Economics Unit 3

QCE Economics

Open economy

Any nation that trades with other nations.

Exchange rates

The value of the currency of a nation expressed in terms of the currency of another nation.

Commodity prices

The prices of raw materials and primary products such as iron ore, coal, wheat, oil and gold.

Tariffs

Taxes that a government places on imported goods and services, paid by the importer.

External stability

An economy’s ability to meet its international financial obligations without causing problems for the rest of the economy.

Internal balance

A state of the domestic economy in which there is full employment and acceptable levels of inflation.

Economies of scale

Cost efficiencies that are derived by producing a large volume of standardised products.

Prima facie

Latin term meaning “on the face of it”. Refers to something that appears to be true on the first look at evidence.

Trade deficit

When the value of a country’s imports of goods and services is greater than the value of its exports.

Intertemporal efficiency

Producing goods and services while ensuring resources will be available for future generations.

Infant industries

A new or emerging industry in a country that is not yet strong enough to compete with established foreign producers.

Imports

Goods that enter a nation from overseas.

Exports

Goods that a nation sells to foreign nations.

Multinational corporation

An enterprise operating in several countries but managed from one home country.

Intercompany trade

When trade occurs between affiliates or subsidiaries of the one organisation, often using transfer pricing.

Transfer pricing

The price set for goods, services, or intellectual property when they are traded between branches or subsidiaries of the same company.

Composition of trade

What we trade

Direction of trade

Where and with whom we trade

Trade theories

Trade theories attempt to explain how trading partners can benefit the most from the international exchange of goods and services to increase overall economic output and growth.

Absolute advantage

The ability of a nation to produce commodities more efficiently than another nation.

Lower direct resource cost

Fewer inputs like labour hours, raw materials, land or capital to produce one unit of output compared with another country.

Comparative advantage

The ability of a nation to produce a product at a lower opportunity cost of production than another nation.

Competitive advantage

A nation’s prosperity relies on the ability of its industry to be innovative and upgrade to adapt to technology.

Fixed exchange rate

A regime applied by a government or central bank which ties the country’s currency official exchange rate to another country’s or the price of gold.

Managed currency

Price and exchange rate are influenced by some intervention from a central bank.

Floating exchange rate

A regime where the currency price of a nation is set by the forex market based on supply and demand relative to other countries.

Firm strategy, structure and rivalry (Porters Diamond)

Conditions governing company creation, management and domestic rivalry need to be disciplined, flexible and conducive to innovation.

Demand conditions (Porters Diamond)

Nations can benefit from having a clear view of consumer demand by developing a domestic market to anticipate international needs.

Related and supporting industries (Porters Diamond)

A nation can gain advantage by having efficient and internationally competitive supplier industries.

Factor conditions (Porters Diamond)

Nations can improve factors e.g. by investing in infrastructure and specialised training of the workforce.

Trade embargo

A government imposed restriction or total ban on commerce with a specific country, implemented for political reasons.

S of AUD increases

Exchange rate decreases, dollar depreciates.

S of AUD decreases

Exchange rate increases, dollar appreciates

D for AUD increases

Exchange rate increases, dollar appreciates

D for AUD decreases

Exchange rate decreases, dollar depreciates

Terms of Trade (ToT)

The relationship between the price of exports and the price of imports

Terms of Trade Index

An index number used to show whether the relative movement in prices of exports and imports is favourable or unfavourable

ToT Formula

ToT index= (Export price index/import price index)x100

Current Account

Records day to day transactions for which payments are made or received

Capital and Financial Account

Includes the movement of capital funds between Australia and the rest of the world during a specified period of time

Balance of Payments

Measure of all money entering Australia and all money leaving Australia

Bilateral Measure

Compares the value of currencies of two economies

Trade Weighted Index (TWI)

A single number representing the value of the AUD compared to the currencies of Australia’s major trading partners, weighted by contribution to trade

Forex market

Where currencies from around the world are bought and sold by those engaging in overseas trade or financial transactions

Financial flows

People investing overseas- affects exchange rate

Interest rate differentials

The difference in interest rates between different economies

Credit ratings

A borrowers ability to repay debt- provides reassurance on the risk of foreign investments

Speculative currency trading

Where people buy and sell currencies in order to make short term profit

Foreign investment

Funds invested in an economy by the rest of the world

Direct investment

Any capital invested in an enterprise that gives the investor significant influence over the operation of the enterprise

Portfolio investment

Covers the acquisition by foreigners of shares in Australian enterprises- foreigner acquiring shares exerts no real influence over the operation

Factor endowment

The mix of resources a country has for economic activity, such as land, minerals, labour, or capital.