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Flashcards in AOS 2B Deck (25):

Measuring E.S CAD

CAD - this is a statistical record of the financial transactions that occur between Australia and the rest of the world. The CAD makes up one half of the balance of payments, the CA is generally in debt by roughly 40m.
The Cad is comprised of 4 sectors net good,services primary incomes and secondary incomes.


CAD 4 sectors

Net goods - difference in total value between exports credit for goods sold overseas (wool) minus import debits for goods purchased from abroad -oil.
Net services - equal to the difference between value of services credit received by Aus (tourism) minus service debits paid abroad (insurance & tourism).
Net primary income - difference between income credit received from overseas (dividends) minus income debits paided it abroad ( wages dividends)
Net secondary incomes - the difference between value of secondary income credit received by our residents (pension) minus the value of secondary income debit paid abroad (gift fees) . - 1 way transactions


Measuring E.S - E.R

Measures the value of the Aus dollar when it is swapped for other currencies. Exchanging currencies is necessary as nation citizens want to paid in the currency unit approximately for their country.


E.R. Measures

Individual - Aus dollar has a separate E.R for every currency in the world, which expresses how much units for each country we can purchase with one aud.
TWI - is a general measure of Aus exchange rate, where we weight in accordance to each nations importance to our trade, -USD is weighted heavier then the indo currency.


Goal of E.S

The goal of external stability is achieved if Australia is living within it's means and able to meet it's international financial obligations.
Generally this is indicated by a low CAD to GDP ratio, sustainable NFD and a stable exchange rate.


Measuring E.S - NFD

Is an indicator of Australia external position, it is the difference in value between what Australia has borrowed from and owes overseas minus what Australia has lent or invested abroad. There is two types of overseas borrowing in AUS.
Public / official - cover budget deficit
Private / unofficial - LSO raising capital


Demand factor effecting E.S

-any factor that causes ^ to AD ( inc to business confidence) will tend cause an increase to 'C' spending, a part which must be in imports (M).Therefore AD^ from M ^ = CAD ^ =worsening the external stability.
Eg - due to the increase in household disposable income/ consumer confidence there should be an ^ to C particularly if there's no spare capacity in the domestic economy, this demand can't be meet by domestic production so we look aboard into importing goods and services which increase the cad and worsen our external stability as more is going out then in.


Supply factor effecting E.S

Adverse supply factors conditions (inc to wages) tend to make exports less price attractive, so less competitive in the international market.
Eg - increase to rulcs/ interest rates will result in less AS therefore, less D for X so less X, therefore CAD ^ = worsening the external stability.



Refers to the price of our exports in relation to the price of our imports.X:M. Can be interpretated as how many imported goods can be purchased from our per unit exported goods


Effects of excises on income equity

Excise taxes are set amounts added onto good like alcohol cigarettes and petrol, as they are deemed socially bad goods.
Alcohol and cigs tax - will worsen equity, people in the bottom quintiles tend to spend more on these items, therefore essentially they pay more tax then normal person, which worsens equity.
Petrol tax - worsens equity because poorer people have worse cars, live in outer suburbs (no access to public transport) therefore have to consume more petrol then those inner city.
Sales tax - gst impacts roughy 10% of a persons expenditure, so a poorer persons 10% is a greater amount of money then someone in the upper quintiles who can afford to give the 10%.


Income Taxes on equity

Income taxes Improve equity. Those in the higher tax bracket and quintiles are taxed heavier than those in the bottom quintiles and tax bracket. This means that those with higher incomes are brought in and those with lower incomes aren't taken out to far, essentially it smoothens out the population by bringing the higher incomes down a lot more then it brings the lower incomes down.


Trade off between E & E

We want both, but can't have both. Efficiency causes less equal income, people work more efficiently for better income. But in the other hand reaching full equality causes inefficiency, not max. But we need to be efficient to meet other goals like full employment, high e.g and low inflation. But if the inequity is too strong there social division, 'people start robbing the rich' it's not fair which causes domestic economic goals to fail. We need a happy median, where people still have the inventive to work hard and reap the benefits, but still we need a degree of equity.


Goal of I.D

The goal of equity in income distribution is achieved when every person has access to basic goods and services, enjoys a reasonable standard of living and obsolete poverty is avoided.


4 types of income

Earned income - included wages and salaries, these are incomes for effort.
Unearned income - includes dividends, profit and rent, arise firm ownership of assets.
Factor - gained by taking part in selling resources. Can be earned and unearned.
Transfers - ink uses government welfare assistance, to those families who have needs - single parents, unemployment.


Measuring income distribution

The ABS conduct a survey of households to determine the level of income distribution, the level of income can be measured at different stages.
1 private inc - from personal sources - wages profit.
2 gross inc - minuses personal income taxes
3 disposable household inc - plus indirect gov benefits -single parent
4 social wages - minuses indirect taxes - GST
5 - final income
Using any of these measure we can graph income distribution. Done by dividing the population into quintiles broken up to groups of 20 or 10%. The graph is know as the Lorenz curve


Lorenz curve

Line of perfect fit - each quintile received the exact same amount of money. - Communism
Line of perfect inequity - only the top quintile receives money, bottom quintiles received minimal. -kings and queens
The Lorenz curve moving towards P.F means we are increasing more equity in distribution
Moving towards perfect inequity means less equity, more incentive to work hard.


Economic cost of inequitable distribution of income

When we move towards inequitable distribution of income it develops an underclass of society. As we move towards inequity income isn't distributed 'fairly' which causes long term unemployment and crime, due to the top quintile receiving most/all of the income this underclass can't survive and rely on theft and robber to create an income.


Economic benefit of inequitable distribution of income

When we move towards the perfect line of inequity it creates a greater incentive to work, as a better income is received. Those who are valued higher by society, will earn a better income therefore there is an incentive to work and study.


Measuring poverty

In regards to poverty we tend to think of absolute poverty, which refers to having inadequate access to basic food, shelter and clothing which is commonly found in developing countries. But we always have relative poverty, this refers to people material living standards in comparison to the rest of the nation/communities level. For example if someone doesn't have an mobile phone, they would be deemed in poverty (in Aus for instance).
Hendersons poverty line is a measure of relative poverty in Australia. Those whom fall blow this line are deem relatively poor, although this line changes all the time.


Limitations of measuring personal income distribution

Definitional issues - equity in income distribution can't be defined, in an objective way.
Statistical issue - the stats achieved from measuring income inequality aren't accurate. - errors, false info and adjusted figures.



A cad rise mean we have greater reliance on oversea borrowing, but the more we borrow means our repayments will be bigger, so if the deficit increase then NFD will too. Circle cycle



If the aud increase, it creates our exports to be less price attractive and importing to be more attractive, which tends to increase the cad. So when the cad increase it puts downward pressure on the aud to decrease, which may cause less deficit to the ca because now the aud decrease our exports look relatively better priced then before. Correcting cycle



Large NFD causes aud to decrease, because repayments abroad are bigger. So we sell more aud in the foreign exchange. So NFD increase our aud decreases.


Demand factor to distribution of income

Any positive demand factor that increase the demand components should improve equity.
If consumer confidence increases then the component 'c' will increase so AD increase. If AD increase economic growth will increase, so to meet the demand of economic growth employment levels will rise, which means more humans will now be getting an earned income therefore improving equity as the bottom quintiles income has improved.


Supply factor to distribution of income

Any positive supply factor should result in better equity.
If rulcs/interest rates decrease, then the component 'c' decrease too, therefore AS increase. As AS increase so does economic growth and therefore employment will increase, which will result in more people getting an earned income and off the bottom quintiles. Causing better equity as the lower incomes are increasing.