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econ 3/4 > econ U3 AOS3 > Flashcards

econ U3 AOS3 Flashcards

1
Q

Balance of payments

A

Record of financial transactions between residents of Australia and the rest of the world

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2
Q

Current account

A

An account in the balance of payments that show transactions which hold no future obligations
- records the value of credits and debits for goods, services, primary incomes and secondary incomes.

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3
Q

Capital and financial account

A

records the value of credits and debits for capital transactions, such as investments or the movements of money capital.

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4
Q

Iron ore and coal exports G+S sub account

A

A structural cause of the CAS

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5
Q

Cyclical component of the CAS

A

-

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6
Q

Net Foreign Liabilities

A

Total financial obligations Australians have to the rest of the world and includes Net Foreign Debt and Net Foreign Equities, worth $976bn as at Dec 2018.

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7
Q

Terms of trade

A

A ratio of Australian export prices to import price (Px/ Pm)

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8
Q

International competitiveness

A

Measures a country’s ability to compete in global markets for goods and services, where this competition can be based on price or non-price factors (such as service or quality)

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9
Q

Trade liberalisation

A

Any government policy initiative designed to promote or reduce restrictions on free trade with other countries by reducing or eliminating tarriffs, import quotas and export subsidies

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10
Q

Material living standards

A

Measures a households ability to access goods and services

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11
Q

Non-material living standards

A

Looks at a range of non-monetary factors that affect a society’s quality of life

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12
Q

productivity

A

measure of outputs per input

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13
Q

3 macro-economic goals

A
  • Strong & sustainable economic growth
  • Full employment
  • Low & stable inflation
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14
Q

The goal of strong and sustainable economic growth

A

the highest growth rate possible, consistent with strong employment growth, but without running into inflationary, environmental or external pressures. Generally considered to be within the range of 3 - 3.5% per annum.

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15
Q

The goal of low inflation

A

2-3% growth in inflation per annum on average over the course of an economic cycle to maintain price stability within the economy.

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16
Q

Goal of full employment

A

The lowest rate of unemployment that can be achieved without running into excessive inflationary pressure. Often referred to as the NAIRU, and is currently considered to be 4.5%.

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17
Q

Q. Explain the relationship b/w the current account deficit and the level of Net Foreign Payment

A

Current account deficit refers to a situation where total debits in the Current Account of the Balance of Payments exceed total (credits). Net Foreign Debt is debt owed to overseas creditors. Persistent current account deficits lead to an accumulation of net foreign liabilities/debt as the deficits are financed by capital inflows. The higher net foreign debt then, necessitates greater income outflows to service that debt, worsening future current account deficits.

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18
Q

what area of the Australian economy negatively impact our international competitiveness

A
  • Bad business management practices
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19
Q

What are the 5 gains from trade

A
  • Lower prices for consumers
  • Greater choice
  • Increased Access to resources
  • Promote economies of scale
  • Increased competition & efficiency
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20
Q

Lower $’s for consumers

A
  • The increase competition from overseas businesses forces Australian businesses to lower their prices to compete
  • Trade gives Australians access to cheap G+S overseas
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21
Q

Greater choice

A

Australians rely heavily on imported goods (life saving medicines, tech, etc) which would not be available w/o trade

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22
Q

Increased access to resources

A
  • Trade gives Australia access to resources [land, labour & capital] from around the world which would otherwise not be available
  • Most capital resources like computers & equipment are imported as well as petrol [despite exporting oil] & have a high history of immigration [labour].
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23
Q

promote economies of scale

A
  • By opening up borders to trade Australian businesses can sell to a much larger market place
    –> This allows businesses to spread their fixed costs across a much greater volume of sales thus reducing their cost per unit
  • Scale improves competitiveness of businesses therefore, a good thing
    e.g. cotton on: fixed cost = paying rent, if they sell more clothes their rent is paid for but if they sell less clothes their rent may be another expense
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24
Q

Increased competition & efficiency

A
  • More firms = increased competition & efficiency
  • Efficiency: if firms don’t improve productivity & lower their costs they will go out of business
  • Good for consumers as access to G+S increases
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25
Q

Explain the difference between a credit and a debit

A

credit = money flowing into Australia
debit = money leaving Australia

26
Q

I can explain the relationships between the five gains from trade (how the gains are linked and influence each other)

A

Increased access to resources & increased competition & efficiency = inc economies of scale = Lower prices for consumers = greater choice

27
Q

create a diagram that identifies all accounts and sub-accounts of the BOP

A

CA = G+S PI SI [GISPIS]
PI -> dividends, profits, rent & interests
SI -> pensions, gifts, foreign aid

CAFA = PI DID RO
- portfolio investments; shares
- direct investment; sale of a coal mine to China
- derivatives
- reserve assets
- other

28
Q

identify where on the BOP transactions are recorded

A

Current Acc = (BOT = export & import of G+S) + (PI & SI)
CAFA = debt X & M+ equity X & M

29
Q

explain why the overall balance of payments must total to zero.

A

because the BOP must be balanced therefore total value of credits = total value of debits
e.g. we currently run a CA surplus thus we have a CAFA deficit

30
Q

explain the difference between a Current Account Surplus and a Current Account Deficit

A

CAS = value of all CA credits exceeds total value of all CA debits for G+S PI SI, measured over a period of time whereas, CAD = value of all CA debits exceeds total value of all CA credits

31
Q

explain the structural factors that influence the current account and why Australia has mostly experienced current account deficits

A

structural factors - Anything that impacts AS; the ability and willingness of businesses to produce

32
Q

explain the cyclical factors that influence the current account

A

Cyclical factors - Anything that impacts AD
- stronger domestic spending inc imports & dec exports weakening the CA balance

33
Q

distinguish between the structural and cyclical influences on the balance on current account

A
34
Q

explain factors that have influenced Australia’s balance on current account in the last four years and describe the trend in the balance on current account over the last four years

A
35
Q

evaluate the impacts of the balance on current account on the goals and living standards

A
36
Q

explain the difference between Net Foreign Debt (NFD) and Net Foreign Equities (NFE) and Net Foreign Liabilities

A

Net foreign debt NFD = Australia’s liabilities [borrowed] - Australia’s assets [owns]
Net foreign equity (NFE) = (value of foreign owned Australian assets) - (value of foreign assets owned by Australians)
- The NFD is debt owed to overseas creditors, while NFE is the excess value of foreign-owned assets over Australian-owned assets.
NFD + NFE = NFL

37
Q

composition of NFD

A

NFD = government + private sector debt

38
Q

explain reasons for existence of Net Foreign Debt in Australia

A
  • Lack of domestic savings
  • On-going budget deficits
  • Opportunities for foreign investors
  • Sound environment
  • Lower value of AUD
  • Financial sector deregulation
39
Q

describe relative levels of NFD and NFE over the last four years

A

Australia has funded its current account deficits and domestic investment largely through accumulating foreign debt obligations (high NFD).
At the same time, Australian investment abroad in foreign equities/assets has exceeded foreign investment into Australia (negative NFE).

40
Q

explain the two way relationship between the level of NFD and NFE and the balance on current account

A
41
Q

explain the impact on the goals and living standards if the level of NFD is unsustainably high

A

high NFD reduces potential economic growth; resources are diverted, higher interest rates on borrowed money. Negative impact on price stability. Increase unemployment

42
Q

explain two ways the exchange rate is commonly measured

A

TWI - statistical measure of the value of the AUD by comparing it to a basket of o/s currencies weighted by their importance in trade

direct quotation - Price of one currency expressed in terms of another currency

43
Q

explain the difference between demand for Australian dollars and supply of Australian dollars

A

SIDE
supply = imports = supply of AUDD
demand = exports = demand for AUD

44
Q

recognise eight factors on a multiple choice question and explain four factors on a short answer question that affect the value of the exchange rate

A
  • Decrease in export demand = decrease demand for AUD = depreciation in AUD
  • Decrease in import demand = decrease supply of AUD = appreciation in AUD

G+S PI SI investment relative interest rates

45
Q

explain two factors that
have impacted the value of
Australia’s exchange rate in
the last four years

A

commodity prices [inc commodity price = inc value of AUD] and relative interest rates [attract foreign investors]

46
Q

explain the impact of the exchange rate on the balance of the current account, NFD and NFE.

A

Exchange Rate Appreciation:
Current Account: Worsens trade balance by making exports more expensive and imports cheaper, but improves net primary income due to lower debt interest repayments.
NFD: improves NFD as exchange rate is lower.
NFE: increasing NFE due to reduced foreign investment and lower exchange rates.

47
Q

explain what the terms of trade is

A

$ of exports compared to $ of imports -> (export $ index / import 4 index) x 100, TOT > 100 = favourable movement for export prices; good for economy

48
Q

what 2 factors influence the Terms of Trade

A
  • commodity prices [x]
  • production costs in trading partners [M]
49
Q

How have “commodity prices” influenced the Terms of Trade

A
  • impact export price index
  • main driver of the TOT in Australia
  • this is bc commodity prices of iron ore, coal, oil, natural gas & gold are determined by global demand and supply which fluctuate daily and are quite volatile
50
Q

Example of commodity prices influencing TOT over the last 4 yrs

A
  • when china reopened their economy post covid around late 2022 there was a big spike in demand for iron ore; iron ore prices increased; export $ index increased our TOT became more favourable
  • when a large supplying iron ore mine in brazil collapsed in 2019 that also drove up the $ of iron ore increasing aus’ export $ index
51
Q

how has “production cost in trading partners [o/s]” influenced the Terms of Trade in the last four years

A
  • impact import price index
  • if the cost of production increases then import prices will also increase which will cause an unfavourable movement in the TOT & vice versa
52
Q

explain the impact of the terms of trade on the exchange rate and the balance on current account

A

improvement in TOT = increased demand for AUD = increased X earnings = improve the CA balance by enhancing the trade balance and reducing import costs = increasing national income

53
Q

explain the impact of the terms of trade on the goals and living standards

A

Appreciation in AUD = dec X & inc M = dec AD = dec growth in Aussie economy = dec material living standards [vice versa]

54
Q

explain the concept of international competitiveness

A

ability of Australian business to compete in the international market on price or quantity

55
Q

recognise five factors affecting international competitiveness

A
  • productivity
  • production costs
  • availability of natural resources
  • exchange rates
  • relative rates of inflation
56
Q

Explain how “productivity” impacts international competitiveness

A

productivity - measure of outputs per inputs
- labour & capital productivity drive improvement in cost & quality = increase international competitiveness
–> more outputs per hour means unit costs are lower = lower prices on G+S
e.g. Aus’ mining market has increased outputs per inputs, remaining as a low-cost supplier of bulk commodities

57
Q

Explain how “availability of natural resources” impacts international competitiveness

A

we are abundant in natural resources; This means that minerals and rural commodities can often be produced at lower prices, often making us more internationally competitive in these areas.

58
Q

explain the impact of changing levels of competitiveness on the goals and living standards

A

improvement in international competitiveness = inc X & dec M = increase AD = inc growth = inc material living standards

59
Q

Australia’s capital account is currently in a surplus, why? what does that mean for the CAFA

A
60
Q

TOT & exchange rate as an AD factor

A

favourable movement in TOT = export $ index increased = value of exports in AD formula increased
AD = C+I+G+(X-M)
X = $ x qty
Favourable movements in TOT = increased dividends, wages & profits
& govt receives higher tax revenues
–> increased C, I & G
- imports are cheaper

61
Q

TOT & exchange rate as an AS factor

A
  • import prices = impact cost of production = affecting the willingness & ability of Aussie firms to produce
  • Increase in TOT due to dec in import prices = improvement in TOT = good for AD & AS [vice versa]
  • increased exchange rate = inc $ of our exports and dec $ of imports [vice versa]

econ 3/4 (4 decks)

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