ECO - TRIALS REVISION

what is the Balance of Payments? (subjectively)

an economic indicator

what does the Balance of Payments show?

the record of the transactions between Australia and the rest of the world during a given period

what are the two main components of the Balance of Payments?

the Current Account (CA) and the Capital & Financial Account (KAFA)

what is money flowing in referring to? (BOP)

inflow OR credit

what is money flowing out referring to? (BOP)

outflow OR debit

what is another name for BoGS? (BOP)

trade balance

what is the terms of trade? (BOP)

an index value which measurres the relative moevements in the prices of an economy’s imports and exports over a period of time

what does an improvment in the terms of trade mean? (BOP)

the same volume of exports can buy more imports

what are the three components of the Current Account? (BOP)

• the Balance of Goods & Services (BoGS)

• Net Primary Income (NPY)

• Net Secondary Income (NSY)

what does BoGS on the CA record? (BOP)

all export and import transactions

what does the NPY on the CA record? (BOP)

all earnings on foreign investment (NOT the investment itself)

what are some examples of earnings recorded on the NPY? (BOP)

interest payments, rent, profit & dividends

what does the NSY on the CA record? (BOP)

all non-market transfers- unconditional foreign aid, payouts on insurance claims & workers’ remittances

what are the two components of the Capital Account? (BOP)

capital transfers to other countries (debt forgiveness) & exchange of intellectual property rights (patents & franchises)

how many types of investment are recorded on the financial account? (BOP)

5 types

what are the five types of investment in the financial account? (BOP)

• direct investment

• portfolio investment

• financial derivatives

• reserve assets

• other

what is a floating exchange rate system?

where a currency's value is determined by market forces of supply and demand in the foreign exchange market, rather than fixed by a government

what are structural factors on the BOP?

those which are long-term in nature

what are examples of structural factors on the BOP?

structure of the economy (what is produced) and Australia’s persistent CAD’s (accumlation of NFL)

what is the savings-investment gap?

Australia invests more than savings, requiring borrowing from foreign countries & interest payments on debt

what are some changes in the global economy which impact the BOP?

Global growth rates, exchange rate movements & international capital flows

what is a CAD (Current Account Deficit)?

where more income is paid to non-residents, than what is earned from non-residents

when did Australia switch to a floating exchange rate?

1983

what is the TWI?

“Trade Weighted Index” measures the value of the AUD against a basket of currencies, with each currency weighted according to Australia's trade with that country

what is the terms of trade (ToT)?

measure of the relative movements in the export prices and import prices

what is international compeitiveness?

the ability of a country to produce goods and services that succeed in global markets

what is the J-Curve effect?

states that when there is a currency depreciation, BoGS will worsen in the short-term because prices adjust (volume doesn’t), however when volume adjusts in the long-term, BoGS will improve

what is the trade balance?

exports minus imports

what is external stability?

sustainability on Australia’s external accounts so that Australia can meet its’ financial obligations

does an appreciation worsen or improve the CAD?

worsens the CAD (increased imports, reduced exports)

does a depreciation worsen or improve the CAD?

improves in the long-run (reference J-curve effect)

what does value refer to? (VCD)

how much? → eg export/import amounts

what does composition refer to? (VCD)

what? → eg export/imports of tourism

what does direction refer to? (VCD)

to who? → eg China, India….

what policy has the longest impact lag?

monetary policy

what are the internal stability measures/objectives?

economic growth, unemployment, inflation & distribution of income/wealth

what is the ideal currency exchange rate for international competitiveness?

0.65 AUD to 0.70 AUD (per $1 US)

what is the name of one multilateral trade agreement Australia has?

AANZFTA - Australia, NZ + 10 ASEAN member countries (east-asia)

what are exemplar POSITIVE implications of multilateral trade agreements for Australia?

• increased export volumes (agriculture, resources, and education)

• tariff reductions = improved competitiveness for Australian exports (beef, dairy, wheat and wine)

what is an externality?

additional costs/benefits of production/consumption, experienced by people other than those directly involved in the transaction

what is the effect of an externality?

they are not reflected in the price mechanism = under/over supply