SAC 5 Flashcards
(21 cards)
Relationship between trade and living standards : lower prices for consumers
Free trade has the impact of increasing competition in domestic markets meaning that domestic markets will turn to technological efficiency in order to retain profit.
Short Term - Unemployment increases and associated impact to living standards
Long Term - firms will be able to offer lower prices to consumers and will increase living standards
The relationship between trade and living standards : Greater choice for consumers
Trading with other nations allows producers access to goods and services not produced in Australia. Having greater choice, usually at lower prices will enhance both material and on material living standards
The relationship between trade and living standards : The ability of businesses to achieve economies of scale
Where production takes place on a large scale with cost of production being spread throughout a number of outputs.
By producing in larger volumes a natural reduction in cost of production will be shown.
Prices will fall, operations increase and so an increase improvements in structural run employment, tax revenue and living standards will be shown
The relationship between trade and living standards : Access to resources
The ability to import previously unimportance resources rise as trade becomes easier.
Living standards will rise as prices tend to fall and firms become more profitable resulting in improvements to structural unemployment, tax revenue and living standards
The balance of payments and its components
Current Account
Credit = Positive
Debit = Negative
A deficit of the Current account means debits are more then credits
Current Account, made up of net goods, services, primary income and secondary income
Changes to current Account
Net Goods - Sale of coal in China
Net Services - Indian students studying in Australia
Primary Income - Interest on Net Foreign Debt
Secondary Income - Overseas pensions paid to Australian Citizens
The balance of payments and its components
The capital and financial account
Capital Account - Covers capital transfers
Example - Net inflow of funds to permanent migrants
Financial Account - records how Australia finances its Current Account Deficit (National Spending exceeding national income)
Causes of Australias Current Account Deficit
Structural CAD
Structural CAD
- Savings/Investment balance, due to Australia having a small population, savings is decreased compared to investment needed to utilise natural resources. This gap is filled by foreign investing and lending to ensure that growth in Australia is achieved.
The debt and interest on the debt both contribute towards the CAD
Causes of CAD
Cyclical CAD
Cyclical CAD
- During a boom consumption spending (c) increases (imports increase –> CAD increase) also people save less (meaning savings and investment gap increases)
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Relationship between the current Account and the capital and financial account
The size of the CAS directly impacts the amount we need to borrow internationally and Capital + Financial Account = CAD
Net Foreign Debt
The difference between what Australian households/businesses/government has borrowed from overseas minus what has been lent or invested
This debt includes interest
Net Foreign Equities
The difference in value between foreign owned Australian assets and overseas assets owned by Australian residents
The cause of net Foreign debt and net Foreign equities
- Savings and Investments Gap:
- Budget Deficits: Usually funded Foreign liabilities to ensure that the nature of the budget is not lost
- Opportunity for foreign investors: Due to high natural resources there are many opportunities for foreign investors to make high returns. Although helping our economy’s productive capacity it also adds to our external liabilities
- Financial sector deregulation and globalisation: Deregulation has increased overseas capital inflow and foreign ownership of assets
Terms Of Trade
An index that reflects changes in the weighted average prices received for a basket of exports against average prices paid for a basket of imports
HISTORICAL MEASURE OF WHAT HAS ALREADY OCCURRED
Export price divided by import price x 100
Factors affecting terms of trade
Any factor affecting the demand or supply of exports or imports
Examples:
Exchange rate decreases, price of imports will increase, cause a decrease in the terms of trade
China GDP decreases, input and demand exports decrease, price of exports will decrease
Effects of movements in the terms of trade on macro economic goals and living standard
Rise - Decreased CAD, higher net exports, increased growth, higher inflation, improved employment
Fall - Increased CAD, lower net exports, decreased growth, lower inflation, increased unemployment
Net Good Example
Sale of Coal in China
Net Service Example
Indian Student studying in Australia
Primary Income Example
Interest On Net Foreign Debt
Secondary Income Example
Overseas pension paid to Australian Citizen
Effect of Trade Liberalisation on Australia’s International Competitiveness, Macroeconomic Goals and Living Standards
Favourable Trade - Trade Liberalisation forces Domestic producers to become more efficient in production in order to be internationally competitive, with this better efficiency, exports should increase, increasing AD and economic growth. An increased demand for labour will mean that the unemployment rate will decrease with downwards inflationary pressure due to a decrease in cost inflation. Material living standards will increase as consumers will have an increased purchasing power and have access to more goods and services
Trade Liberalization
Trade liberalization is the removal of tariffs, subsidies and other types of protectionist policies to promote trade between nations. This concept allows different nations to specialize in different fields where they hold a comparative advantage and where economies of scale can be reached.
