Year 11 and 12 Economics

like everything

Globalisation

Process leading to the emergence of a global economy/marketplace when level of trade liberalisation and increases (economic integration), results in structural change from increased trade flows of imports and exports

Post-Industrial Economy

Service-industry/tertiary based economy

Trade Liberalisation

Opening countries to trade

Economic Integration

Liberalisation of trade between countries

• Removal of trade barriers (trade liberalisation)

• Promotion of trade agreements (trade liberalisation)

• Standardisation of goods and services

• Use of electronic communication and commerce

Global Economy

The world economy, sum of all market exchange activities between countries and within countries

Domestic

Non-tradable sector

International

Tradable sector

Gross World Product (GWP)

Sum of all goods and services produced by all economies in world

International Financial Flows

Flows of money, capital or investment across international borders

• Speculative purposes

• Investment purposes

Foreign Direct Investment

Purchase ownership of foreign assets outright, degree of control over foreign assets (>10%)

Foreign Portfolio Investment

Purchase ownership of foreign assets without gaining significant control (<10%), eg. bonds

Carry Trade

Borrowing in a country with low interest rates while investing in high interest countries for profit

Developed World

Advanced industrialised economies

• High levels of real GDP

• High income per capita

• High living standards.

Developing World

Countries with low levels of industrialization

• Low real incomes per capita

• Low standards of living

Multinational/Transnational Corps

Interdependent worldwide operations which disperse activities and resources globally

Specialisation

Leads to changing pattern and division of labour in production or provision of goods and services (structural change)

Offshoring

TNCs set up overseas subsidiaries in major developing countries to increase profits

Outsourcing

Close internal departments and contract more efficient or expert external independent businesses

International Business Cycle

Changes in world output or GWP over time, 3-4% annual growth in GWP

Contagion

Rapid development of negative economic conditions from one country quickly transfer to another

Protectionism

Activity to stimulate domestic economy over other economies, internationally competitive

• Tariffs

• Subsidies

International Trade

Buying and selling transactions of goods and services across national boundaries

• Exports

• Imports

Imports

Purchase of foreign goods and services leading to selling of Australian dollars by Australian importers

Exports

Sale of foreign goods and services leading to buying of Australian dollars by foreigners

International Cross-Border Trade

Tradable sector, domestically produced good sold internationally

Non-tradable Sector

Domestically produced goods only sold domestically

Principle of Comparative Advantage

Each country, firm or person performing the economic activity has a comparative advantage.

Occurs when one country can produce both goods at a lower cost (sacrifice less resources in production in both areas)

Absolute Advantage

One country can only produce one good with fewer resources than others

Factor Endowment

Quality and quantity of a country’s supply of resources (CELL), can be exploited for manufacturing

Infant Industry

New domestic industry that has not reached economies of scale (not yet efficient)

Rent Seeking

Protection of an infant industry longer than required through industry lobbying instead of achieving economies of scale during duration of protection

Diversification

Increase variety of goods and services produced, opposite of specialisation

Dutch Disease

Relationship between increase in exploitation of natural resources and decline in manufacturing sector, decreases competitiveness and results in recession.

Eg. oil industry in middle eastern countries

Dumping

Selling a good in an international market at a price below the cost of production.

Attempts to drive domestic producers out of business so they are unrivalled in the future, anti-competitive behaviour

Opportunity Cost

A basis of cost/benefit economic reasoning, cost of the activity chosen measured by the benefit forgone by next best alternative

Basis for Free Trade

Gains from free trade based on comparative advantage

Protection

Any government action which aims to either hinder foreign competitors of domestic firms or which provides an advantage to domestic exporters and/or domestic import-competing firms

Tariffs

A government tax paid by the importer on imported goods which are usually eliminated in free trade agreements.

• Fiscal revenue

• Import tariff

• Customs tariff

• Import duty

• Import levy

Quotas

A fixed amount of an imported good allowed into a country in a set period

Subsidies

Taxpayer’s money given to domestic producers to offset higher production costs

Embargo

Government order which stops trade (imports/exports) with a particular country

Protection Effect

Domestic producers gain larger market share

Consumption Effect

Revenue Effect

Government revenue from tariff

Redistribution Effect

Movement of consumer surplus to producer surplus due to introduction of a tariff

Deadweight Loss|

Destruction if value that is not compensated by gain to someone else

Retaliation Effect

Subsidies

Government cash payments to domestic producers per unit for offsetting higher production costs (compared to imports), keeping domestic firms competitive internationally, Government expenditure.

Increases fiscal spending. Worsens fiscal position (increase budget deficit)

Quota

Physical restriction limiting the quantity or number of goods imported into a country, increase in quotas lead to less protection

Voluntary Export Restraint (VER)

Self imposed trade restriction whereby an exporting country limits the quantity of goods that it can export.

Imposed by exporting country at the request of importing country (alternative involves future quotas)

Manufacturing Local Content Rules

When a foreign country makes products in a country, trade regulations insist a certain percentage of parts be made/sourced domestically rather than imported.

Requirement under trade laws when giving foreign country when giving foreign companies right to manufacture

Millennium Development Goals

Focused on breaking international poverty cycle in developing countries

Debt Servicing

Interest repaid to developed economies on foreign loans to poor governments

Special Drawing Rights (SDR)

Right to draw funds from the IMF during private currency attacks on the economy. Stabilises economic activity

Austerity

Policies to reduce government deficit through spending cuts and tax increases.

Imposed by governments unable to pay debts, demonstrating government’s fiscal discipline to creditors, credit rating agencies

Organisation for Economic Co-operation and Development (OECD)

International economic organisation of 38 countries that aims to stimulate economic progress and world trade

Trade Agreements|

Bilateral, regional or multilateral agreements to bring down barriers to trade between signatory countries, no trade diversion in FTAs.

• AUSTFA (bi) Australia and US

• CERTA (bi) Australia and New Zealand

• ASEAN (regional)

• APEC (regional)

• WTO (multi)

Bilateral Agreement

Agreement between two countries, do not involve trade diversion as limited in scope

• Increases inefficiencies

• Secrecy favouring TNCs over consumer

• Loss of government tariff revenue

• Greater regulation

  • Rules of Origin monitoring

Multilateral Agreements

FTA between more than two countries

eg. WTO

Plurilateral

FTA with up to a few dozen members,

eg. USMCA, PACER, AANZFTA

Blocs

Group of countries trading

Monetary Policy

Changes to short term interest rates

Fiscal Policy

Using annual budget to affect the level of economic activity, resource allocation, and income distribution

Policy Mix

Monetary and Fiscal policies available to government to control aggregate demand

Free Market

"Laissez Faire" approach, favoring free markets and minimal government intervention. Favours free markets and minimal government intervention

Social Overhead Capital (Infrastructure)

Public goods that could be provided by private sector (as rival and excludable) but only provided when profit can be made

Public Trading Enterprise (PTE)

Excludable services provided to whole community in markets of natural monopolies where households would pay higher prices if operated in private sector

Lowest Quintile (people of lower socioeconomicclass)

Poor people

Poverty

An enforced lack of socially perceived necessities

Lorenz Curve

Graphical representation of inequality, the proportion of national income earned (total wealth) of a given percentage of the population

Gini Coefficient

Proportion of the area taken up by the Lorenz curve in relation to the overall area under the line of equalityNumerical representation of inequality,

Between 0 and 1, where 0 refers to no inequality and 1 refers to total inequality (must be clarified in answer)

Private Costs

Price that does not include all externalities regarding socialcost of production

Social Costs

Costs that include all externalities (external diseconomies)

Externalities Cost

Vertical distance between private costs and social costs

Regulation

Regulation of monopolies and deregulation of markets

Privatization

Selling state-owned monopolies and PTEs

Corporatization

Analyzing the private sector to improve efficiency

Commercialization

Making PTEs more efficient for profit

Budget Outcome

Short term of fiscal policy, budget management, tax and spending

Measure of the extent which governments underlying cash balance is adding to or using up national saving

Fiscal Position/Outcome

Medium term of fiscal policy, stabilise business cycle, debt reduction

Change in budget figure/stance over years

Fiscal Consolidation

Long term of fiscal policy, future dangers and implications for population

Policy aimed at reducing government budget deficits and overall debt accumulation in the long term

Progressive Tax

Varying tax rates depending on income, done by dividing income into tax brackets

Proportional Tax

Fixed tax rate (same percentage) applied to taxable income,eg. old corporate tax

Regressive Tax

The same dollar amount of tax paid by incomes regardless oflevel of income, tax rate decreases as income increases

Equity

Fairness of tax system, burden based on ability to pay

Vertical Equity

Higher earner pay greation portion of tax as they have greater ability to pay (greater income)

Horizontal Equity

Equal earners pay equal levels of tax

Evasion

Illegal activity of not paying tax liability owed to government

Avoidance

Legal efforts to use loopholes or rules in the tax code to lower tax liability to play less tax

eg. Agri-businesses

Average Rate of Tax

Percentage of taxable income paid in tax due to the relevant tax schedule (effective tax rate)

Marginal Rate of Tax

Change in tax payable as one more dollar of taxable incomeis earned

Marginal Tax Rate

The tax rate (%) paid on the last dollar of one's income

Output Gap

Difference between potential output and real output (GDP)

Potential Output

Long term expected growth due to increases in population, productivity and labour participation

Expansionary

Larger deficit or smaller surpluses, increasing economic activity. Desired during negative output gaps

Contractionary

Smaller deficit of greater surpluses, reducing economic activity. Desired during positive output gaps

Neutral

No change to budget outcome

Structural Component

Discretionary structural decisions made in budget or plannedspending (budget related)

Cyclical Component

Outcome change due to economic conditions experienced during the year, resulting operation of automatic stabilisers

Dictated by cyclic business cycle, eg. progressive income tax, unemployment benefits (business cycle related)

Autonomic Stabilisers

Counter cyclical measures that spring into operationdepending on rescission of boom situation in economy