Economics topic 2 hsc

exports

credit or debit

Goods and Services sold to other countries

MONEY FLOWING IN - CREDIT

CAD definition:

income leaving country and not coming back

Imports

credit or debit

goods produced abroad and sold domestically

o MONEY FLOWING OUT - DEBIT

who is aus largest trading partner

china

who creates the HDI

United Nations

aus direction of trade

years

until 1960's major trading partner UK (62% of exports)

WW2 - shifted from UK, leaned to US for military support

1960's: Japan became largest trading partner (we imported their tech, exported mineral and energy products

1980's: Switch to Asian nations

2006: china is largest trading partner

composition of trade def

the pattern of g+s traded (the types of products exported and imported)

composition of trade in Aus

exports

imports

exports:

- largest is minerals and fuels, next services (comparative advantage)

- agriculture has decreased from 35% to 17%. prior to 1970 this was main exports

- Manufacturing got shut down due to Chinas comparative advantage in this

imports:

- consumption goods increased dramatically due to growing incomes

- even between: intermediate (chemicals, oils), consumption goods, services, capital goods

value of trade calc

volume traded x price

value of exports and imports in aus increasing or decreasing

both consistently increasing

terms of trade def

calc

if increasing, impact on exports

if decreasing, impact on exports

the relative prices a country receives for its exports and pays for its imports

export price index/import price index x 100/1

if it increases, aus is receiving more for its exports

it decreases aus is receiving less

improvement of terms of trade

higher exports price

or decrease in import price

deterioration of terms of trade

lower export price

higher import price

financial flows

FDI: money invested by gov in overseas country with controlling interest (10% of asset)

portfolio investment: stocks or bonds not with intent of controlling (less than 10%)

loans: money borrowed expected to be paid back with interest

debt repayment: paying back money from loan

financial derivatives: contract between parties whose value is based on an agreed financial asset

remittances: money international migrant workers send to their home country

development aid: financial assistance for disaster relief or infrastructure development

advantages and disadvantages of financial flows

advantages

- Transfers of technology and management and productivity skills

- Access to foreign exchange

- Creation for employment opportunities and management training

- Increased access to export markets

disadvantages

- Loss of ownership and control of resources

- Costs of servicing overseas debt and equity borrowings

- Volatile nature of speculative portfolio capital flows - impacting exchange rates

foreign debt

inflows and outflows

OWE - borrowed money that must be repaid with interest

in: australians borrowing money from overseas

out: Australians' lending money overseas

foriegn equity

inflows and outflows

OWNERSHIP - selling a share of a business

in: Foreigners purchase of Australian assets

out: Australians' purchase of foreign assets

types of financial flows

inbound flows and outbound flows

DEBT

in:

loan

interest

out:

loan money out

pay interest on loans to foreigners

EQUITY

in:

money invested in australia

recieve dividends

out:

invest money out

pay dividends

NET foreign debt

what we owe to others - what they owe to us

for foreigners to owe us more.. we want net foreign debt to

decrease

Net foreign equity

investment inflows - investment outflows

net foreign liabilities

net foreign debt + net foreign equity

liabilities: total money owed to others

inbound debt flow and stock

flow: how much did world lend to aus during the period?

stock: foreign debt

inbound equity flow and stock

flow: how did the world invest into australia by buying shares during the period

stock: foreign equity

outbound payment of interest and dividend

how much did aus pay to foreigners as interest on debt and dividends paid in relation to equity during the period

called primary income

if We owe them $100, they owe us $80

net foreign debt it $20

$80 is like a giftcard

China owns a factory in Australia that's $50, then we own a factory in china that's $100.

We own more foreign assets then foreigners own of ours

net foreign equity =

public sector debt

money owed by gov to overseas parties (40% of net foreign debt)

private sector debt

Money owed by private businesses (60% of net foreign debt)

total foreign equity

total value of aus domestic assets owned by foreigners

net foreign equity

total value of aus domestic assets owned by foreigners MINUS the value of the overseas assets that are owned by australians

aus was -$187,354 million in september 2019 (meaning we owned more overseas assets than foriegners owned of ours)

what do the following stand for

C

I

G

X

M

C= consumption

I = investment

G = gov spending

X = exports

M = imports

aggregate demand

(real gdp): C+I+G+(X-M)

absolute advantage

refers to the ability to produce more or better goods and services than somebody else.

comparative advantage

refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality

trade flows

Money paid for exports and imports of goods and services between Australia and other economies

we are talking about NOT MOVEMENT OF GOODS but the movement of the money to pay for the goods

was is a trade deficit

imports>exports

Australia has a trade deficit or surplus

deficit

trends in value of Australia's exports

or how much did consumers pay for exports?

1st: minerals + fuels: 245.8B

2nd: services: $92.8B

3rd: rural: $46.7

composition of Australia's exports and imports

- primary industries are main focus of aus exports

- Australia has a comparative advantage in commodities due to its vast natural resources

- Australia has exported high volumes of agricultural products such as wheat, wool and beef, and minerals such as coal, iron ore, gold and alumina

- minerals and metals

1989-90: 39%

2020-21: 66%

- manufacturing:

1989-90: 13%

2020-21: 8%

direction of Australia's exports and imports

China is Australia's dominant trading partner in past decade, while South Korea and ASEAN countries have become more important.

the key export markets for Australia in previous decades - Japan, the United Kingdom and Europe - have declined in importance.

why is our equity low?

superannuation: has increased, creating a large pool of domestic funds therefore we rely less on foreigners buying australian shares

if liabilities are increasing: if decreasing:

increasing they worsen, decrease they improve

direct investment

- more than 10% of the shares in an existing company or 100% of the shares in a new company by a foreigner

- The intent is to control the affairs of the business

- Long term investment

- Associated with the transfer of capital, technology, skills

portfolio investment

- less than 10% of the shares in an existing foreign company, or loans by a foreigner

- Investments are more anonymous and investors do not have any say in the management of investments.

- Short term investment; more volatile

Structural change

Built into nature of economy (businesses that exist, things produced)

cyclical change

booms and busts of economic cycle

trade flows structural and cyclical factors ///

structural

- high labour rates in aus make manufacturing less international

- abundant natural resources and high labour = narrow export base

cyclical

- china growth rate has very significant impact on commodity prices and export value

financial flows structural and cyclical factors ///

structural

- aus saving investment gap means we are a net capital importer

cyclical

- higher interest rates = attractive place to lend/invest money

- domestic and global interest and inflation rates

- domestic and global growth rates (increase

investment and need to loan funds)

what is good debt

when we take a loan, we can use this to improve capital -> become more efficient -> in the future have a better return

Explain the difference between direct and portfolio investment flows

Direct investment includes the establishment of a new company or a purchase of 10% or over of an existing company, typically for long term investment and investor may intend to play a role in the management of the company. Portfolio investment may include loans and is buying less than 10% of a business is more volatile and for short term investment.

Distinguish between debt and equity financial flows

debt (OWE) : borrowing money to repay back (principle + interest)

equity (OWNERSHIP): selling a share of a business (provides finance in exchange for part ownership of a business) - investing

Explain the trends in the components of Australia's net foreign liabilities

We are purchasing more foreign equity than foreigners are purchasing of ours. Net foreign debt continuously increases. Relying less on foreign debt and equity means for liabilities to reach zero.

Net foreign debt continues to increase while net foreign equity has moved into negative as Australia investment in foreign companies exceeds foreign investment in Australian companies.

Identify TWO factors that have influenced financial flows into and out of Australia in recent years.

- technological changes: made it easier to shift finance between countries.

- Australia has increased domestic savings due to superannuation -> lowering reliance on foreign investment

- A shift from direct investment to portfolio investment into Australian companies as less dependence/need for the benefits of direct investment eg capital, experience, job creation and technology transfer

Discuss the extent to which Australia's financial flows have been influenced by globalisation

We become reliant and interdependent on foreign investment in Australia. Without globalisation, financial flows wouldn't exist and Australia's economy would be much further behind without this investment.

Balance of payments

record of every financial transaction with Australia and the rest of the world.

what is money coming in?

credit (positive number

money leaving australia is called?

debit (negative number

the way the balance of payments work

when we lend the world money, that money leaving is a debit on our balance of payments

when foreigners pay back their debt (principal + interest) = money flowing back into Australia.

Principal: original cost going there and back

Interest: extra earning

why do we record the balance of payments

We record balance of payments so we don't get in a situation when we can't pay back loans (ruining peace between countries and potentially create war)

who created the balance of payments and what do they do

IMF International Money Fund

monitors the ability of countries to meet their financial obligations to other countries sin order to promote international financial stability.

- created a standardised way to record and report the trade and financial flows called the balance of payments.

2 components of balance of payments

they always...

current account and capital and financial account

they always sum to zero: If the current account is positive, the capital and financial account with be the same number but negative to make zero.

current account

records IRREVERSIBLE TRANSACTIONS

- BOGS (Balance of goods and services: exports - imports)

- PI: primary income - RETURN ON INVESTMENT interest and dividends)

- SI: secondary income - INCOME NOT EARNED THROUGH FACTOR OF PRODUCTION untied aid, insurance claims, workers' remittances)

capital and financial account

records REVERSIBLE TRANSACTIONS

- Capital account (IPS assets, conditional aid, capital transfers)

- Financial account (direct investment, portfolio investment, financial derivatives (complex financial assets), other investment (trade credit and loans), reserve assets(transfer of foreign currency/net transfers of the RBA))

what are irreversible transactions

- (money is never coming back) e.g. exports and imports, or paying interest or dividends

what are reversible transactions

(money that is coming back later). e.g. loans and investments which will be either repaid or sold back at some point.

net errors and omissions

what is it

where is it recorded

ABS cannot actually track every single trade and financial flow that occurs during a

year - so there are some transactions which are not recorded.

refers to statistical discrepancies

to ensure balance of payments sum to 0, reported with the capital and financial account

But be careful, the Balance of Payments balances because of the floating

exchange rate, not because the ABS uses this process to correct for the incomplete

nature of its records.

the current account

3 categories

what makes the current account

balance on goods and services

primary income

secondary income

the current account is the sum of all 3

BOGS

Balance on Goods and Services

X - M (flow of money we receive - flow of money we let out)

primary income

Interest paid and received, and dividends paid and received, during the period

secondary income

Irreversible flows of money which are not exports or imports, and are not payments of interest or dividends ie anything else eg pensions from foreign govts, insurance payouts, unconditional foreign aid

Capital account

Reversible money flows which are not defined as financial flows eg purchase and sales of intellectual property assets, and conditional foreign aid/foreign aid of a capital nature eg roads

financial account

The making of and repayment of debt and equity flows eg FDI, portfolio, financial derivatives, reserve assets, other investments

CAPITAL + FINANCIAL ACCOUNT if there is

Less out, more in

= credit on financial account

subtract or add flows?

add

• links between key Balance of Payments categories

inflows create outflows

Inflows in KAFA create outflows in CA

§ When foreign firms invest in Australia - recorded in the KAFA as as credit - however money flows back overseas when the company makes a profit - debit - vice versa

§ When Australia lends money to foreigners who borrow - debit - however interest on repayments flow back to Australia - credit

trends in the BOGS

typically in deficit, more recently surplus MEANING we typically import more than we export

- cyclical

this is because when in economic upturn, people want to buy more imports therefore BOGS worsen

trends in NPI

consistently in deficit

- structural and stable

We are a net capital importer due to our savings-investment gap.

current account trends

in mining boom

in GFC

typically deficit by 4%, of GDP since 2018 been in surplus

thus KAFA opposite

mining boom: higher demand for our resources = more investment

GFC: deficit improved, seeing a trade surplus

impact on current account if

growing pool of superannuation funds/domestic savings -->

don't rely on foreign debt and equity/liabilities > reduction in credit on KAFA (as there are no more investments coming into Australia) > decrease debits on net primary income account on the current account (improving the CA/moving out of deficit)

impact on current account if

Lower interest rates globally >

Australia's who have borrowed money, are paying less in interest repayments (repatriation) therefore reducing the debits on NPI > improving the current account

(amount debt holders have to pay back in interest will decrease)

impact on CA if...

COVID meant that overseas travel could not occur >

decrease in overseas travel >decrease in imports improving the trade balance (BOGS) > improve the current account toward

def international competitiveness

refers to a country's ability to compete with other countries on international markets taking into account both price and non-price factors

what does NPI reflect

the extent to which Australia relies on foreign savings to fund its domestic investment

BOGS is impacted by...

cyclical: the exchange rate, terms of trade, rate of eco growth domestically and internationally

structural: the savings-investment gap, narrow export base, Low value-added exports, High value-added imports (ETMS), international competitiveness

exchange rate impact on BOGS

o movements affect international competitiveness and the relative price of G and S

a depreciation = decreases foreign currency price, increasing aus competitiveness of exports and increases import prices, discouraging consumers from buying imports, improving the BOGS

TOT impact on BOGS

o if export prices are increasing relative to import prices, Aus TOT improves = meaning the same volume of exports can buy imports > improvement in BOGS

----> Higher TOT reflects an increase in demand for Australian exports, the demand for Australian dollar rises, increasing inflation in exchange rate.

o if import prices are increasing relative to export prices, the BOGS will deteriorate.

rate of economic growth in Australia impact on CA + BOGS

UPTURN

- Increase in demand for imported g and s + capital inflows from foreign investors > worsening the current account > worsening BOGS

DOWNTURN

decrease in demand for imported g+s > credit in CA as Australia will export more than they import > improving BOGS

international business cycle impact on BOGS and NPI

BOGS: Downturn in international economic growth affects demand for Australian exports → worsening BOGS

- If other countries are growing, they will need more resources and thus will demand more of what Australia produces to balance this → improving BOGS

NPI: If there is high growth internationally, this leads to more consumer spending → financial investment into the financial account, therefore as "inflows lead to outflows", a surplus in the capital and financial account, we will see a deficit in the Net Primary Income

to remain internationally competitive what should australia do?

keep inflation lower than other countries

narrow export base - impact on BOGS

Australian exports are heavily weighted toward bulk commodities

o Australia lacks international competitiveness in manufacturing and tends to import these products, outweighing their exports, putting BOGS in deficit

o And commodities are more volatile than manufacturing products causing large fluctuations in BOGS

worsening BOGS

why should aus expand export base

· growing impact of climate change will import export base

· mining exports have high volatility

Savings-investment gap impact on BOGS

Australia's economy is relatively small, national savings have been historically low, high level of capital investment is needed (e.g., mining investment boom). Firms look to foreign sources of finance to fund investment

Foreigners invest causing us to be in deficit because we are continuously paying this back

Superannuation funds are improving the gap

causes Consistent CA deficits

Not really influenced by contraction and expansion of business cycle

TOT def

formula

The TOT is a measure of the relative prices received for exports compared to the prices paid for imports

exports/import x 100

TOT IMPROVEMENTS

caused by increase in export prices or decrease in import prices

tot deterioration

we see export price fall or an increase in import prices

how has free trade influenced TOT

low export cost - decreasing TOT

Our quality of life is directly related to Chinas impact on the economy - we have experienced low inflation because what we buy from China is so cheap

if australia is selling exports at same price, but import price is increasing, what impact does this have?

import debits increase - BOGS WORSEN > CA deteriorates

- imported inflation

- falling living standards

if aus buys same price imports, but increase export prices what impact does this have?

- rising living standards

- improve CA

Australia's TOT with commodities

TOT improve Resource exporting countries have increased their TOT: the cost of primary resources (natural gas), these prices have risen