Economics - AOS 3 International Trade

6 WAYS WE CAN GAIN FROM INTERNATIONAL TRADE (ASEECC)

• Allows countries to access resources that they would not have otherwise (lift output and incomes)

• Specialise in the production of particular types of G+S’s where it is most efficienct or with a cost advantage

• Allows local businesses to sell in bigger international markets, lowering unit cost by promoting economies of scale.

• By increasing efficiency, international trade can help increase exports, economic growth and jobs.

• Increases consumer choice and variety.

• Exposing local firms to international comp, allows us to consume cheaper and more affordable goods (increase purchasing power)

Cyclical influences on Australia’s current account balance

• Short term and volatile aggregate demand side factors or conditions that cause value of spending to rise or fall.

• If there is increased spending and little spare capacity due to savings investment gap, then there will be a rise in domestic spending on imports, causing a CURRENT ACCOUNT DEFICIT.

• If there is a trough in the business cycle, then there will likely be minimal spending on imports by consumers or imvestors in Australia, this will lead to their likely being a CURRENT ACCOUNT SURPLUS.

FIND AN EXAMPLE (REDBIC) AND TALK ABOUT HOW THAT IMPACTS EXPORT/IMPORT SPENDING AND ITS AFFECT ON CURRENT ACCOUNT

Structural Influences on Australia’s current account balance.

• Aggregate supply side factors or conditions that can affect the current account balance, over the longer term (influencing COP and IC).

• Aus large savings investment gap which indicates a deficiency in savings which means we must borrow finances in order to expand which causes greater obligations to repay interest or debits in the NPI causing a decrease in CURRENT ACCOUNT'

Distinguish Question between NFE and NFD

Net foreign debt is the difference in value between what Australia' has borrowed from overseas and owes overseas (liabilities) minus what Australia has lent or invested abroad (Assets).

Net foreign equity represents the excess value of foreign owned Australian assets over the value of overseas assets owned by Australian residents.

Key DIFF; Net Foreign Debt implies an obligation of repayment through interest payment in NPI account, whilst Net Foreign Liabilities relate to asset ownership, and Net Foreign Equity doesnt imply a an obligation of repayment.

BENEFITS OF NFD

• Finance future expansion (unable to with current savings deficiency)

• Provide access to cheaper credit (foreign debt can provide local firms access to lower interest rates - business expansion)

NEGATIVES OF NFD

• Burden of debt repayment (heavier if the AUD depreciates against the currency owed)

• Interest repayments abroad weaken the current account balance (NFD causes NPI deficit)

TOT - Definition and measurement

• measures the ratio for the average price the world is prepared to pay Aus for our exports against the average price we pay the world for our imports.

• Export Price index/Import Price Index x 100 = TOT

FACTORS AFFECTING TOT (DECREASING TOT)

DEMAND DECREASE: REDBIC

• Weaker rates of economic growth in trading partners

• Decreased Business and Consumer Confidence

• Reduced growth rates in population or disposable income

• Faster domestic rates of inflation/fall in IC

SUPPLY DECREASE: APECOP

• Resource depletion

• Declining productivity

• Severe climate conditions here or overseas

• Higher production costs and lower general profitability.

FACTORS AFFECTING TOT (INCREASING TOT)

DEMAND INCREASE: REDBIC

• Stronger rates of economic activity among our major trading partners

• greater levels of consumer and business confidence overseas

• faster growth rates in global disposable income

• Slower domestic rates of inflation and an increase in our international competitiveness

SUPPLY INCREASE: APECOP

• New discoveries of minerals or the opening of new mines

• The effect of new technology on productivity

• Ideal domestic and international growing conditions for crops

• Relatively lower production costs and higher overall profitability in production, globally.

DECLINE IN TOT ON DOMESTIC ECONOMIC GOALS

• a decline in the TOT tends to weaken the value of our export sales, and hence in itself, tends to slow the value of net exports and hence AD. The cyclical rate of economic growth will tend to slow, perhaps below 3% as sales and new orders decline and firms cut their production to avoid further rises in stocks.

• Rate of cyclical unemployment is likely to rise because firms cut production and reduce demand for resources including labour.

• Demand inflation may slow, perhaps below the 2-3% range, because reduced sales and rising unsold stocks, many sellers are likely to discount prices.

RISE IN TOT ON DOMESTIC ECONOMIC GOALS

• Rate of economic growth will tend to strengthen towards the 3% target, without initiating inflationary pressures, because firms have spare capacity to lift production in response to rising orders.

• The rate of unemployment will fall twards the NAIRU because as firms try to lift their production, they increase their derived demand for labour

• Demand inflation may start to rise but only slowly, while there is spare capacity, widespread shortages will occur as DEMAND > SUPPLY

EFFECT OF TOT ON LIVING STANDARDS

• A decline in TOT tends to lower our living standards. This is because we recieve lower prices for our exports relative to imports, the value of our export sales falls relative to the value of imports thereby slowing AD. As well as jobs/incomes economic growth and MLS

• A rise in the TOT improves living standards. This is because we recieve better prices for exports relative to the prices for imports, the value of export sales rise relative to the value of imports, increasing AD. Usually means higher incomes, hence improving purchasing power, material living standards.

FACTORS THAT AFFECT THE VALUE OF AUD EXCHANGE RATE

AFFECT SUPPLY:

• If the supply rises above the demand, the currency at the exchange rate will be depreciated

• When sales of the A$ fall relative to the demand for the A$ at the original price, there will be an appreciation of the currency.

FUNDAMENTAL REASONS AFFECTING THE VALUE OF AUD IS IMPORTS/EXPORTS AND INVESTING OVERSEAS/INVESTING INTO AUS

AFFECT DEMAND:

• if demand rises relative to its supply of the AUD, the price of the dollar will appreciate

• If demand falls relative to the supply in the foreign exchange market, the A$ will depreciate.

EXCHANGE RATE - INFLATIOn

Demand inflation may occur when there is excessive spending in an economy that has little spare capacity. This will be in boom conditions with shortages of G+S. As an AD factor, a falling A$ can stimulate the value of exports and reduce imports

Cost Inflation occurs when the resources needed for production are more expensive for businesses to purchase. This tends to erode business profits. Firms are forced to raise prices. As an AS factor, a falling A$ can add to cost inflation becuase many local firms need to purchase more expensive imported resources.

EXCHANGE RATE - UNEMPLOYMENT

As an AD factor the exchange rate can affect the value of net exports (X-M) and therefore AD. The demand for resources and hence unemployment. By boosting exports relative to imports, a weaker A$ helps to accelerate AD causes firms to lift production and employ more labour. THEREFORE LOWER UNEMPLOYMENT.

As an AS factor, the A$ can alter production costs and our international competitiveness. A lower A$ means dearer imports and higher production costs for some firms, reducing their profits and possibly leading to closures and structural unemployment.

EXCHANGE RATE - LIVING STANDARDS

a lower exchange rate can help to improve macroeconomic conditions and hence living standards. For instance, when there is much unused productive capacity a lower exchange can help boost the value of overseas spending on our exports (more injections) relative to our spending on imports (lower leakages).

a higher exchange rate can sometimes benefit living standards. For example, a rising exchange rate means that the A$ will buy a bigger quantity of imports than previously, making us better off

However, a higher A$ in a booming economy that has no unused capacity, also tends to slow overseas spending on our exports (lower injections) relative to our spending on imports (higher leakages)

EXHCANGE RATE - CURRENT ACCOUNT (BOGS)

A FALL in the A$ tends to strengthen the balance of G+S. This is because Australia’s exports of G+S’s become relatively cheaper to overseas buyers. NET EXPORTS RISE THEN

A STRONGER A$ tends to weaken balance on goods and services. As this causes our exports of goods and services to become more expensive, reducing the value of sales or credits. while imports become cheaper, increasing debits on the current account.

FACTORS AFFECTING AUSTRALIA’S INTERNATIONAL COMPETITIVENSS (APECOP)

• labour costs / cost of production

• productivity or efficiency

• availability of natural resources

INTERNATIONAL COMPETITIVENESS - INFLATION

lower levels of efficiency and competitiveness cause our production costs and prices to be higher than in some other countries. Firms will pass on these costs onto consumer as they raise prices in an attempt to preserve profits.

INTERNATIONAL COMPETITIVENESS - ECONOMIC GROWTH

Being less competitive will make it harder for local firms to sell their G+S to export markets. Lower sales and profits means firms are less willing to expand operations, limiting Aus productive capacity and potential GDP.

INTERNATIONAL COMPETITIVENESS - UNEMPLOYMENT

As many australian businesses have higher production costs and are not strong, they have lower profits than counterparts abroad. Causing a decrease in the derived demand for labour and hinderance to achievement of the goal of full employment.

INTERNATIONAL COMPETITIVENESS - LIVING STANDARDS.

MLS - Because australia is less competitive than some nations, this tends to slow the growth of business capacity., GDP and incomes. This would reduce the average quantity of G+S consumed per person and limit access.

NMLS - Australia’s environmental outcomes may benefit from low competitiness, as lower economic growth tends to reduce carbon emissions, pollution, resource depletion and NMLS.