Year 12 Economics Answer Strategy

3 Marks

Source States: Australia recorded a $22.2 billion trade surplus in 2018, which was the highest ever for a calendar year. Australia’s two-way trade in goods and services also hit a record high of $854 billion in 2018. Increased resource exports along with rural goods helped contribute to Australia’s strong 2018 result, while natural gas exports grew by 70 percent to become Australia’s third largest export. Our services industries, including education and tourism, also continue to enjoy strong growth with services exports growing by 9 per cent. China remained Australia's top trading partner, a position it has held since 2009.

Explain how the change in Australia’s trade balance in 2018 would have affected both the current account and the financial account in the balance of payments.

Identify that there was a large increase in the trade balance (trade surplus increased).

1 Mark

This would have caused the current account deficit to decrease (ceteris paribus).

1 Mark

This would have caused the financial account balance (surplus) to also decrease, since the CAD & the FAS must sum to zero.

1 Mark

6 Marks

Explain how each of the following factors may have contributed to Australia’s record trade surplus in 2018:

i.      the exchange rate  

ii.      the terms of trade   

iii.       free trade agreements                                                                        

i. During 2018 the AUD depreciated – this would have caused net exports to increase since export prices would have fallen, increasing qty of exports while import prices would have risen, reducing purchases of imports.

2 marks

ii. If the terms of trade increased then this means that export prices have risen relative to import prices which will increase export revenue (assuming no change in volumes) and this will increase the trade surplus.

2 marks

iii. Recent FTAs with China & Japan would have boosted trade with these countries by reducing trade barriers (both exports & imports), increasing the volume of trade – net effect is likely to be an increase in net exports.

2 marks

4 Marks

Explain how a tariff harms both the importing country and the exporting country.

In the case of the importing country, tariffs increase the price & reduce consumption. Tariffs will also increase the costs of domestic firms relying on imported inputs. Tariffs reduce economic efficiency.

2 Marks

The exporting country’s exports will be less competitive, reducing its export sales which will have a negative effect on its employment & national income (GDP)

2 Marks

2 Marks

Define the following terms:

TWI:

Trade weighted index (TWI) – an index showing the value of a country's currency in relation to a basket of currencies of its main trading partners (weighted according to volume of trade).

2 Marks

Define the following terms:

Australia’s interest rate differential: 

Interest rate differential – the difference between Australia’s interest rates & interest rates of another country (e.g. the US).

4 Marks

Using evidence from the graph, explain the relationship between changes in commodity prices and the Australian dollar.                                           

Describe the relationship displayed in the graph.

1 mark

Reference of data

1 mark

Australia’s largest export category is resources – iron ore, coal, natural gas, gold – which means that when prices increase (decrease), the value of Aust’s resource exports will increase (decrease), increasing (decreasing) the demand for AUD.

2 marks

12 marks

Outline the role of the World Trade Organisation (WTO) in facilitating globalisation and evaluate the economic effects of globalisation

Role of WTO: 6 Marks

Define globalisation - is the integration of national economies through trade, foreign investment, migration, and technology

1 Mark

WTO – organisation dealing with the rules of trade between nations. It’s an organisation for liberalising trade; it’s a forum for governments to negotiate trade agreements and It’s a place for them to settle trade disputes, involving dumping, use of subsidies & tariffs. Overall aim is to promote free trade by negotiating the reduction or removal of trade barriers (multilateralism)

4 Marks

Better students will mention the two key principles – the ‘most favoured’ nation principle & the ‘national treatment’ principle.

1 Mark

Evaluate Economic Effects – 6 marks

Discuss both positive & negative effects – but net effect has been positive

1 Mark

Positives – Increased trade has reduced prices, provided greater choice of goods & services, higher consumption, increased living standards, promoted competition & economic growth, increased access to investment funds.

3 Marks

Negatives – created structural change resulting in structural unemployment in less competitive industries, loss of local culture, increased inequality.

2 Marks

8 Marks

Discuss the ways in which the Australian economy is dependent on the global economy.

Discuss 3 factors  – allocate more marks to discussion of trade & foreign investment (3 marks each) & less to either tourism & immigration (2 marks)

i. Trade

Discuss both exports & imports – some knowledge about the composition & direction of Australia’s trade. Total trade is around 45% of GDP. Much of our export income comes from the sale of resources, but services such as education & tourism are also important. Aust industry depends on the import of capital & intermediate goods. Some may focus on discussion of FTAs which is fine

3 Marks

ii. Foreign investment – Aust has an I – S gap & so relies on foreign investment to fund our shortfall in savings needs. Inflows of foreign funds enable increased spending on housing, construction, infrastructure, industry expansion etc.

3 Marks

*iii. Tourism – Aust tourists travelling overseas is our main import but inbound tourism is also significant (5^th largest export) 

OR

*iv. Immigration – immigration can add to our skilled labour force, which is an important source of economic growth

2 Marks

12 Marks

Demonstrate the theory of comparative advantage using the production possibility frontier model and the concept of opportunity cost

Two correctly labelled PPFs showing 2 countries/2 goods

2 Marks

Define comparative advantage

1 Mark

Use opportunity cost to determine which country has comparative advantage & therefore who will specialise in which good.

4 Marks

*Need to demonstrate that after trade, both countries will gain – easiest to show this with a consumption possibility frontier based on opportunity cost ratios (e.g. see p. 32 P&K)

OR 

*Use a table showing consumption before & after trade

5 Marks

8 Marks

Evaluate the efficiency of a subsidy as a form of protection to an import   competing industry

Suggested mark split: explanation – 5 marks / model – 3 marks

Explain the nature of a subsidy and how it works as a form of protection – govt payment to import competing industry to increase domestic production & reduce imports.

2 Marks

Diagram to show effect of subsidy.

3 Marks

State that a subsidy is inefficient.

1 Mark

Why? Because the cost of the subsidy exceeds the benefit to domestic producers – the subsidy creates a DWL.

2 Marks

8 Marks:

Using examples, describe the main components of Australia’s current account.

Goods – exports (iron ore, coal, natural gas, gold, metals); imports (motor vehicles, petrol, consumer goods, machinery)

1 Mark

Services – exports (education, overseas tourists, professional services); imports (Aust tourists, transport)

The trade balance is the sum of both goods & services trade – which can swing from deficit to surplus

2 Marks

Income –primary income is largest & most important which includes compensation of employees & investment income (dividends & interest).  Australia always records a large net income deficit due to its large income payments related to foreign investment.

3 Marks

12 Marks

Explain the effects of each of the following on Australia’s current account deficit:

i. a decrease in Australia’s economic growth

ii.    an increase in foreign investment

iii. an increase in the TWI                                                                       

3 factors x 4 marks

A decrease in Australia’s economic growth will decrease the CAD (ceteris paribus)

1 Marks

A fall in economic growth will reduce spending in the economy (both consumption & investment). This will reduce the demand for imports and cause the trade balance to increase thereby reducing the CAD  (ceteris paribus).

3 Marks

An increase in foreign investment will increase the CAD (ceteris paribus).

1 Mark

An increase in foreign investment will increase the income payments (both dividends & interest) associated with the foreign investment. These payments are recorded in the current account which will increase the income deficit & therefore the CAD.

3 Marks

An increase in the TWI will increase the CAD (ceteris paribus)

1 Mark

A rise in the TWI means that the AUD has appreciated, on average, against the currencies of its major trading partners. This will decrease the competitiveness of Aust’s goods & services to overseas buyers, reducing exports. At the same time, an appreciation reduces the price of imports, increasing imports. This will reduce the trade balance and increase the CAD.

3 Marks

12 Marks

Distinguish between Australia’s foreign assets and foreign liabilities and outline the recent trends in Australia’s net foreign liabilities.                    

Foreign liabilities (equity & debt) is the stock of foreign investment into Australia – what Australia ‘owes’ to the rest of the world. Foreign assets (equity & debt) is the stock of Australia’s investment abroad – what Australia ‘owns’. Australia’s total foreign liabilities is around $3,600bn and is much greater than Australia’s foreign assets of $2,600bn. This means that Aust’s net foreign liabilities is around $1,000bn.

4 Marks

Australia’s net foreign liabilities is divided into net foreign debt and net foreign equity. Foreign debt is the amount borrowed from non-residents by residents of Australia. Net foreign debt is around $1100bn. Foreign equity is the extent to which foreign residents own Australian assets. Australia's net foreign equity is around -$100bn – which means that Australian has a positive net equity asset position (we own more overseas assets than the world owns of our assets!).

4 Marks

While net foreign liabilities increases each year in dollar terms, it has remained fairly stable over the past decade when measured as a per cent of GDP – fluctuating between 50% & 60%. In 2018 it was 52%. Net foreign debt was equal to 57% of GDP while net foreign equity was around -5%. The main change has been that net foreign equity has shifted from a liability to an asset position due to the growth of Aust’s superannuation funds investing in overseas assets. 

4 Marks