Unit 2 (Year 11) ATAR Economics 2022

Exports

The selling of Australian goods and services to countries overseas

Example of Export

Australia sells Iron Ore to China

Imports

When Australia buys goods and services from other countries overseas (due to the fact that we do not have the capacity to produce it ourselves)

Example of Import

Australia buys cars from Japan

Medium Open Economy

A country is dependent on international trade for its living standards, but still produces some of its own goods.

CHAFTA

China Australia Free Trade Agreement (signed in 2015)

Benefit of Free Trade

Countries can focus on specialisation, and also have access to goods and services they don't produce. Also helps to achieve economies of scale

Commodities

Are rural and mineral resources (e.g Coal, Iron Ore, Oil, Gold)

Non-Commodities

Comprise of manufactured goods and other services (e.g Tourism, Education, Cars)

Trade Surplus

When the total value of exports are greater than the total value of imports

Trade Deficit

When the total value of Imports is greater than the total value of exports

Endowment of Natural Resources (influencing nations to trade and specialise)

Some countries have an abundant supply of natural resources and farmland that enable them to sell these overseas. This creates international specialisation as each country might have an endowment of different resources.

Differences in Labour and Capital Resources (influencing nations to trade and specialise)

Some countries might have large, low cost labour forces enabling them to carry out mass manufacturing (China), whereas other countries have a comparative advantage in producing products with quality capital equipment.

Technology

Is the application of knowledge and technical skills to the development of new products and production processes.

Differences in Technology (influencing nations to trade and specialise)

By investing in technology, countries can add to their stock of knowledge, improving the productivity of labour and capital and therefore gaining a critical advantage over countries.

Who Gains from Exports?

Producers will gain from exports (sell more goods at higher prices) and producer surplus increases, whereas consumers will lose out as they pay more and receive less so consumer surplus decreases.

Who Gains from Imports?

Domestic Consumers will gain and they pay a lower price and receive more (consumer surplus increases), whereas producers will lose out as they are producing less at a decreased price (producer surplus decreases).

Exchange Rate

is the price of a country's currency in terms of another country's currency

Appreciation of AUD

increase in the value of AUD. Demand for exports is greater. Therefore imports are cheaper and exports are more expensive

Depreciation of AUD

Decrease in he value of AUD. Demand for imports is greater, so imports are more expensive, and exports are cheaper.

Balance of Payments

a record of all economic transactions between residents of one country and residents of the rest of the world during a given period

Balance of Payments =

Current Account + Capital and Financial Account (will always equal to 0!!)

Current Account

Records all transactions including goods, services, primary income (rent, dividends, wages) and Secondary Income (pensions, Gifts, money for foreign Aid)

Trade Balance on Current Account

Made up of net goods + net services

Net Income on Current Account

Primary income + Secondary Income

Capital and Financial Account

Records the net acquisitions and net change in the ownership of assets and liabilities.

Capital Account

the net acquisitions and transfers, as well as the sale or purchase of non-produced, non-financial assets

Financial Account

The net change in the ownership of liabilities, investments and assets. Made up of direct, portfolio and other investments as well as financial derivatives and reserve assets.

Direct Investment

when a firm purchases more than 10% of another firm

Portfolio Invesment

When a firm purchases less than 10% of another firm

Debit

Money flowing OUT of the economy

Credit

Money flowing IN the economy

Example of Debits

When Australia buys a car from Japan

Example of Credit

Australia sells iron ore to china

Macroeconomics

Study of the economy as a whole

Aggregate Supply (AS)

Refers to the values of goods and services (output) a country can produce

Aggregate Demand (AD)

Refers to the total level of spending in the economy

What happens when AD > AS?

There is too much spending in the economy, and so inflation occurs

What happens when AS > AD?

There are too many goods in the economy, causing unemployment to increase

Circular Flow of Income

Shows the flows of goods, resources, services and income between parts of the economy.

Leakages

Represent the reduction in money flow/ goods between households and firms

Types of Leakages in CF

Savings (S), Taxation (T), Imports (M)

Injections

Represent the increase in money flow / goods between households and firms.

Types of Injections in CF

Investment (I), Government Expenditure (G), Exports (X)

Macroeconomic Equilibrium Condition

Leakages = Injections

Macroeconomic Equilibrium Condition

Expenditure = Output = Income

Income

Defined as wags, rent, interest and dividends and profit from the resources they provide firms

Resources

Land, labour, capital, enterprise owned by households and provided to firms

Consumption

The spending on goods and services by households

Savings (S)

The portion of income not spent on goods and services for current consumption. This is a leakage!!

Investment (I)

The expenditure on goods and services which are not intended for current consumption. This is an injection!!!

S > I

Total spending is less that total output, so stock of goods increases. This means that firms will cut back production, meaning unemployment will rise. Therefore households will receive less income so consumption and savings will decrease.

I > S

total spending is greater than total output, so stock levels will decrease. Firms will increase production, and therefore unemployment decreases.

Taxation (T)

Form of revenue raised from the private sector by the government. This is a Leakage!!!

Government Expenditure (G)

is an injection!!

Current Expenditure (G1)

spending on wages, salaries and transfer payments. This is the day to day spending of the government.

Capital Expenditure (G2)

Spending on capital or investment goods such as schools, hospitals and railways.

T > G

This causes income to decrease, therefore people will consume less. This means less output is produced. and the economy contracts

G > T

Income will increase, so consumption will also increase. This causes production to increase and therefore the economy expands

Open Economy

An economy that trades goods and services with other countries

Imports (M)

When Australia buys goods and services from overseas (Money flowing out from the economy). This is a leakage!!!

Example of imports

Australia buys cars from Japan

Exports (X)

When Australia sells goods to overseas countries (money flowing into the economy). This is an Injection!!!

Example of exports

Australia sells Iron Ore to China

Net Exports (NX)

X - M

X > M

Causes a trade surplus, which increase income of an economy, causing expenditure to increase. Output will increase and therefore the economy expands

M > X

Causes a trade deficit, where income will decrease, so consumption will decrease. This means output will decrease and therefore the economy contracts.

Multiplier Effect

When an increase in an injection causes an increase in the income and consumption greater than the initial amount spent. (one man's spending is another man's income)

Aggregate Expenditure (AE)

The total amount that firms, households and government PLAN to spend on goods and services at each level of income

Formula for AE

C + Ip + G + NX

Gross Domestic Product

The final value of goods and services produced in a country. (C + Ia + G + NX)

Non Durable Goods

Goods that last for less than 3 months (e.g Food)

Durable Goods

Goods that last for longer than 3 months (e.g Fridges and furniture)

Employed

People who work for more than 1 hour a week and are paid.

Unemployed

People who are willing and able to work but cannot find a job

Labour Force

The section of the population over 18 who is employed or unemployed.

Working Age Population

People between the ages of 15 and 66

Participation Rate

The percentage of the population in the labour force

Not employed

People who are not actively seeking paid employment

Unemployment Rate Formula

unemployed / labor force x 100

Labour Force Formula

employed + unemployed

Participation Rate Formula

labour force / Population x 100

Underutilisation Rate Formula

Unemployment rate + Underemployment rate

Underutilisation

a measure of the spare labour capacity in an economy (more broad that unemployment)

Underemployed

When a person is working a casual / part time job and would like to work more

Underemployment Rate Formula

Part time / Labour force x 100

Structural Unemployment

Occurs when there are changes in technology or pattern of demand in an economy. People with certain skills will find themselves unemployed because their skills do not match with the emerging industries.

Structural Unemployment Example

People who worked in the Records industry would become structurally unemployed when the iphone was released. because their skills of making records did not match the skills required to make iphones.

Cyclical Unemployment

Occurs when there is a downturn in the level of economic activity. There is less consumption in an economy, so firms will produce less and therefore people will become unemployed

Cyclical Unemployment Example

During Covid-19 in 2020 unemployment was at 7.5%

Frictional Unemployment

Occurs during the period of time when a person is changing between jobs

Seasonal Unemployment

Occurs at predictable and regular times of the year because of the seasonal nature of a job

Seasonal Unemployment Example

People who work as dress up Santas at shopping centres will become frictionally unemployed during winter, as Christmas is not on

Long Term Unemployment

Refers to the people who are unemployed for longer than 12 months, due to a lack of skills, education or training.

Hardcore Unemployment

Refers to the people who are permanently or long term unemployed due to difficulties such as mental health issues or physical disabilities.

Natural Rate of Unemployment

is the minimum level of unemployment which can be achieved given the current characteristics of the labour market.

Target Range for Unemployment

4% - 4.5%

Inflation

The appreciable and persistent rise in the general level of prices.

Deflation

A general decline in the level of prices

Target Range for Inflation

2% - 3%