Economics IA1 2025

Do what is right. Not what is easy

Open economy

Any nation that trades with other nations.

External (foreign) sector

That sector of the circular flow model that identifies economic influences external to the domestic economy.

Exchange rates

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

Commodity prices

Commodity prices refer to the market prices for raw materials or primary goods that are traded globally. These include agricultural products, energy resources, metals, and minerals. Prices are determined by the forces of supply and demand in global markets.

Tariffs

Taxes that a government places on imported goods and services, paid by the importer. They make imports more expensive, which protects local producers by making their goods relatively cheaper in comparison.

External stability

An economy's ability to meet its international financial obligations without causing problems for the rest of the economy. It means keeping the balance of payments, exchange rates and foreign debt at sustainable levels.

Internal balance

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

Factor endowment

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

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' it refers to something that appears to be true on the first look at the 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 (MNC)

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

Intra-company 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 growth and output.

Absolute Advantage

The ability of a nation to produce commodities more efficiently than another nation. Another way of saying this is that one nation produces at a lower direct resource cost than another.

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.

Opportunity Cost

The value of the next best alternative foregone when a choice or decision is made.

Competitive Advantage

A nation's competitiveness depends on the ability of its industries to innovate, upgrade, and adapt.

Factor Conditions

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

Firm strategy, structure, and rivalry…

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

Demand Conditions

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

Related and Supporting Industries

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

Fixed Exchange Rates

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

Managed Currency

One whose 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 currencies.

In fixed exchange rates, if the exchange rate is increased, this is a…

Revaluation

In fixed exchange rates, if the exchange rate is decreased, this is a…

Devaluation

In floating exchange rates, if the exchange rate increases, this is an…

Appreciation

In floating exchange rates, if the exchange rate decreases, this is a…

Depreciation

Quota

Limit on how many items can be exported.

Subsidies

Support from the government to industry to reduce costs.

Embargo

Total ban on a good or service.

Terms of Trade

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.

An index number greater than 100 is

Favourable Terms of Trade

An index number less than 100 is

Unfavourable Terms of Trade

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.

Net Foreign Debt

Net foreign debt is the total stock of loans owned by Australians to foreigners, minus the total stock of loans owed by foreigners to Australia.

Primary income balance

The income that Australian residents earn from, less that they pay to, the rest of the world from working and from financial investments.

Inflation

The rate at which the general level of prices for goods and services rises over time in an economy.

International Trade

In Australia, exports generate income and support national growth, while imports provide access to goods not produced domestically. These flows impact the current account.

Effect of a Trade Deficit

A trade deficit can increase reliance on foreign borrowing, weakening external stability.

Foreign Investment Explanation

Australia attracts foreign capital to fund infrastructure and business activity, helping cover the savings-investment gap. However, this also leads to higher foreign liabilities and income outflows, which can pressure Australia’s ability to repay debt over time and affect its credit rating.

Capital Inflows

Capital inflows can stimulate growth. But, sudden outflows (capital flight) can destabilise the exchange rate and lead to volatility.

Trade Liberalisation

Trade liberalisation boosts competitiveness and export opportunities. But, it can also increase import penetration, affecting domestic industries and the trade balance.

Circular flow of income

In the circular flow of income, exports and foreign investment act as injections. But, heavy reliance on imports and foreign debt repayments (leakages) can reduce national income and strain external accounts.

Effect of a depreciation of the AUD

Makes exports cheaper and imports more expensive, improving the trade balance and helping to reduce the current account deficit. However, it also increases cost of servicing liabilities that are denominated in foreign currencies, such as interest on debt. This worsens the net primary income component of the current account.

CAD results in…

the accumulation of a large foreign debt, and a depreciation of the AUD.

When the economy grows at a rapid rate…

CAD increases due to increased spending on improts of consumption and capital goods.

Balance of Payments

The Balance of Payments is a record of all Australia’s economic transactions with the rest of the world over a period of time. It records all the money flowing in and out of Australia including in areas of trade and investment.

Foreign Investment

Funds invested in an economy by the rest of the world.

Specialisation

Specialization is the economic process where individuals, firms, or countries focus on producing a limited range of goods or services to become more efficient.