Economics

Globalization Costs & Benefits

• Globalization involves the integration of economies, industries, markets, cultures and policy-making around the world.
• A cost of globalization can be increased competition for domestic industries.
• A benefit of globalization is access to larger markets for exports.

Inflation and the Australian Dollar

• A rise in domestic inflation typically leads to a depreciation of the Australian dollar.
• Higher inflation reduces the purchasing power of the currency domestically.
• Exports become more expensive.
• Imports appear cheaper to domestic consumers.
• Increased demand for foreign currency and decreased demand for the Australian dollar leads to depreciation.

Production Possibilities: Springfield vs. Quohog

• Springfield can produce 300 computers or 800 wheat.
• Quohog can produce 200 computers or 400 wheat.
• Total production between Springfield and Quohog is 500 computers and 1200 wheat.
• Absolute Advantage: Springfield has an absolute advantage in both computers and wheat production, as it can produce more of both goods than Quohog.
• Comparative Advantage: To determine comparative advantage, calculate the opportunity cost for each country.
• Springfield's opportunity cost of producing one computer is 8/3 (or 2.67) wheat.
• Quohog's opportunity cost of producing one computer is 2 wheat.
• Quohog has a lower opportunity cost in computer production and therefore has the comparative advantage in producing computers.
• The opportunity cost of producing one wheat in Springfield is 3/8 (or 0.375) computers.
• The opportunity cost of producing one wheat in Quohog is 1/2 (or 0.5) computers.
• Springfield has a lower opportunity cost in wheat production and therefore has the comparative advantage in producing wheat.
• Specialization: According to the theory of comparative advantage, Quohog should specialize in producing computers, and Springfield should specialize in the production of wheat.

Terms of Trade Index

• Year 2: Export price index is 102, and import price index is 100.
• Year 4: Export price index is 110, and import price index is 110.
• Terms of Trade Index Formula: (Export Price Index / Import Price Index) * 100
• Year 2 Terms of Trade Index: (102 / 100) * 100 = 102
• Year 4 Terms of Trade Index: (110 / 110) * 100 = 100
• Changes in Terms of Trade:
• Terms of trade have moved from 102 in Year 2 to 100 in Year 4.
• Unfavorable Movement Explanation:
• A decrease is unfavorable because the country now receives relatively less for its exports compared to what it pays for its imports.
• Economic Effects of this Change:
  • Reduced Export Revenue: Lower terms of trade mean the country earns less revenue from the same volume of exports, impacting the trade balance.
  • Decreased National Income: Reduced export earnings can lead to lower overall national income, potentially slowing economic growth.

Overseas Economy Affecting Australia's Trade

• Events in an overseas economy can significantly impact Australia's trade.
• Example: A recession in China reduces demand for Australian resources such as iron ore.
• Reduced demand negatively affects Australia's export revenue and overall economic growth.

Growth Factors of the Global Economy

• Technological advancements have reduced communication and transportation costs.
• Trade liberalization through reduced tariffs and trade agreements has expanded global trade volumes.
• Increased foreign investment by multinational corporations promotes economic integration.

Trade, Employment, and Inflation

• Trade impacts employment and inflation within an economy.
• Increased Trade:
  • Employment: Increased export opportunities can create jobs in export-oriented industries.
  • Inflation: Higher demand from trade can lead to increased inflationary pressure, especially if the economy is near full capacity.
• Decreased Trade:
  • Employment: Reduced trade may result in job losses in industries reliant on exports or competing with cheaper imports.
  • Inflation: Lower demand from trade can decrease inflationary pressure, potentially leading to deflationary conditions.

Conflict Between External Stability and Increased Trade for Australia

• Conflict between external stability and increased trade arises for the Australian economy.
• Rapid export growth can raise the value of the Australian dollar, making imports cheaper and exports more expensive.
• Impact on External Stability:
  • Increased imports could worsen the trade deficit, affecting external stability.
  • Higher AUD could reduce the competitiveness of export industries.
• Management:
  • Policymakers must balance the benefits of trade with the need to maintain external stability.
  • Tools to manage this include monetary policy, fiscal policy, and foreign exchange interventions.

Factors Contributing to Multinational Corporations

• Technological advancements have improved communication and coordination.
• Lower trade barriers have facilitated the movement of goods and services across borders.

Comparative Advantage

• New Zealand produces 180 cheese and 160 wine.
• Australia produces 200 cheese and 240 wine.
• Comparative Advantage Calculation:
• Opportunity cost of cheese is 160/180 = 0.89 wine.
• Australia's opportunity cost of cheese is 240/200 = 1.2 wine.
• New Zealand has the comparative advantage in cheese production.
  • Opportunity cost of wine is 180/160 = 1.125 cheese.
  • Australia's opportunity cost of wine is 200/240 = 0.83 cheese.
• Australia has the comparative advantage in wine production.
• Benefits of Specialization and Trade:
• New Zealand specializes in cheese, it can produce more cheese efficiently.
• Australia specializes in wine, its wine production becomes more efficient.
• By trading, both nations can consume beyond their domestic production possibilities.
• Both nations experience economic gains.

Multiple Choice Questions

• International trade occurs due to the unequal distribution of resources.
• The International Monetary Fund (IMF) promotes global financial stability and the World Bank promotes global economic development.
• An increase in the demand for Australian exports leads to an appreciation of the Australian dollar.
• A recession in Australia together with a depreciation of the Australian dollar is most likely to reduce Australia’s import volumes.
• Overseeing and promoting international financial stability plus monetary cooperation is a function of the International Monetary Fund (IMF).
• If China reduces demand for Australian exports, the Trade Weighted Index (TWI) decreases and the Terms of Trade decrease.

Australian Exchange Rate Determination

• Australia's exchange rate is primarily determined by the forces of supply and demand in the foreign exchange market.
  • Demand Factors: Demand for Australian exports, investment inflows, and interest rates.
  • Supply Factors: Demand for imports, outward investment, and relative interest rates.
• Floating Exchange Rate: Australia operates under a floating exchange rate regime, which means the value of the AUD fluctuates based on market dynamics.
• Intervention: The Reserve Bank of Australia (RBA) has the power to intervene.

Comparative Advantage Example

• Country A: 650 Wheat and 400 Beef
• Country B: 600 Wheat and 200 Beef
• Country B has a comparative advantage in beef production.

Depreciation of the Australian Dollar

• Increased international competitiveness occurs with the depreciation of the Australian Dollar.

Terms of Trade Calculation and Analysis

• Terms of Trade Index = (Export Price Index / Import Price Index) * 100
• 2023 Export Price: 440, Import Price: 400
• 2024 Export Price: 200, Import Price: 220
• Terms of Trade for 2023: (440/400) * 100 = 110
• Terms of Trade for 2024: (200/220) * 100 = 90.91
• Movement Analysis:
• The terms of trade have moved from 110 in 2023 to 90.91 in 2024.
• The movement is unfavorable.
• Economic Effects:
  • Reduced Export Income: Lower export prices relative to import prices reduce income from exports.
• Decreased Purchasing Power: A decline in terms of trade reduces the economy's ability to purchase imports, potentially affecting living standards and economic growth.

Not a Cause of Globalization

• Increase in domestically manufactured goods is not a cause of globalization.

Australia's Trade Weighted Index (TWI)

• The TWI weights currencies according to trade volume between Australia and its partners.

Exchange Rate

• Exchange Rate determines how many Australian dollars must be paid by the importer to give the foreign exporter the sum asked for the goods.

Terms of Trade Measurement

• Ceteris paribus, the terms of trade are measured by the general level of prices received for exports.

Opportunity Cost

• Tonnes: China 80, Japan 20
• DVD's: China 40, Japan 20
• Opportunity cost of one DVD in China: - Two tonnes of steel is the opportunity cost of one DVD

Appreciation of the Australian Dollar (AUD)

• Two effects of AUD appreciation:
  • Decreased competitiveness of the Australian export industry.
  • Lower revenue and profits for the export industry.

Decline in International Students

• Decrease demand for Australian dollar

Factors That Might a Cause a Rise in the Value of the $AUD

• Increased foreign investment in Australia leads to a higher demand for the Australian dollar.