Eco U3AOS3

What is international trade?

The exchange of goods and services between countries.

What are the gains from international trade?

Lower prices, greater choice, access to resources, economies of scale, increased competition and efficiency.

What is the Balance of Payments (BOP)?

A record of all economic transactions between Australia and the rest of the world over a period of time.

What is the Current Account Balance (CAB)?

The net result of transactions involving goods, services and income between Australia and the rest of the world.

Formula for Current Account Balance?

BOGS + Net Primary Income.

What is BOGS?

Balance of Goods and Services = export credits minus import debits.

What is Net Primary Income (NPI)?

Income earned overseas minus income paid overseas.

Why is Australia's NPI usually negative?

Australia has high foreign liabilities, so significant income is paid overseas as interest, profits and dividends.

What is Net Foreign Debt?

Australia's foreign borrowing minus lending.

What is Net Foreign Equity?

Foreign ownership of Australian equity assets minus Australian ownership of foreign equity assets.

What is the exchange rate?

The value of one currency expressed in terms of another currency.

What is Terms of Trade?

Export Price Index ÷ Import Price Index × 100.

What is International Competitiveness?

The ability of Australian businesses to sell goods and services in international markets at competitive prices.

What causes Terms of Trade to rise?

Export prices rise relative to import prices.

What causes Terms of Trade to fall?

Export prices fall relative to import prices.

What happens when Terms of Trade rises?

Export revenue rises → BOGS improves → GDP growth rises → living standards rise.

What happens when Terms of Trade falls?

Export revenue falls → BOGS worsens → GDP growth falls → living standards fall.

Main factor affecting Australia's Terms of Trade?

Commodity prices.

Why do higher commodity prices improve Australia's Terms of Trade?

Commodity exports form a large share of exports, increasing the export price index.

What is appreciation?

Increase in the value of the AUD.

What is depreciation?

Decrease in the value of the AUD.

Effect of appreciation on exports?

Exports become more expensive, export demand falls.

Effect of appreciation on imports?

Imports become cheaper, import demand rises.

Effect of appreciation on BOGS?

BOGS worsens.

Effect of appreciation on GDP growth?

GDP growth falls.

Effect of depreciation on exports?

Exports become cheaper, export demand rises.

Effect of depreciation on imports?

Imports become more expensive, import demand falls.

Effect of depreciation on BOGS?

BOGS improves.

Effect of depreciation on GDP growth?

GDP growth rises.

Higher Australian interest rates → AUD?

Appreciates.

Why? (Higher interest rates)

More foreign investment → greater demand for AUD.

Higher commodity prices → AUD?

Appreciates.

Why? (Higher commodity prices)

More export earnings → more demand for AUD.

Higher Terms of Trade → AUD?

Appreciates.

Greater export demand → AUD?

Appreciates.

More foreign investment → AUD?

Appreciates.

Lower inflation than trading partners → AUD?

Appreciates.

Better credit rating → AUD?

Appreciates.

Speculation that AUD will rise → AUD?

Appreciates.

What is productivity?

Output produced per unit of input.

Productivity rises → IC?

Improves.

Why?

Lower costs → lower export prices → greater competitiveness.

Productivity falls → IC?

Worsens.

Wage rises → IC?

Worsens.

Why?

Costs rise → export prices rise → competitiveness falls.

More natural resources → IC?

Improves.

Why?

Greater supply → lower prices → competitiveness improves.

Lower inflation than overseas → IC?

Improves.

Depreciation of AUD → IC?

Improves.

Cyclical influence on CAB?

Changes in economic activity.

Strong Australian growth affects imports how?

Imports rise.

Strong Australian growth affects CAB how?

CAB worsens.

Weak growth in trading partners affects exports how?

Exports fall.

Weak growth in trading partners affects CAB how?

CAB worsens.

Appreciation affects CAB how?

Worsens CAB through weaker BOGS.

Depreciation affects CAB how?

Improves CAB through stronger BOGS.

If NFD falls, what happens to interest payments?

Interest payments fall.

If interest payments fall, what happens to NPI?

NPI improves.

If NPI improves, what happens to CAB?

CAB improves.

Higher GDP growth generally affects living standards how?

Improves material living standards.

Higher export income affects living standards how?

Improves living standards.

Lower unemployment affects living standards how?

Improves living standards.

Productivity falls (full chain)

Productivity falls → costs rise → export prices rise → international competitiveness worsens.

Minimum wage rises (full chain)

Costs rise → export prices rise → competitiveness worsens.

Foreign investment falls (full chain)

Less demand for AUD → AUD depreciates.

Commodity prices fall (full chain)

Export prices fall → Terms of Trade falls.

Terms of Trade falls (full chain)

Export revenue falls → GDP growth falls → living standards fall.

AUD appreciates (full chain)

Exports dearer → exports fall → imports rise → BOGS worsens → GDP growth falls.

AUD depreciates (full chain)

Exports cheaper → exports rise → imports fall → BOGS improves → GDP growth rises.