Year 12 Economics

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Globalisation

Process leading to the emergence of a global economy/marketplace when level of trade liberalisation and increases (economic integration)

Results in structural change from increased trade flows of imports and exports

Post-Industrial Economy

Service-industry/tertiary based economy

Trade Liberalisation

Opening countries to trade

Economic Integration

Liberalisation of trade between countries

• Removal of trade barriers (trade liberalisation)

• Promotion of trade agreements (trade liberalisation)

• Standardisation of goods and services

• Use of electronic communication and commerce

Global Economy

The world economy, sum of all market exchange activities between countries and within countries

Domestic

Non-tradable sector

International

Tradable sector

Gross World Product (GWP)

Sum of all goods and services produced by all economies in world

International Financial Flows

Flows of money, capital or investment across international borders

• Speculative purposes

• Investment purposes

Foreign Direct Investment

Purchase ownership of foreign assets outright, degree of control over foreign assets (>10%)

Foreign Portfolio Investment

Purchase ownership of foreign assets without gaining significant control (<10%), eg. bonds

Carry Trade

Borrowing in a country with low interest rates while investing in high interest countries for profit

Developed World

Advanced industrialised economies

• High levels of real GDP

• High income per capita

• High living standards.

Developing World

Countries with low levels of industrialization

• Low real incomes per capita

• Low standards of living

Multinational/Transnational Corps

Interdependent worldwide operations which disperse activities and resources globally

Specialisation

Leads to changing pattern and division of labour in production or provision of goods and services (structural change)

Offshoring

TNCs set up overseas subsidiaries in major developing countries to increase profits

Outsourcing

Close internal departments and contract more efficient or expert external independent businesses

International Business Cycle

Changes in world output or GWP over time, 3-4% annual growth in GWP

Contagion

Rapid development of negative economic conditions from one country quickly transfer to another

Protectionism

Activity to stimulate domestic economy over other economies, internationally competitive

• Tariffs

• Subsidies

International Trade

Buying and selling transactions of goods and services across national boundaries

• Exports

• Imports

Imports

Purchase of foreign goods and services leading to selling of Australian dollars by Australian importers

Exports

Sale of foreign goods and services leading to buying of Australian dollars by foreigners

International Cross-Border Trade

Tradable sector, domestically produced good sold internationally

Non-tradable Sector

Domestically produced goods only sold domestically

Principle of Comparative Advantage

Each country, firm or person performing the economic activity has a comparative advantage.

Occurs when one country can produce both goods at a lower cost (sacrifice less resources in production in both areas)

Absolute Advantage

One country can only produce one good with fewer resources than others

Factor Endowment

Quality and quantity of a country’s supply of resources (CELL), can be exploited for manufacturing

Infant Industry

New domestic industry that has not reached economies of scale (not yet efficient)

Rent Seeking

Protection of an infant industry longer than required through industry lobbying instead of achieving economies of scale during duration of protection

Diversification

Increase variety of goods and services produced, opposite of specialisation

Dutch Disease

Relationship between increase in exploitation of natural resources and decline in manufacturing sector, decreases competitiveness and results in recession.

Eg. oil industry in middle eastern countries

Dumping

Selling a good in an international market at a price below the cost of production.

Attempts to drive domestic producers out of business so they are unrivalled in the future, anti-competitive behaviour

Opportunity Cost

A basis of cost/benefit economic reasoning, cost of the activity chosen measured by the benefit forgone by next best alternative

Basis for Free Trade

Gains from free trade based on comparative advantage

Protection

Any government action which aims to either hinder foreign competitors of domestic firms or which provides an advantage to domestic exporters and/or domestic import-competing firms

Tariffs

A government tax paid by the importer on imported goods which are usually eliminated in free trade agreements.

• Fiscal revenue

• Import tariff

• Customs tariff

• Import duty

• Import levy

Quotas

A fixed amount of an imported good allowed into a country in a set period

Subsidies

Taxpayer’s money given to domestic producers to offset higher production costs

Embargo

Government order which stops trade (imports/exports) with a particular country

Protection Effect

Domestic producers gain larger market share

Consumption Effect

Revenue Effect

Government revenue from tariff

Redistribution Effect

Movement of consumer surplus to producer surplus due to introduction of a tariff

Deadweight Loss|

Destruction if value that is not compensated by gain to someone else

Retaliation Effect

Subsidies

Government cash payments to domestic producers per unit for offsetting higher production costs (compared to imports), keeping domestic firms competitive internationally, Government expenditure.

Increases fiscal spending. Worsens fiscal position (increase budget deficit)

Quota

Physical restriction limiting the quantity or number of goods imported into a country, increase in quotas lead to less protection

Voluntary Export Restraint (VER)

Self imposed trade restriction whereby an exporting country limits the quantity of goods that it can export.

Imposed by exporting country at the request of importing country (alternative involves future quotas)

Manufacturing Local Content Rules

When a foreign country makes products in a country, trade regulations insist a certain percentage of parts be made/sourced domestically rather than imported.

Requirement under trade laws when giving foreign country when giving foreign companies right to manufacture

Millennium Development Goals

Focused on breaking international poverty cycle in developing countries

Debt Servicing

Interest repaid to developed economies on foreign loans to poor governments

Special Drawing Rights (SDR)

Right to draw funds from the IMF during private currency attacks on the economy. Stabilises economic activity

Austerity

Policies to reduce government deficit through spending cuts and tax increases.

Imposed by governments unable to pay debts, demonstrating government’s fiscal discipline to creditors, credit rating agencies

Organisation for Economic Co-operation and Development (OECD)

International economic organisation of 38 countries that aims to stimulate economic progress and world trade

Trade Agreements

Bilateral, regional or multilateral agreements to bring down barriers to trade between signatory countries, no trade diversion in FTAs.

• AUSTFA (bi) Australia and US

• CERTA (bi) Australia and New Zealand

• ASEAN (regional)

• APEC (regional)

• WTO (multi)

Bilateral Agreement

Agreement between two countries, do not involve trade diversion as limited in scope

• Increases inefficiencies

• Secrecy favouring TNCs over consumer

• Loss of government tariff revenue

• Greater regulation

  • Rules of Origin monitoring

Multilateral Agreements

FTA between more than two countries

eg. WTO

Plurilateral

FTA with up to a few dozen members,

eg. USMCA, PACER, AANZFTA

Blocs

Group of countries reaching common agreement on a broad range of trade issues related to economic integration

• Reduces barriers to trade

• Increased movement of FOPs

Single Market

Goods and services free of border control, goods and services can move between borders

Single Trade Policy

In a bloc, members can lose independence and sovereignty

• Interest rates 

• Trade policy in customs

Economic Growth

Quantitative measure, subset of economic development

Economic Development

Qualitative measure of an increase in real GDP per capita

• UN human development index

• Structural Change

• Poverty Levels

• Urbanisation

Development Gap

Difference in real per capita incomes, living standards and quality of life between DC and LDC

Newly Industrialised Countries

Usually developed countries that have recently achieve industrialisation

Economies in Transition

Economies shifting from planned to free market, drop in output initially

• Shifting away from government deciding production

• Exchange and distribution

• Increases all efficiencies

Human Development Index

Measurement looking beyond GDP to broader definition of wellbeing

• Life expectancy

• Years educated

• GNI per capita

Gross Domestic Product (GDP)

Value of all goods and services produced by an economy in a period of time

Gross National Product (GWP)

Value of all goods and services produced with the labour or property of an economy’s residents in a period of time

Economic Dualism

Urban elite in commercial economy alongside traditional economy

Relative Poverty

Income unit is unable to achieve standard of living relative to the average 

Absolute Poverty

Income unit is unable to achieve basic standard of living

Trade Flows

Sum of export inflows and import outflows

Capital Flows

Sum of financial capital inflows and overseas capital investors outflows

Income Flows

Sum of returns on financial investments, income debits paid out to overseas investors and income credits received by Australian investors

International Trade

Flow of goods and services across national boundaries, tradable sector/tradable goods

Consumption Goods

Food and Beverages, PMVs, TCFs, Electrical

Intermediate Goods

Goods that must be exported from overseas to finish manufacturing jobs

International Financial Flows

Flows of money/currency across international boundaries

• Short term speculative

  • Derivatives

  • Foreign Exchange

• Long term investment

  • Ownership

  • Equity

  • Debt

Foreign Direct Investment (FDI)

Investment through buying foreign entity (>10%), 70% from TNCs

Foreign Portfolio Investment (FPI)

Investment through buying bonds or equities of foreign entity (<10%)

Exchange Rates

The bilateral price of one country’s currency in terms of another at a particular time, measure of a currency’s purchasing power

Spot Rate

Price of a country’s currency quoted for immediate settlement against the US dollar

Cross Rate (not in syllabus)

Price of a country’s currency quoted for immediate settlement against a currency other than the US dollar

Appreciation

Rise in a currency in relation to other currencies in free market

Depreciation

Fall in a currency in relation to other currencies in free market

Commodity Currency

Value fluctuates with prices of commodities

Free Floating Currency

Exposure to market forces without government intervention

Interest Rate Differential

Gap between interest rates around the world, in favour of country with higher interest rate

International Competitiveness

Degree of ability for Australian exporters and import-competing firms to compete against foreign producers

• Productivity (of workers)

  • Technology

  • Education

• Quality

• Retail price

  • Fx rate 

  • Inflation 

  • Costs

• Service

• Government Policies

• Trade Agreements 

Influences BOGS

Trade Weighted Index (TWI)

AUD exchange rate against 18 major currencies (trading partners)

Fiat Currency

Currencies that only have value because of government regulation

Floating Exchange Rate

Price only determined by market demand and supply of currency, no government intervention

Pegged (Fixed) Exchange Rate

Exchange rate is fixed by government as central bank artificially controlled and not reacting to supply and demand for currency

Managed Exchange Rate/Dirty Float

Government influences exchange rate through RBA to slightly move everyday, buying or selling around a preferred rate

Revaluation

Planned adjustment setting the peg higher

Devaluation

Planned adjustment setting the peg lower

Dirtying the Float

Covert action by RBA to reduce floating exchange volatility in short term by countering imbalance of market forces or sentiment