Unit 3 - AOS3

Question 1

Gains of Trade (5)

Answer 1

• lower prices for consumers
• greater consumer choice
• access to resources
• economies of scale
• increased competition & efficiency

Question 2

Free Trade

Answer 2

The removal of barriers to trade such as tariffs and quotas.

Question 3

Fixed Costs

Answer 3

Business costs that are the same regardless of the amount of goods produced (e.g. rent).

Question 4

Variable Costs

Answer 4

Business costs that change depending on the level of output (e.g. the paint needed for a car).

Question 5

Economies of Scale

Answer 5

The cost advantage experienced by a firm when it increases its level of output, thereby spreading its fixed costs over more units.

Question 6

Financial Capital Flows

Answer 6

The movement of money from one country to another for the purpose of investment (e.g. the purchase of stocks).

Question 7

Human Capital Flows

Answer 7

The movement of employees from one country to another (e.g. skilled migrants).

Question 8

Balance of Payments (BOP)

Answer 8

A record of all the transactions between Australia and the rest of the world over a period of time (measured quarterly).

Question 9

Credit

Answer 9

Money flowing into Australia (e.g. exports)

Question 10

Debit

Answer 10

Money leaving Australia (e.g. imports)

Question 11

Surplus

Answer 11

When the value of credits is greater than the value of debits.

Question 12

Deficit

Answer 12

When the value of debits is greater than the value of credits.

Question 13

Stock (BOP)

Answer 13

The measurement of an account at one point in time.

Question 14

Flow (BOP)

Answer 14

The measurement of the transactions occurring in an account over a period of time.

Question 15

Net (BOP)

Answer 15

After deductions (credits - debits).

Question 16

Current Account (CA)

Answer 16

A record of all the transactions between Australia and the rest of the world that are of a current nature (no future obligations). Made up of the BOMT, Net Services, Net Primary Income, and Net Secondary Income accounts.

Question 17

Balance on Merchandise Trade (BOMT)

Answer 17

Also “net goods”, “balance on goods”. The total value of all exported goods, minus the total value of all imported goods.

Question 18

Net Services

Answer 18

The total value of all exported services (e.g. education, tourism), minus the total value of all imported services.

Question 19

Net Primary Income

Answer 19

The earnings received by Australians overseas for their contribution to the production process, such as dividends, profits, rent and interest.
Primary Credits - Primary Debits

Question 20

Net Secondary Income

Answer 20

One way transactions, such as foreign aid and gifts.
Secondary Credits (e.g. gifts) - Secondary Debits (e.g. foreign aid).

Question 21

Capital & Financial Account (CAFA)

Answer 21

A record of all the transactions between Australia and the rest of the world that are of a capital nature (future obligations).

Question 22

Net Portfolio Investment

Answer 22

Investment involving less than 10% control of a company (e.g. buying shares).
Portfolio Investment Credits - Portfolio Investment Debits

Question 23

Capital Account

Answer 23

A sub account of the CAFA which records the transfer of non-produced, non-financial assets such as brand names and copyrights.

Question 24

Financial Account

Answer 24

A sub account of the CAFA which records how Australia finances its current account deficits. Made up of Net Portfolio Investment, Net Direct Investment, Net Derivatives, Net Reserve Assets, and Others.

Question 25

Net Direct Investment

Answer 25

Investment involving more than 10% control over a company (e.g. China purchases an Australian mining firm). Direct Investment Credits - Direct Investment Debits

Question 26

Net Financial Derivatives

Answer 26

Complex contracts between buyers and sellers (e.g. a futures contract which agrees to buy or sell an asset at a predetermined price at a future date). Financial Derivatives Credits - Financial Derivatives Debits

Question 27

Other Investments (CAFA)

Answer 27

Investment flows that do not fit into the other 4 sub accounts of the financial account (e.g. trade credit - consumer purchases goods and pays back later).

Question 28

Net Reserve Assets

Answer 28

Transactions made by global banks (e.g. the RBA sends money to the UN to help fund research) Reserve Asset Credits - Reserve Asset Debits

Question 29

Savings/Investment Imbalance

Answer 29

When a country spends more on investment than it has saved, meaning that it must rely on loans from foreign countries to fund investment projects.

Question 30

Current Account Deficit (CAD)

Answer 30

When there are more debits (money leaving Australia) than credits (money entering Australia) in the current account. Represented by a negative figure.

Question 31

Structural Components of Current Account

Answer 31

The underlying economic factors which determine a country's long term current account balance (in our case, CAD). - savings/investment imbalance - young economy - level of international competitiveness

Question 32

Cyclical Components of Current Account

Answer 32

Movements in the current account balance due to fluctuations in economic activity. Note: high economic growth = greater current account deficit.

Question 33

Net Foreign Debt (NFD)

Answer 33

The value of all loans Australians owe overseas countries - the value of all loans overseas countries owe Australia. Note: currently positive, due to our savings/investment imbalance and budget deficits.

Question 34

Net Foreign Equity (NFE)

Answer 34

The value of all Australian assets owned by overseas companies - the value of all foreign assets owned by Australians. Note: currently negative, which means we own a greater portion of the world than they own of us. (Influenced by superannuation system).

Question 35

Terms of Trade (TOT)

Answer 35

The ratio of import to export prices, calculated by Export Price Index / Import Price Index * 100. Note: increase TOT = favourable (more injections relative to leakages).

Question 36

Factors Influencing the Terms of Trade (2)

Answer 36

- commodity prices - production costs in trading partners

Question 37

Exchange Rate

Answer 37

The value of one currency when swapped with another, determined by damage and supply in the foreign exchange market.

Question 38

Factors Influencing the Exchange Rate (8)

Answer 38

- commodity prices - terms of trade - relative interest rates - relative inflation rates - demand for imports/exports - foreign investment - credit ratings - currency speculation

Question 39

International Competitiveness

Answer 39

The ability of Australian businesses to compete with overseas businesses on price and quality of products.

Question 40

Factors Influencing International Competitiveness (5)

Answer 40

- productivity - production costs - availability of natural resources - exchange rates - relative inflation rates

Question 41

Net Foreign Liabilities

Answer 41

The net value of all the financial obligations Australia has to the rest of the world. Includes net foreign debt and net foreign equity.

Question 42

Balance on Goods and Services (Trade Balance)

Answer 42

The total value of the BOMT and Net Services accounts. i.e. exports - imports