exports is higher than average price received for imports. TOT is more favourable when export prices rise faster/fall less then import prices

42
Q

define unfavourable terms of trade

A

where the average prices for exports is lower than the average price for imports. export prices rise slower/fall faster than import prices.

43
Q

effects of TOT: AD and economic activity

A

TOT is an AD side factor that effects (X-M). decline in TOT weakens value of our export sales relative to import spending and slows AD/economic activity. rise in TOT boosts value of net exports and gross national income. tends to increase consumption, AD, economic activity

44
Q

effects of TOT: CAD

A

fall in TOT boosts CAD. when we receive lower prices, it means theres a relatively weaker demand internationally for our exports. the value of credits for our exports decreases while higher global prices paid by us for imports increases our import debits, decreasing the BOGS

45
Q

effects of TOT: exchange rate

A

as commodity prices rise, aus exporters are receiving more for any given quantity of exports. this higher level of income must be converted to AUD, increasing AUD demand and raising its value.

46
Q

effects of TOT: living standards

A

when export commodity prices rise, improves TOT and increases profits for those who export their goods/services, increasing real national disposable incomes, increasing purchasing power for individuals

47
Q

effects of TOT: domestic goals (economic growth & full employment)

A

high TOT increases profits/incomes for those who export, increasing real national disposable income, increasing purchasing power (C + I) aswell as demand for exports. this increases AD and GDP, boosting economic growth. with increases in growth, places downward pressure on unemployment.

48
Q

effect of TOT: domestic goals (inflation)

A

if prices for import goods fall relative to exports, this reduces unit costs and maximises profits for producers using imported inputs, reducing inflationary pressures. if world prices for our exports rise in conjunction with an increase in demand, may cause inflation due to capacity restraints on production & increase in C + I dye to higher national income.

49
Q

define exchange rate

A

value of one countries currency when compared to the currency of another country. predominantly compared against USD

50
Q

define trade weighted index

A

a price in terms of a weighted average on a basket of currencies. gives a measure of if the AUD is rising/falling in comparison to the currencies of our trading partners

51
Q

define floating exchange rate

A

system where currency price is set by foreign exchange market based on supply and demand compared with other currencies. helps stabilise the economy

52
Q

exchange rate & interest

A

when aus increases interest rates, overseas investors will invest to achieve a higher return & australians are more likely to domestically invest. money entering aus needs to be converted to AUD, increasing demand for the dollar, causing an appreciation.

53
Q

exchange rate & TOT

A

when TOT increases, prices received for exports have increased relative to prices paid for imports, therefore exporters receive more for goods/services. higher income must be converted to AUD, increasing demand and causing an appreciation

54
Q

exchange rate & relative rates of inflation

A

high inflation reduces demand for our exports as prices are higher in global markets, as consumers buy less and leads to an increase in supply as australians buy more imports, thus trading out of AUD, causing a depreciation

55
Q

exchange rate & demand/supply for exports/imports

A

high overseas growth increases export demand and places upward pressure on exchange rates as suppliers are paid in AUD. increase in disposable income/consumer confidence increases demand for imports (cars televisions) therefore increasing supply of AUD causing a depreciation

56
Q

inflation & a depreciation of the exchange rate

A

lower dollar = demand inflation. high incomes from higher export sales increase C + I, increasing AD. lower dollar will increase costs of production, creating cost inflation. imports purchased by consumers will be more expensive

57
Q

CAD/CAS & a depreciation of the exchange rate

A

increase in demands for exports, increasing BOGS/trade balance and reducing CAD/increasing CAS

58
Q

strong/sustainable growth & full employment & depreciation of exchange rate

A

exports are more price competitive in global market, increasing demand. this increases AD(X) and encourage local producers to lift production to meet demand, increasing national production and economic growth. this also increases derived demand for labour, reducing unemployment and moving closer to the goal of full employment.

59
Q

living standards & depreciation of exchange rate

A

imports are more expensive, therefore australians will purchase domestic g/s, increasing GDP and the ability of people to access goods and services, increasing material living standards

60
Q

inflation & appreciation of exchange rate

A

higher dollar will reduce cost of production for producers using imported resources, decreasing cost inflation.

61
Q

define international competitiveness

A

measures a countries ability to compete in global markets.

62
Q

high productivity & international competitiveness

A

total output per unit of input. high productivity allows businesses to reduce prices/increase quality, increasing international competitiveness

63
Q

production costs & international competitiveness

A

labour/capital/raw material costs. when these costs increase, prices will rise & competitiveness will decline. capital costs have decreased due to advances in modern technology

64
Q

availability of natural resources & international competitiveness

A

depends on amount of land available for cultivation and climate. aus has an abundance of natural resources (mining)

65
Q

exchange rates & international competitiveness

A

reduced productivity will increase inflation and reduce competitiveness, reducing value of exchange rate as net demand for AUD on foreign currency markets will fall. the depreciation restores competitiveness.

66
Q

relative inflation rates & international competitiveness

A

low inflation rates will assist aus tradeables sector as export prices are lower in global markets & import prices are higher in domestic markets, increasing international competitiveness

67
Q

international competitiveness & economic growth

A

if prices decrease relative to overseas goods, it enables aus businesses to gain larger market share & boost AD & economic growth.

68
Q

international competitiveness & full employment

A

lower prices relative to overseas goods increases AD and therefore derived demand for labour, boosting employment and going closer to full employment goal. may increase structural employment in the short term as businesses restructure to be more competitive

69
Q

define trade liberalisation

A

government policy initiative designed to promote free trade/reduce barriers to trade with other countries.

70
Q

state the types of barriers to trade (3)

A

import quotas, subsidies and industry assistance, tariffs

71
Q

define tariffs

A

indirect tax placed on certain imported goods to make them less price attractive to consumers. limits foreign competition

72
Q

define subsidies

A

government cash payments to local producers to assist in covering costs of production. allows local businesses to grow and internationally compete

73
Q

define import quotas

A

restriction that involves importers needing to obtain a license that gives permission to bring in a certain number of goods into the country.

74
Q

trade liberalisation and full employment

A

makes local businesses more internationally competitive, leading to higher sales and production which increases need for more resources (derived demand for labour) lowering unemployment

75
Q

trade liberalisation and living standards

A

short term may lead to structural employment for businesses who restructure, therefore negatively affecting material living standards as income will be reduced. long term, more employment: higher incomes allow people to access more g/s putting them in a better position to pursue non material factors (increased leisure)

eco 3/4 (3 decks)

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