Year 12 Economics Notes PDF

Economics Notes Year 12 *Elsie Gillezeau* **Year 12 Outcomes** *Objectives* ============ - The economic behaviour of individuals, firms, institutions and governments - The function and operation of markets - The operation and management of economies - Contemporary economic problems and issues facing individuals, firms and governments Skills to: - Investigate and engage in effective analysis, synthesis and evaluation of economic information from a variety of sources - Communicate economic information, ideas and issues in appropriate forms Values and attitudes about: - Informed participation in economic debate and decision-making - Responsible approaches towards people, societies and environments. Year 12 Course ============== 1. The Global Economy 2. Australia's Place in the Global Economy 3. Economic Issues 4. Economic Policies and Management - Economic Growth - Unemployment - Inflation - External Stability - Distribution of Income - Environmental Sustainability **Question** -------------- -- -- -- -- **25** **26** **27** **28** [[https://www.abs.gov.au/]](https://www.abs.gov.au/) **HSC TOPIC ONE: The Global Economy** Examine economic issues ----------------------- - Examine the **effects of globalisation** on the economic issues (economic growth, quality of life, unemployment, inflation, environment and external stability) - Investigate the [global distribution] of income and wealth and its consequences - Discuss the effects of [protectionist] policies on the global economy Apply economic skills --------------------- - Analyse statistics on trade and financial flows to determine the nature and extent of [global interdependence] - Assess the impact on the global economy of [international organisations] and[] contemporary [trading bloc] agreements - Evaluate the impact of [development strategies] used in a range of contemporary and[] hypothetical situations. ***International economic integration (1.1)*** - The global economy (1.1.1) As a result, changes in a single economy can have ripple effects on other national economies thus creating a 'global economy'. - Gross World Product (1.1.2) \*in 2022 GWP was \$US 160 trillion dollars (PPP) - Globalisation (1.1.3) Major indicators of international integration include: 1. International trade in g/s 2. International financial flows 3. Foreign direct investment flows and TNCs 4. Technology, transport and communication 5. International division of labour, migration 1. Trade in g/s - Annual growth in trade has been twice that of economic growth. However they are more volatile (Coronavirus has seen world trade fall up to 30%) Trade has grown rapidly over the decades from US\$6.2trillion in 1987 (37% of global output) to US\$43.8trillion in 2018 (50% of global output) [ ] [Volume] of world trade grew to 125 times its 1960 level.[] - Used to be dominated by manufactured goods (still is 75% but smaller) - Services are growing significantly 17% in 1980 to 25% today - In the future it is expected that trade in finance and communication services will be the fastest growing industry, which Australia will benefit from due to the Australian labour market having extensive business and commercial skills. - reflecting strong growth in [emerging] economies and their embrace of globalisation[ ] - East and Pacific region saw an 8% point rise in their share of global trade between 1995 and 2016 (7% to 15%) 2. Financial flows - FOREX (Foreign Exchange Market - the market for foreign currency) - Foreign capital flows - Banking interest rates - FDI inflows. - Speculation (FOREX) increases market volatility due to high volumes being traded. - Speculators: investors who buy or sell financial assets with the aim of making profits from short-term price movements. - Worsened by 'herd behaviour' when an upward or downward trend in asset prices is established the trend continues. - 95% of Australia's currency is involved in speculative activity, hence our exchange rate is volatile relative to stable currencies like the USD. International Monetary Fund (notes further down) - global financial flows enable countries to attain funds that are used to finance domestic investment (countries with low national savings wouldn't otherwise be able to obtain the necessary finance to undertake large scale business and investment- therefore global financial flows may enable a country to achieve high levels of economic growth Trends of financial flows: -recent years have seen growth in international capital flows after their two decades of rapid growth before the GFC where it plummeted significantly -in 2016 global derivative turnover was \$US532 Trillion or x6 GWP -the foreign exchange market had daily turnover of \$US 6.6 trillion as in April 2019 -foreign exchange has grown x40 since 1986 and is almost double 2007 levels -short term speculation is still the largest proportion of financial flows 3. Investment and transnational corporations - FDI is a long-term investment - Investors intend to be involved in the management of the business. - In contrast financial flows are often short term (portfolio investments) - Emerging and developing nations received 59% of FDI inflows in 2014. - FDI normally accounts for less than 20% of total investment within an economy with the other 80% being domestic investment. They establish global chains where resources are procured from around the world at the lowest cost, assembled in places with cheap labour then shipped to markets (EU and US) - Since the 1990s it has grown from 37000 TNCs to 104,000 and employs over 79 million. Technology facilitates the process of globalisation. - Cheaper and more reliable international communication (broadband) to allow the ability to plan and coordinate business related information - Efficient aircrafts allow for greater labour mobility. - Tech has improved productive capacity, creating a surplus that can be sold internationally at lower prices - Freight economies have benefitted from more efficient logistics systems to facilitate greater trade in goods (e.g. roads, railways, airports etc.) - The internet also allows for international communication, which is widely used in financial markets (2 billion internet users and 7.2 billion phone subscriptions) 5. International division of labour, migration - Almost 70% of the world's migrants live in high-income countries. - Movement of labour between economies is concentrated at the top and bottom. - Bottom: Low skilled labour in demand for jobs that require basic skills (can be illegal) - 258 million migrants in 2016 and the US, Saudi Arabia, Germany and Russia were the 4 largest hosts and India, Mexico, Russia and China were the largest sources - Many immigrants send remittances home - International division of labour reflects the theory of [comparative advantage] which states that economies should specialise in the production of the goods and services they can produce at the lowest opportunity cost. - Trends of different nations specialising in different types of production and labour skills. - Developing nations have low skilled, low paid labour markets (attractive to TNCs) - But capital (AI) means production is going back to advanced economies- less labour - Immigration restrictions - Language - Cultural factors - Incompatible education. - The international and regional business cycles (1.1.4) - When a country is experiencing strong growth, its people attain high incomes and spend more on imports. This means trading partners are selling more exports, resulting in higher levels of growth. - Eco growth in individual economies is stronger when the rest of the world is growing strongly. - Size of the economy is important eg. Aus impacted more by China and US than NZ - RBA found that 63% of changes in their level of output in Australia is attributed to changes in interest rates, growth levels, and inflation rates in the largest industrialised countries (i.e. the G7). - In the GFC Aus economic growth rate fell from 5-2% - IBC = International business cycle and RBC = regional business cycle Factors strengthening the international business cycle: - Free trade agreements - Coordinating economic policy (often through WTO) - Integrating into the global economy [Transmission] of economic conditions (factors strengthening) - Trade flows - booms and recessions in one country affect its demand for g/s from other nations - Investment flows -- growth of an economy affects whether they will choose to invest in other countries or not (FDI), which affects the growth of countries receiving money - TNCs - Financial flows - countries with strong financial integration experience an increase in financial flows between themselves in response to common external shocks - Global interest rates (financial market confidence) - Commodity prices (reliance in the manufacturing/production process, driver for inflation/growth and therefore has flow on effects in employment, investment etc) - International organisations (coordinating global economic strategy) - Regional business cycles dominated by the largest and most globalised economies. Regional business cycles can be different from patterns in global economic activity with some regions performing more strongly than others and fluctuating independently of other regions. ***Trade, financial flows and foreign investment (1.2)*** This section is **very** frequently tested, especially 3-4 mark questions. Must know diagrams. - The basis of free trade - its advantage and disadvantages (1.2.1) Absolute advantage: can produce [both] goods at a higher productivity.[] - Even if an economy has an absolute advantage at producing all goods, each country will have comparative advantages. Production and trade according to comparative advantage increases world allocative efficiency and maximises global output (specialisation). - Trade allows countries to obtain g/s otherwise could not produce - Free trade allows countries to specialise = increased efficiency - Free trade encourages efficient allocation of resources - Greater specialisation results in economies of scale (low production costs) - Encourages innovation and spread of new technologies. - Leads to higher living standards as a result of lower prices (increased competition) - Efficiency: - Technical efficiency = specialisation leading to economies of scale - Allocative efficiency = more optimal allocation of resources - Dynamic and innovative efficiency = producers have greater incentive to innovate - Increase in unemployment may occur due to structural changes (CAR INDUSTRY) - More difficult for less advanced economies to establish new business without protection - Production surpluses from some countries can lead to dumping - Encourage environmentally negative externalities with irresponsible production methods due to competing with prices. - National security may be undermined if an economy is dependant on trade in a time of emergency- eg. Vaccines, defence - Role of international organisations - WTO, IMF, World Bank, UN, OECD (1.2.2) World Trade Organisation (WTO): - Role = implement and advance global trade agreements and resolve trade disputes - Trade liberalisation (forced China at start to reduce average tariff from 35% to 15%) - Formed in 1995 - 164 members and 23 observer countries - Role = maintain international financial stability, in relation to foreign exchange markets - Structural adjustment policies \> open up to trade \> receive financial assistance - IMF injected \$250 billion US into the global markets to maintain financial liquidity during GFC 2008 World Bank: - Role = help poorer countries with their economic development - Funded by contributions made from member countries and borrowings on global financial markets - Two major goals are: - Reduce the rate of extreme poverty to less than 3% of population (2030) - Reduce inequality by fostering income growth for world's bottom 40% - Established 1945, 193 members - Broad objectives to do with global economy = international security, environment, poverty and development, international law and global health issues. - The United Nations Development Program (UNDP) is a UN agency with a development mandate that helps the economies of developing countries by devising appropriate economic strategies and policies, as well as building the human capital in those places. - The United Nations has also played an important global economic role in establishing the Millennium Development Goals (MDG) and supporting initiatives to achieve the targets set out in the MDG. - Role = promote policies to achieve the highest sustainable eco growth and employment while rising living standards of member countries + fiscal stability - 36 countries committed to democracy and the market economy (Australia) - Undertakes a large amount of original economic research regarded as most reliable and highest quality. - Influence of government economic forums - G20, G7/8 (1.2.3) Group of Seven Nations (G7) - Seven largest [industrialised] nations (US, UK, France, Germany, Canada, Japan, Italy) - Significance in decline [reflects] the shift in the global balance of power towards emerging economies (particularly [China] ) - Share of GDP shrunk from 68 % in 1992 to 39% in 2018 Group of Twenty Nations (G20) - Coordination of fiscal stimulus following GFC - Includes 19 of the world's largest national economies, plus the EU - Makes up 80% of World GDP and ⅔ of the population - Limited effectiveness as no ramifications for not implementing agreed policy. - Trading blocs, monetary unions and free trade agreements (1.2.4) - **Trading Blocs:** occurs when countries join in formal preferential trading agreement to the exclusion of other countries. Trading blocs impose protection on non member countries i.e. not free trade (EU) - Customs Union: A Free Trade Agreement (FTA) that includes a common set of external tariffs. - **Common Market:** the same as a Customs Union but also allows for the free travel of labour and capital between the member countries (visas). - **Monetary Unions:** characterised by the features of a single market which allows not only free trade but also the free mobility of labour and capital within the union PLUS the adoption of a [common currency] and the coordination of monetary policy through a single central bank. (EU) - **Free Trade Agreements:** are formal agreements between two or more countries to break down barriers to trade and encourage increased trade flows. Can be called 'preferential trade agreements'. - Two countries = Bilateral (ChAFTA China + Australia) - Three or more = Multilateral (ASEAN Association of SouthEast Asian Nations) - Advantage of FTAs is that it is a 'stepping-stone' to free trade. Disadvantage is that they can lead to the formation of trading blocs, hindering progress to global free trade. - Regional trade agreements: 27 in 1990 now 206 in 2015 - Reduction in average tariffs around the world from 14 % in 1990 to 7% in 2014 allowed trade to increase 5 times to US \$45 trillion. - Advantages and disadvantages of multilateral and bilateral agreements **MULTILATERAL:** - **APEC** ( Asia-Pacific Economic Cooperation) - Established 1989 in response to other trading blocs forming like EU- 21 members - Region accounts: - 60% of population - 54% of world GDP - 44% of trade - NOT a secluded trading bloc does not put barriers on non-member economies. - FORUM not a FTA or BLOC - Australia: - Increased Australia's national output by 6.8% and created 500,000 jobs between 1989 to 2010. - APEC accounts for 75 % of Australian trade. - Impacts: - Income per capita across the region almost doubled - Not very enforceable though. - **TPP-11** ( Trans-Pacific Partnership) - Multilateral trade agreement among 11 Pacific Rim countries - Ratified March 2018 - Represents 13 % of global economic output and 15% of global trade - Australia: - Exports to TPP-11 members in 2018 were \$164 billion (22% of trade ) - Impacts: - The World Bank estimates that TPP-11 members should see an increase in GDP by approx. 1.1% - **ASEAN** ( Association of South-East Asian nations) - Counter-weight to APEC forum which is dominated by larger economies - AANZFTA 2010 (ASEAN + Australia and NZ) - Extensive tariff reductions (96 % of Australian exports into the region) - Largest preferential trade agreement for Australia - Impacts: - \$3.8bn increase in [service] exports in the four years after agreement to ASEAN nations - Australia's FDI in ASEAN nations from 2011-2016 increased by \$21bn - **NAFTA** ( North American Free Trade Agreement) - United States, Canada and Mexico - 1994 accounts for 13% of global merchandise trade - Impacts: - Access to Mexico for USA and Canadian manufacturers to exploit lower labour costs - Trade creation - trade quadrupled in first 18 years FDI increased fourfold. - However, highly political in the US because of jobs - Mexico lost 1.3 million farm jobs as a result. - **EU** ( European Union) - MOST important trading bloc in the world economy - Larger than US similar size to China - Accounts for 20 % of global merchandise trade - Trade between EU countries accounts for 66% of all EU trade - Customs Union: - Common external tariff average is 5.9% mode is 15% - 47% of items have no tariff - Free movement of labour and capital - EU Monetary Union: - Single currency (euro) amongst 18 members - Came under pressure during GFC and consequent Euro crisis. - Reduced transaction costs - Eliminates exchange rate uncertainty - BUT loss of national currency controls - Loss of monetary policy as a tool to solve specific issues in your domestic economy. - Benefits of EU membership - Free trade - Attractive for FDI - Huge market size - Free movement of labour and capital. - Costs of EU membership - Forced to follow EU laws and regulations - Cost of contributions to EU budget - Trade benefits accrue from FTAs instead. - Trade diversion! Reduces world allocative efficiency. - CHAFTA 2015 aimed to eliminate 86% of tariffs and then 96% on full implementation in 2029. - Services: Most-favoured nation (MVN) clause, Australia's competitive position in services will be protected for legal services, education services and telecommunication services - AUSFTA (2005) USA. provides significant tariffs reductions on agriculture and manufacturing. Tariffs on ALL GOODS eliminated from 2015 ***Protection (1.3)*** - Reasons for protection - infant industry argument, domestic employment, dumping, defence (1.3.1) 1. Infant Industry Argument Infant industries- emerging domestic industries that require the financial and regulatory protection to be fostered and competitive in the future. Methods: trade quotas (quantity restriction), grants + funding, subsidies, tax incentives, STEM funding, tight regulations on IP. \- Start out with high operating costs - small scale - Firms cannot gain international competitiveness as they become reliant on protection and fail to innovate - CAR INDUSTRY: Toyota, Holden and Ford - Subsidy was \$500 million a year but industry only supplied 10 % of domestic demand and couldn\'t stay competitive due to higher costs of production than the competitors in Japan and the US. - Ceased manufacturing in Australia 2016-2017 2. \*\*Domestic employment\*\* Support industries with high human labour in key industry sectors and in key states/ electorates. 'Vote buying': Pork Barrelling Methods: subsidies, tariffs, quotas, local content rules - Argument gains support during times of recession when unemployment is rising (COVID... gas?) but economists do NOT support this argument. Disadvantages: - Protection distorts the allocation of resources in an economy away from areas of more efficient production in the long run leading to higher levels of u/e and lower growth rates. 3. Prevention of dumping \- Consumers gain from lower prices but foreign producers will increase prices after. Methods to prevent: quotas, competition laws and appeals to WTO 4. Defence and self-sufficiency. Methods: FTAs, voluntary export restrictions, trade embargoes Argument arises for three key industries: food, technology and medical supplies to provide for domestic needs and in times of crisis. Methods: subsidise, grants, tax incentives, training, funding 5. Other Ethical arguments, modern slavery, environmental degradation - Allowances for higher wage and transport costs to support industries in developed economies (eg. Gov subsidises the Aus tourism industry to keep it alive because its symbolically important) - Methods of protection and the effects of protectionist policies on the domestic and global economy - tariffs, subsidies, quotas, local content rules, export incentives (1.3.2) - Causes an extension in [domestic supply], increasing production and employment[] - Creates a source of revenue for the [government]. Cons: - Contract domestic demand because consumers pay a higher price - Reduction in allocative efficiency. Represented by the [deadweight] loss where part of the[] consumer surplus is lost and never recovered in the economy. - Retaliation effect (US-China trade war) - Tariffs increase the input costs for other industries who did not receive tariff protection. - Making industries artificially competitive reduce dynamic efficiency as domestic firms have less incentive to adopt new technology to reduce production costs. - OECD estimates that every \$1 in protection decreases GWP by 66 cents Facts: - Average tariff 3 % (20% in 1990) - Increase domestic production and employment - Doesn't raise the price unlike tariffs or quotas (good price for consumers) - Less retaliation Cons: - Cost for the government - Opportunity cost of subsidising is not spending it on healthcare, education etc - Increased domestic production represents increase in demand for factors of production raising factor costs for other firms who do not receive subsidies. - Domestic firms become reliant (loss of dynamic efficiency) - Can create an oversupply, which can lead to dumping. - Stimulates domestic production and employment is protected - More resources allocated to protected industry Cons: - Redistribution of income away from consumers to domestic producers, resulting in lower levels of overall economic growth. - Unlike tariffs, no government revenue directly generated benefits consumers **Voluntary Export Restraints:** Self imposed limitations on goods being sold to other nations (anti free trade) - Best examples occur when: issues of over supplying to export markets (dumping) that they might be accused of doing therefore self impose restrictions eg. China "the WTo is on our case we're being accused of dumping manufactured goods lets impose a restriction" - Other eg. ethical (mining lithium, child labour)/ environmental (live cattle exports), energy security (LNG and lithium) and military security - 2015 one assessment criteria for overseas companies wanting to build Australia's submarines was the extent of local manufacturing and maintenance work that would be done in Australia. - Commercial TV required to have 55 % of local content between 6am to midnight on primary channel. - Grants, loans or technical advice and encourage businesses to penetrate global markets. - Australia has the Export Market Development Grant (EMDG) that provides direct funding and general assistance to local manufacturers looking to break into international markets. - More than \$250million support for future STEM businesses - Reductions in trade between nations - Reduce living standards and reduce global economic growth by shielding inefficient producers - Increased difficulty for individual economies to specialise in efficient production - Negative impacts tend to be greatest for developing economies that are excluded from access to the markets of advanced economies. ***Globalisation and economic development*** **(1.4)** *The process of globalisation has seen a transformation in the size and power of the world's major economies.* - Differences between economic growth and economic development (1.4.1) **Q. Describe the difference between economic growth and economic development (2 marks)** Economic growth (EG) is the increase in the overall value of G+S produced by a given economy measured in the percentage rate of increase in real GDP. Comparatively, economic development (ED) refers to a country's well being measured using trends in sustainability and quality of life as well as the Human Development Index (HDI), which involves education and life expectancy. - GNI (Gross National Income) is the sum of value added by all resident producers in an economy plus receipts of primary income from foreign sources (inflation adjusted + PPP) - US and China have the largest GNI - Inaccurate to use as a comparison because it doesn\'t consider living standards. This is why economists use PPP - PPP (Purchasing Power Parity): a theory that states that exchange rates should adjust to equalise the price of identical goods and services in different economies throughout the world. - Divide the REAL GNI by the POPULATION generating a GNI per capita figure. - Global Wealth: Another dimension to global inequality. - Significant growth over recent decades 66% from 1995-2014 - Natural capital was the most important asset for low income countries at 47% of total wealth in 2014 - Human capital accounts for approximately ⅔ of global wealth. - Top 10% of people account for 87% of the world\'s wealth. (developed countries) - A measure of economic development devised by the UN - Considers: life expectancy at birth, levels of education attainment and expected years of attendance, GNI per capita. - 0 = bad 1 = good - Norway highest 0.949 (Australia 2nd 0.939 ) and lowest Central African Republic at 0.352 - Distribution of income and wealth (1.4.2) - Australian Gini for income declined from 68.7 in mid 2000s to 64.9 in mid 2010s - Income and quality of life indicators (1.4.3) - UN Summit 2000 189 countries agreed to eight MDG goals - Improve: income, education, health and environment. - From 1995-2015 global population living in extreme poverty fell from 36% to 12% - Developing economies, emerging economies, advanced economies (1.4.4) Advanced economies; characterised by: - High levels of economic development (average income \ - Varying income levels - High rates of income GROWTH - Strong economic growth (5-10%) - Currently industrialising (heavy manufacturing presence) Developing economies; characterised by: - Low income levels - Human resources with poorer education and health outcomes - Industrialisation to a limited extent - Large numbers of people living in absolute poverty - Reasons for differences between nations (1.4.5) **Global Trade System:** Several features of the global trade system work to reinforce inequalities - Protectionism in the agricultural sector, particularly in wealthy countries - Regional trading blocs (cause trade diversion away from developing countries) - Benefits of free trade agreements being inaccessible to developing nations. - If developing countries like Africa, South-America and Asia could increase trade by 1% would lift 128 million out of poverty. - Bilateral agreements favour advanced and emerging economies. - Long-term flows of investment favour developed countries and short-term favour emerging economies (can be volatile though) - International tax havens - IMF structural adjustment policies favour and serve interests of rich countries - World's 48 poorest countries received just 4.3% of global FDI - Developing countries have huge foreign debt burdens. World Bank/IMF provide 'debt relief' to HIPCS (heavily indebted poor countries) Global aid and assistance: - 58% shortfall of promised vs. delivered aid since 1970 - [Phantom Aid] - aid that does not improve lives of poor[] - 1 in 6 dollars is technical cooperation, further 11% is debt and 5% is administration - Aid spending reflects military interests rather than the needs of the poorer countries - Economies with larger quantities of natural resources such as oil and precious minerals generate higher export income, which can fund education and health. - Differences in education quality and standards and skills. - High levels of corruption, which decrease public investment in schools etc. - Political instability - Effects of globalisation (1.4.6) Economic growth and development: - No clear evidence globalisation produced an acceleration of eco growth. - World GDP fallen marginally from 2.9 % during 1980s to 2.8% per year from 2000-2017 - BUT most countries experienced improvements in development. - Impacted emerging economies the most Income inequality: - Global mobility of skilled labour has increased income inequality. - Lower tariffs can improve standards of living for the poor by reducing prices of goods. - Income inequality has risen by almost 0.45 % per year over the past three decades. - Major reason is the impact of technological change. - Trade, investment and transnational corporations (1.4.7) SIGNIFICANTLY INCREASED TRADE FLOWS AND FDI. - [Vertical specialisation:] feature of trade growth where goods are produced in different stages in different economies. (Since late 2000s two thirds of global trade is intermediate goods). - Between 1990 and 2001 FDI increased sevenfold due to deregulation - Environmental sustainability (1.4.8) Negative environmental consequences. - Increased trade sees increase in use of non-renewable fuels for transport - Low income countries desperate for foreign investment engage in economic behaviour that harms the environment. - BUT there are also international institutions and conventions to help enviro (Kyoto) - The international business cycle (1.4.9) - Ability to conduct international transactions - Easier to access loans or attract investors - Efficient international financial markets fosters economic development Negative impacts of global financial markets: - Markets shift massive volumes of money causing volatility and collapse exchange rates - In 2000s financial markets played a part in worst economic crisis since Great Depression ***Case Study*** +-----------------------------------+-----------------------------------+ | **Stats** | | +===================================+===================================+ | **History** | 1978 introduced 'Open-Door' | | | policy beginning the SEZs that | | | attracted TNCs and FDI because | | | the tax rate was 15% rather than | | | 33%, low labour costs (5% of US | | | wages) and low import duties. | | | | | | - FDI rose US0.25bn (1978) to | | | US71bn (2019) | | | | | | - Open-Door accounted for 45% | | | of FDI | | | | | | - 1993 International Trade and | | | Investment report stated "*in | | | the* | | | | | | *1980s contribution to EG came | | | mainly from foreign investment"* | +-----------------------------------+-----------------------------------+ | **Economic Growth** | Average 9.5% annually was | | | | | | January 2020 China recorded | | | negative growth rates for first | | | time -6.8% | +-----------------------------------+-----------------------------------+ | **Economic** | **HDI** = 0.758 in 2019 (85th | | | worldwide) improved from 0.500 in | | **Development** | 1990 **Wages:** increased by 6% | | | p.a. Every year since 1995 \ | | | US\$770 in 1995 now US\$12680 in | | | 2020 | | | | | | - TNCs created 335 million new | | | kobs | | | | | | - 2013 Rise of the South Report | | | estimated EG achieved as a | | | result of trade and financial | | | strategies helped raise 800 | | | million out of poverty | | | | | | **Enviro** "War for blue skies" | | | (2018) strategy renovate outdated | | | factories **Education**: | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | | The Compulsory Education | | | Development Memorandum (2017), | | | focuses on critical thinking and | | | innovation, which are crucial | | | skills stated under the Oxford | | | Economics Report. It purports | | | that China must employ innovation | | | to boost productivity and sustain | | | its previous high levels of EG. | | | In January 2020 China recorded | | | negative growth rates for the | | | first time, shrinking 6.8% due to | | | the Covid-19 pandemic. However, | | | in April 2020, China still | | | managed to record a trade surplus | | | of \$45.34bn, which can be | | | attributed to manufacturing | | | industries refocusing on | | | producing medical supplies. This | | | feat could only have been | | | achieved through an innovative | | | and skilled workforce | | | demonstrating that education | | | strategies have not only | | | benefited China's ED but also its | | | growth. | +===================================+===================================+ | **Trade** | **Goods:** Successful due to | | | cheap prices and high volumes | | | | | | - 38% of GDP in 2018 | | | | | | - Trade doubled in first 10 | | | years of Open-Door | | | | | | - Foxconn stated their parts | | | would cost double if they | | | were produced in the US | | | rather than China. | | | | | | BOGS trade surplus of \$45.34bn | | | in April 2020 (slightly less than | | | 2019) | | | | | | However, China is export-led | | | (they need to transition away | | | from this) | | | | | | - Too strong a reliance on | | | trade revenue | | | | | | - Highlighted during US-China | | | Trade War US accounting for | | | 16.2% of China's exports | | | placed tariffs on hundreds of | | | billions worth of goods | | | dropping EG to a pre-Covid | | | low of 6% in 2019 | | | | | | Multilateral and bilateral | | | agreements are valuable (WTO) in | | | 2001 China has 44 FTAs. | | | | | | **Services:** Records trade | | | deficits highlighting need for | | | reform | | | | | | 2017 trade deficit of US\$290bn | | | (services) | | | | | | Imports mostly skilled services | | | like education (Australia) | | | | | | \- To boost services China | | | focused on education reforms. | +-----------------------------------+-----------------------------------+ | **Financial Flows** | **Direct:** ( more than 10% | | | otherwise known as FDI) | | | | | | - Open-Door policy improved FDI | | | | | | - China receives huge financial | | | inflows but wants to increase | | | its financial outflows to | | | balance reliance on inbound | | | FDI. | | | | | | - Financial outflows = 0.5% of | | | GDP between 2000-2015 | | | | | | - China has relaxed restriction | | | on private firms investing | | | abroad | | | | | | - SOEs (state-owned | | | enterprises) compromised 94% | | | of outbound FDI in 2002 but | | | [strategies] | | | like "Made in China | | | 2025" (2015) helped this drop | | | to 50% in 2018. | | | | | | - [Belt and Road | | | Initiative] | | | (2013)[] | | | | | | - Largest global infrastructure | | | project | +-----------------------------------+-----------------------------------+ | | - Costs China US\$150bn per | | | year to link 68 countries - | | | Boosts China's net primary | | | income earned on FDI | | | | | | **Portfolio:** ( less than 10% | | | can be loans or financial market) | | | | | | - 1990s deregulation improved | | | financial inflows and | | | outflows | | | | | | - Relaxed laws on banking | | | firms, formed a strong stock | | | market and embraced | | | free-market strategies. | | | | | | - Second largest stock market | | | BUT foreign investors own | | | only | | | | | | | | | | | | - China owns US\$4trillion in | | | foreign currency reserves | | | meaning they can control the | | | renminbi against the USD | | | (devaluing) | +-----------------------------------+-----------------------------------+ HSC TOPIC TWO: Australia's Place in the Global Economy ====================================================== Examine economic issues ----------------------- - Assess the impact of recent changes in the global economy on Australia's trade and financial flows - Examine the effects of changes in trade and financial flows on Australia's economic performance - Analyse the effects of changes in the value of the Australian dollar on the Australian economy - Discuss the impact of free trade and protection policies on the quality of life in Australia - Propose likely changes to the structure of industry within Australia as a result of current trends in the global economy Apply economic skills --------------------- - Calculate the main components of Australia's balance of payments - Analyse the relationship between the balance of the capital and financial account and the net income balance - Explain the relationship between the current account balance and the balance of the capital and financial account - Use supply and demand diagrams to explain how the value of a currency is determined under different exchange rate systems - Analyse the impact of changes in the components of the balance of payments on the value of the Australian dollar **Australia's trade and financial flows (2.1)** *Value, composition and direction of Australia's trade and financial flows* - Trends in Australia's trade pattern (2.1.1) 1. Mining 57 % 2. Services 22 % 3. Manufacturing 12% 4. Agriculture 10% 1. Mining 32% 2. Agriculture 29% 3. Services 26% 4. Manufacturing 14% 1. China 36% 2. Other 26% 3. Japan 16% 4. East Asian Economies 12% 5. ASEAN 10% 1. Japan 27% 2. Other 23% 3. EU 15% 4. East Asia 15% 5. USA 10% 6. Asean 9% 1. Intermediate Goods 32% 2. Consumer Goods 25% 3. Services 24% 4. Capital 19% 1. Capital 53% 2. Intermediate Goods 22% 3. Consumer Goods 19% 4. Services 5% 1. China 24% 2. Other 20% 3. EU 17% 4. ASEAN 16% 5. East Asia 13% 6. USA 10% 1. EU 26% 2. USA 21% 3. Japan 20% 4. Other 14% 5. East Asia 11% 6. ASEAN 6% - Australia has a comparative advantage in the primary sector (mining commodities) due to vast natural resources - Less competitive in manufacturing due to high wages - EXPORT BASE HAS NARROWED (i.e. not diverse) - [Dutch Disease] = reliance on mining. When exports from one sector increase demand for dollars causing appreciation and making other sectors less international competitive. - In 2011 AUD surpassed parity with USD due to high mining demand from China, services such as education and tourism suffered. - Reliance on mining makes the country vulnerable to external shocks. - China's GDP growth declined from 8% to 6.9% (2015-16) causing deterioration in world price for coal and iron ore \> Australia's terms of trade and increased the CAD by 40% - **Future:** Australia should diversify its export base by shifting towards services and ETMs - Trends in financial flows - debt and equity (2.1.2) Key definitions: Gross foreign debt: total amount of outstanding funds Australia owes [foreign] firms.[] - More than 10% - Investor intends to have a say in the management of the business - Long Term - Less than 10% - Includes loans, securities, property and smaller share holding - Investors will not play a role in managing - Short term. - Better technology (internet) = easier transfer of information - Floating of exchange rates 1983 (FDI doubled) - Deregulation of financial markets in 1970s (removal of capital restrictions and technological changes) - Growth of TNCs - Investment is currently 90 times its level in 1980 (portfolio higher than direct) - **Does Australia own more FDI overseas or do foreigners own more of Aus?** ### *Australia's Balance of Payments* (2.1.3) - Money flowing **into** Australia is a CREDIT money flowing **out** of Australia is a DEBIT (*follow the money* ) - Structure Current Account (CA) + Capital and Financial Account (CAFA) = 0 i.e. they should [balance].[] - Current Account, debits and credits - Balance on goods and services (BOGS): value of exports minus value of imports - Net Primary Income (NPY): earnings on the factors of production (income interest, rent, profits) - Net Secondary Income (NSY): earnings not from the factors of production (unconditional aid, gifts, insurance claims, pensions received from other governments) - Capital and Financial Account - Capital Account: - capital transfers (foreign aid for construction of infrastructure) - transfers of non-produced, non-financial assets (e.g. intellectual property like trademarks) - Financial Account: (Australia's transactions in foreign financial assets and liabilities) - Direct Investment (10% or more) - Portfolio Investment (10% or less) - Financial derivatives (complex financial instruments) - Reserve Assets (RBA gold or foreign currency) - Other Investments - *Net Errors and Omissions:* statistical discrepancies. ![](media/image5.png) - Links between key Balance of Payments categories Supply of A\$: **(** **M, Y debits** and **K outflows)** - Payments for imports of goods and services **(** **M)** - Primary and secondary income/transfers [overseas] [] **(** **Y debits)** - Capital and financial outflow **(** **K outflow)** Demand for A\$: **(** **X, Y credits** and **K inflows)** - Receipts for exports of goods and services **(** **X)** - Primary and secondary income/transfers from overseas **(** **Y credits)** - Capital and financial inflow **(** **K inflows)** 1. International borrowing (foreign debt) \- This requires regular interest payments (primary income outflow) 2. Foreign investment (foreign equity) - Requires returns on the equity investment - Equity inflows are related to the foreign purchase of Australian assets - These assets return rent, dividends, profits etc. (primary income outflow) - Trends in the size and composition of Australia's Balance of Payments - International competitiveness, terms of trade, international borrowing, foreign investment [CAD (Current Account Deficit)]: first emerged as a serious economic concern in the 1980s. - Averaged 1.1% of GDP in 1970s then 4.0% in 1980s - Sudden increase prompted [structural reforms] to restore international competitiveness. - Since the 1980s [CAD] has moved in a range of **3-6** **%** of GDP. - Recorded a [CAS (Current Account Surplus)] for the first time in 44 years in 2019. - Rise in demand for Australia's commodity exports (LNG) - Growing overseas earning from superannuation investments (NPI) [Balance on Goods and Services:] (trade balance) has recorded an improving trend. - Main cyclical component of the [CAD] [Movements in the exchange rate:] - Affects the international competitiveness of Australia's exports and the relative price of imported goods and services. - Depreciation causes increased international competitiveness of exports (discourages import spending) which improves the BOGS account. - *Shows relationship between* ***price*** *of exports and* ***price*** *of imports.* - Commodity prices (Australia export base) have steadily increased, which has seen the ToT improve. - Leads to a decrease in CAD - Upturn in the domestic business cycle results in increased business investment and higher disposable income. - Leads to higher consumption - Therefore greater import expenditure worsening the BOGS - Above trends have contributed to Australia's poor BOGS performance during the mid to late 2000s. [International business cycle:] Affects demand for Australia's exports - Improvements in IBC improves BOGS (increased consumption of exports) - A continuation of this success depends on strengthening **trade** linkages with the economies that are most likely to drive global economic growth (China + India) [Export Base:] Important long-term behaviour on the BOGS[] - Australia has a narrow export base (heavily weighted towards primary commodities) - Low-value added products such as minerals and agriculture. - Therefore, Australia imports more expensive value-added products such as consumer and capital goods - Long run BOGS tends to then be in a deficit not surplus - Also impacted by global commodity prices. **Trends in the** Primary Income Account: The relative size of Australia's interest repayments is affected by two cyclical factors: - Value of the exchange rate - Movements in the exchange rate will alter the value of debt denominated in the foreign currencies. (**valuation effect** ) - An appreciation will reduce Australia's foreign debt service - A depreciation will increase Australia's foreign debt service - Domestic business cycle - Influence on equity servicing costs - When the domestic economy experiences strong growth, domestic profit rises and the profits redistributed in dividends increases. - Debit on primary income account (converse is true for the above) - Effects of these trends on Australia's Balance of Payments **Consequences of a high CAD:** [Growth of foreign liabilities:] - Over a period of time this will mean that lenders may become more reluctant to lend to, or invest in Australia. [Increased servicing costs:] - Foreign debt must be serviced through interest payments according to global and domestic interest rates. - Higher levels of foreign debt can result in lenders demanding a risk premium on loans. - Forces interest rates up. [Increased exchange rate volatility:] - High CAD may undermine confidence of investors in Australian economy reducing demand for the AUD - Results in depreciation of AUD [Constraint on economic growth:] - Referred to as the Balance of Payments Constraint - The extent to which an economy's capacity to grow is constrained by its need to keep the current account deficit at a sustainable level. [Contractionary economic policy:] - If necessary to reduce a high CAD in the short term, tightening of policies may occur. - This will reduce economic growth etc. [Loss of international investor confidence:] - Countries with high CADs are more vulnerable to shifts in investor sentiment. - Has the ability to trigger economic crises ( Asia Financial Crisis was due to Thailand's high CAD in 1997) **Exchange Rates (2.2)** - Measurement of relative exchange rates (2.2.1) - To other individual currencies - Bilateral - Most common conversion is AUD vs. USD - Not holistic - Trade Weighted Index - Increasing TWI leads to AUD appreciation compared to currencies of trading partners. - Same concept as CPI but for currencies not goods. - Factors affecting the demand for and supply of Australian dollars (2.2.2) NOTE: Short-answer questions for this topic. Do not need to memorise all the reasons. [Financial Flows:] - **Interest rates:** high domestic cash rates/interest rate differentials increase demand - **Investment Opportunities:** When foreigners want to invest in Australia they have to buy AUD increasing demand for AUD. [Expectations:] Speculators who make money off short-term price movements.[] - [Self-fulfilling prophecy] because of herd mentality. If buyers think AUD will go up they buy and then others do to, which increases demand sees AUD go up and voila self-fulfilled. [Exports (Demand and Supply):] - Increasing exports will lead to an increase of demand of AUD - Rise in TOT and commodity prices generally associated with increase in Aus exports - Demand for exports determined by international competitiveness and inflation [Inflation:] - High inflation = less international competitiveness = lower exports = less demand. [Imports (Demand and Supply):] - Increase in imports will lead to an increase of supply of AUD. - Demand for imports comes from rising incomes, taste and preferences and higher domestic inflation rate than other countries. - Strong economic growth increases consumption of imports and thus supply of AUD. [Financial Flows:] - Financial flows leaving Australia increases supply of AUD - I.e. RBA wants to increase their foreign reserves so they buy foreign currency increasing the supply of Australian dollars. - Changes in exchange rates - appreciation/depreciation (2.2.3) - Increase in [interest rates] or a decrease in overseas interest rates - Improved [investment opportunities] in Australia or deterioration in foreign investment opportunities - Rise in [commodity prices] and an improvement in Australia's [ ToT] - Improvement in Australia's [international competitiveness] - Lower [inflation] in Australia[] - Increased [demand] for Australia's [exports] - [Expectations] of a currency appreciation.[] - Strong [global economic conditions] improves demand for Aus exports - OPPOSITE OF EVERYTHING ABOVE. - Determination of exchange rates including fixed, flexible and managed rates (2.2.4) FIXED: Governments determine the exchange rate on the value of another country's currency - What: - Overvaluing: If market equilibrium is below fixed rate, the government must buy excess demand using foreign reserves. - Undervaluing: must create excess supply by purchasing foreign reserves. - Australia used this prior to 1976 - Advantages: - Useful for exporters and importers and central bank - Disadvantages: - Defying market for long periods can deplete foreign reserves increasing i/r - Can increase speculation (Soros selling and buying of Deutschmark and Pound led him to make 1 billion pounds in one day) - BOP creates money supply issues - Country is insulated from global conditions - Clean float = no intervention - Dirty float = central bank will aim to curb volatility - Advantages: - More realistic - Discourages destabilising speculation - Can have more effective monetary policy as BOP doesn't influence money supply - Provides insulation properties for Aus economy - Consistent with major trading partners - Stabilises ToT - Disadvantages: Volatility caused by exchange rate expectations can lead to: - Uncertainty in savings and investment decisions - Overshooting - Bandwagon effects - Speculative bubbles - Mix of fixed and floating - Embraced by China in June 2010 - Fix it everyday - The influence of the RBA on exchange rates\*\* (2.2.5) Used for [dirtying the float] RBA gold and foreign reserves were \$A82bn in May 2018 - Small compared to the \$5.3trillion traded daily - Intervention power is limited by the size of foreign currency holdings. - Higher interest rates will attract more foreign savings - Increase demand put upward pressure on exchange rate (effective short term) - RBA estimates that a 10% depreciation leads to a 0.25%-0.50% increase in inflation each year for two years. - RBA can indirectly affect the exchange rate by releasing information into the public on the forecast influencing speculation decisions. - The effects of fluctuations in exchange rates on the Australian economy (2.2.6) - Australian exports more expensive leads to decrease in export income and deterioration in Australia's CAD in the medium term - Imports less expensive encouraging import spending worsening CAD - Trade deficit reduces economic growth - Lower financial inflows as its expensive to invest - Reduces AUD value of foreign income causing deterioration of net primary income - Reduces value of foreign assets (valuation effect) - Australian consumers enjoy increased purchasing power - Appreciation decreases the interest servicing cost on foreign debt - Inflationary pressures reduce (imports become cheaper so less imported inflation) - Australian consumers suffer reduced purchasing power - Increases the interest servicing cost on Australia's foreign debt - Increases imported inflation - Australian exports are cheaper improving demand and CAD - Imports more expensive discourages spending improves CAD - Trade surplus = better economic growth - Increases AUD value of net primary income inflows - Increases the value of foreign assets **Free Trade and Protection (2.3)** - Australia's policies regarding free trade and protection (2.3.1) Australia was one of the most protected economies in the world. - Whitlam 25% cuts to all tariffs (1973) and more in 1988 (MICROECONOMIC REFORM) - Protection phased out 1991, 25% clothing and 15% textiles averaging 3.7% in 2002 - average tariff 1.3% - Car subsidies ended in 2016 - WTO (1995) - Multilateral and Bilateral agreements (see Topic One) - Australia's multilateral and bilateral free trade agreements (2.3.2) - AANZFTA (2010) - Extensive tariff reductions - Aus two way trade with ASEAN and NZ grew by 10% p.a. Over past 5 years - Covers area of 600 million people and GDP of \$3.3trillion - APEC forum - ASEAN Bilateral: Two countries. Easy to negotiate. - ChAFTA (2015) China - 2017 China bought \$116bn of Aus exports (BIGGEST trading partner) *- More explanation in TOPIC 1.* - The implications of Australia's policies for individuals, firms and governments (2.3.3) Consider both **short term** and **long term** (short term are usually positive and long term bad) INDIVIDUALS: - Structural unemployment in short term - Increase quality of life due to decrease in prices and increase in choices - Long term job opportunities as some sectors become more internationally competitive FIRMS: - Increase efficiency of increase competition - Cheaper imports for firms that use in production - However, increase offshoring in some sectors - Decrease revenue in some sectors GOVERNMENTS: - Decreased tax revenue (from no tariffs) - Structural unemployment benefits increase - Increased expenditure on training - Long term increase international competitiveness OTHER: - Economic development rises - Short-term increase in imports worsens CAD however long term CAD is better due to better international competitiveness. - Implications for Australia of protection of other countries and trading blocs. (2.3.4) Global protectionist policies impede trade reducing the extent of structural change promoted by free trade. - Are preferential - Creates trade diversion - Fragments global trade. HSC TOPIC THREE: Economic Issues -------------------------------- *Students learn to:* ### Examine economic issues - Examine the arguments for and against increasing economic growth rates - Investigate the economic and social problems created by unemployment - Analyse the effects of inflation on an economy - Discuss the effect of a continued current account deficit on an economy - Investigate recent trends in the distribution of income in Australia and identify the impact of specific economic policies on this distribution - Analyse the economic and social costs of inequality in the distribution of income - Examine the economic issues associated with the goal of ecologically sustainable development ### Apply Economic Skills - Identify and analyse problems facing contemporary and hypothetical economies - Calculate an equilibrium position for an economy using leakages and injection - Determine the impact of the (simple) multiplier effect on national income - Explain the implications of the multiplier for fluctuations in the level of economic activity in an economy - Calculate the unemployment rate and the participation rate using labour force statistics - Interpret a Lorenz curve and a Gini coefficient for the distribution of income in an economy - Use economic concepts to analyse a contemporary environment issue - Assess the key problems and issues facing the Australian economy. ### Economic Issues in the Australian economy ***Economic growth*** **(3.1)** - Aggregate demand its components: Y = C+I+G+X-M (3.1.1) GDP = national income (Y) - It is the sum of consumption (C) , investment (I), Government spending (G) and net exports (X-M). **AD** = C + I + G + X-M **X Axis (Output)** can be labelled as Real Equilibrium: **Y = C + I + (G-T) + (X-M)** - CONSUMPTION MAKES UP 50-60% OF AD (59% in 2018) - Income is most important factor of consumption so C\^ when: - Rise in income - RIse in inflation - Future shortage of goods - The more equitable distribution of income the higher the rate of **C** - Most volatile component (15% of AD) - A change in the i/r would make it cheaper to borrow funds for the purchase of capital goods improving investment. - If cost of labour decreased more attractive to businesses than capital - Goal of sustainable economic growth - Policy objectives for external stability - Sustainability of government debt - Higher AD means more imports changing trade balance - International competitiveness - Protectionism - Consumer taste and preferences (demand of Aus exports) - Exchange rate (weaker means more exports \> X-M increase) - *The multiplier also applies for decreases in AD* - Injections and leakages (I+G+X = S+T+M) (3.1.2) Equilibrium when **AD = AS or Y = AD** \- The simple multiplier: k = 1/1-MPC (3.1.3) **K = 1/MPS** or **K = 1/1-MPC** - Measurement of growth through changes in real Gross Domestic Product (3.1.4) You measure economic growth through the increase in the **volume** of g/s measured by the rate of change in **GDP**. ![](media/image8.png) - Sources and effects of economic growth in Australia (3.1.5) SOURCES of economic growth: - They want to smooth the business cycle Fiscal Policy Objectives: - Sustainable economic growth between 3-4% - Price stability CPI between 2-3% (Inflation) - Full employment i.e. u/e rate of \>5% - Reduce taxation **(** **T)** - Increase expenditure **(** **G)** - **DECREASE INTEREST RATES TO STIMULATE ECONOMIC GROWTH BECAUSE MORE PEOPLE CAN BORROW WHICH BOOSTS C+I** Microeconomic policies affect **AS** . - Faster eco growth results in an increase in real GDp per capita -\> real wages can rise and households enjoy high disposable income. - Jobs and growth - Eco growth can mean low unemployment - Higher levels of growth can result in price increases and larger wages \> higher inflation due to cost-push inflation. - Eco growth = higher disposable incomes = more imports = trade deficit Income distribution: - Eco growth can lead to inequality in income distribution as those who own factors of production benefit the most. - Absolute poverty should fall but relative poverty could increase. - Potential negative impacts if growth is pursued with little regard to social costs. - Capital deepening and investment. - Increases in aggregate supply - improvements in efficiency and technology\*\* (3.1.6) Aggregate supply (Y) is the total productive capacity of an economy or the potential output when all factors of production are fully utilised. Components are: consumption (C), Savings (S) and Taxation (T) \> **Y = C + S + T** - Population growth: labour is main input into the production process, increase in population means economy can produce more g/s - Discovery of new resources - Workers acquiring new skills: increases productivity (education programs) - The adoption of new technology: increases productivity (can be cost reducing) - Measures to improve efficiency (i.e. standardisation in freight containers) - Government policies: MICRO - Trends in business cycle (3.1.7) - Not as bad as other economies like US that shrank 5%, Britain 7.7% and CHina 33.8% Recession is two quarters of an economy shrinking. - Terms of trade reached highest level for 140 years in September 2011 adding an estimated 15% to Australia's national income (good use of fiscal and monetary) - Productivity growth has decreased from its peak in the 1990's (2.1%) to around 1.1% ***Unemployment*** **(3.2)** - Measurement (3.2.1) Employed people are those who work for **one or more hours per week**. - Labour force - Participation rate - Unemployment rate - Trends (3.2.2) - Recession in the 1990s u/e reached 11% (highest) - Resources boom saw it gradually drop - 2008 reached its lowest 3.9% (before GFC) Current: - 709,000 jobs were lost to coronavirus in the June quarter of 2020 (coronavirus) - Official u/e is at 7.4% but fails to take into account people on JobKeeper subsidy or who have left the workforce because of Covid. - *Effective u/e* = 11.3% down from 13% but could rise because of Melbourne. - Types and Causes (3.2.3) - Cyclical - Main cause of u/e atm because Coronavirus is impacting the business cycle economic growth should be higher than this to curb unemployment. - Structural - Caused by structural changes in the economy or technical innovation - Women re-entering the workforce or people in the arts - Seasonal - Dressing as Santa for shopping centres. - **Underemployment** ( not counted in official stat) Refers to those who want to work more house - Underemployment is ***not*** counted in the official unemployment statistics published by the ABC. - BIGGEST ISSUE AND MOST IMPORTANT TREND - Currently over 1 million Australians identify as underemployed. - Hidden (not counted in official stat) - Long term - Inadequate levels of training and investment - Inflexibility in the labour market - Level of economic growth - Stance of macroeconomic policy - [Rising participation rates] - Structural change - Technological change - Productivity - Increased labour costs (businesses shift from labour to capital) - Non-accelerating inflation rate of unemployment (NAIRU)\*\* (3.2.4) - When unemployment is above the NAIRU there is spare capacity in the labour market so policymakers should stimulate economic growth to reduce unemployment. - Employers will be forced to raise wages to compete for workers who are already in the work-force, which causes cost-push inflation - If unemployment is [less] than the NAIRU inflation [rises] - If unemployment is [equal ] to the NAIRU inflation [stays] the same - If unemployment is [more] than the NAIRU inflation rate [falls] **Phillips curve:** shows the [inverse] relationship that occurs between inflation and unemployment.[] - Re-skilling programs - Increasing occupational and geographical mobility - Main groups affected by unemployment (3.2.5) Indigenous Australians - Approx. four times the national average at 21.3% (2018) - highest among **young** australians 17.6% from 2015-2019 - Underutilisation 15-24 yr olds 29.6% in 2018 - NSW state average [usually] 4.8%[] - Regional 8.1% and city (eastern suburbs) 2.1% - Born outside of Australians usually contributes to structural differences i.e. language barriers - Effects of unemployment - economic and social costs (3.2.6) ECONOMIC COSTS: [Opportunity cost:] - U/e means an economy is not operating at its PPF [Lower living standards:] - Less income = lower living standards - Reliance on public welfare - Higher u/e production of g/s is reduced lowering overall living standards [Decline in labour market skills for long term u/e:] - **Hysteresis** is the process whereby u/e results in the persistence of u/e in future periods as unemployed people lose their skills, job contacts and motivation. [Costs to the government:] - Falling tax revenue and increase in u/e benefits **(** **BIG during Covid)** - Income from tax fell \$31.7bn in 2019-20 and the Gov expects it to fall another \$63.9bn in this financial year. [Lower wage growth:] - Excess supply means equilibrium level of wages falls. [Increased inequality:] - U/e tends to occur among low-income earners such as the young and the unskilled increasing the gap between low and high [Other social costs:] (social problems)[] - Severe financial hardship and poverty - Increased levels of debt - Homelessness and housing problems - Family tensions and breakdowns - Increased crime ***Inflation*** **(3.3)** - Measurement - headline and underlying (3.3.1) *\^ same calculation but replace 'Previous CPI' with 'Base Year' to find base year.* - Trimmed mean - average inflation after excluding the top and bottom 15% of price changes - Weighted mean - compare the inflation rate of every item in the CPI and identify the - Trends (3.3.2) - Steadily decreased since 1982 where the recession saw inflation peak at 21% - Decrease has been due to inflation targeting (2-3% target) since 1993 - This is deflation - Biggest fall in CPI since the great depression - Inflation should be +2% - Deflation is almost as bad as high inflation - Childcare went down at --95% (because government made it free) - Wages went down 5% - Drop in the price of fuel (-19.3%) - And primary education down (-16.2%). - Mr Hockman said \"Excluding these three components, the CPI would have risen 0.1% in the June quarter.\" - Causes (3.3.3) - Demand-Pull inflation - Associated with the [boom] phase of the cycle. - Cost-Push inflation - Increase in wages or capital - Imported inflation (can cause - Many goods imported and resold domestically - 40% of intermediate goods are imported, so if they increase cost-push increases. - A depreciation of the AUD will increase the price of domestic exports and will lead to imported inflation. - Inflationary expectations (can cause demand-pull) - Positive and negative effects (3.3.4) [Exchange rate:] low inflation suggests stability meaning investors are more confident.[] #### *External Stability\*\*\*\** (3.4) - Current account deficit (CAD) [as a percentage of GDP] - IMF states that acceptable levels of CAD are less than 6% in the short-term and less than 4% in the long-term - Australia has experienced persistently large CAD since the 1980s - CAD is largely explained as the result of a savings and investment gap rather than a trade gap. [Savings-Investment Gap:] - Excess of domestic investment over domestic savings - If people are saving, our national banks have less so they are forced to borrow from overseas to finance high levels of investment, which then increases net primary outflows - NOT happening as much anymore as our banks can borrow from strong domestic reserves. [Trade-Gap:] - International competitiveness: a lack of IC especially in value-added areas of global trade such as ETMS can create a trade gap because our exports are cheaper than our imports. - Terms of Trade: our commodity export base and commodity price trends. - Net foreign debt and liabilities a percentage of GDP **Net foreign liabilities:** net foreign debt + net foreign equity - Has been growing consistently since the 1980s (since globalisation) - Ranges between 50-60% of GDP used to be 6% in 1981 Consequences: - High debt levels increases vulnerability of an economy to deteriorating world economic conditions (i.e. if the currency depreciates foreign currency denominated debt increases interest payments) - Smaller component of net foreign liabilities - Since 2013 recorded for first time greater foreign assets than foreign ownership of australian assets (SUPERANNUATION) - Net foreign equity fell to zero - **Terms of Trade** - Exchange Rate Volatility in the value of currency reflects the world's opinion of Australia as a trading partner - Impacted by people's confidence in Australia for investment, g/s - AUD is the 5th most traded currency. - 80% of AUD sold is used to buy USD Floating exchange rate - One of the most important mechanisms that helps Australia to adjust to changing global economic conditions (shock absorber) - However has a SIGNIFICANT impact on Australia's external stability *Compare the impact of a falling currency in Australia vs. Thailand.* - **International competitiveness** - Trends (3.4.2) - Persistent CAD (but no longer) - Volatile terms of trade - Australia's lack of international competitiveness - Growth of foreign debt - Rising foreign ownership in Australia (offshore profits) - Volatile Australian dollar ∆ - ![](media/image14.png)Positive and negative causes and effects (3.4.3) Causes: - Borrowing overseas allows businesses to fund investment and growth of different industries - Creates employment and development within the economy. - [Pitchford Thesis:] overseas liabilities are acceptable if they are used to fund investment into industries that create money to pay back the loans. - Constraints economic growth. - High debt requires contractionary policies to increase saving so that debt can be paid - Exchange rate volatility - Growth of foreign liabilities (can lead to debt trap) - Higher servicing costs. ***Distribution of income and wealth*** (3.5) - Measurement - Lorenz Curve and Gini coefficient (3.5.1) - Sources of income as a percentage of household income (3.5.2) - Taxation, transfer payments and other assistance (3.5.3) [Taxation:] - Higher marginal rates mean that the more income earned, the more tax paid as a percentage of income - Is then REDISTRIBUTED away from high income earners - Large changes to tax brackets in the last 10 years - Amendments mostly for high income earners - Positively impacted middle-high earners but widened inequality - Capital gains tax taxes gains on investments such as the sale of property or shares - Fringe benefits targets aspects of salary packages such as company cars [Transfer payments:] - Social security accounts for around 33.3% of government expenditure. - Pensions, family benefits, **jobkeeper, jobseeker** , assist the unemployed, elderly single parents, disabled etc. and distributes income to them Superannuation: - ABS estimated that the wealth of the lowest quintile would be 22% of what it is without super - Reduces wealth inequality. [Other assistance:] Social wage: benefits to workers which come from a component other than their wage/salary. - Provision of health, education, housing, transport subsidies etc. - Sources of wealth (3.5.4) Sources: - Real estate (home) = 42% - Real estate (investment) = 16% - Superannuation = 17% - Own business = 6% - Personal assets within the home = 7% - Savings in financial institutions = 5% - Shares = 2% - Trusts = 3% - Vehicles = 3% - Australia is 11th most unequal of 34 countries (OECD) - Highest 20% of income earners are five times richer than the poorest 20% Gini coefficient for wealth. - Dimensions and trends, according to gender, age, occupation, ethnic background and family structure (3.5.5) [Age and education:] - Income remains highest between ages of 25-54 - 45-54 earn highest mean weekly earnings (\$1842) - 20 and under earn lowest (\$722) - Better education = higher income levels - Post grad degree (\$1675) - Non-school qualifications (\$882) [Gender and occupation:] - Full time men earn more than full time women (women earn 84% of men) - Influenced by: - Historical attitudes of women in society - Choice of occupation - Women having greater home responsibilities. [Ethical and cultural background:] - English speaking migrants earned up to \$4000 MORE than national average - Non-English speaking migrants earned \$8000 LESS than national average - Education level, age and english affect the success of new migrants. - Indigenous Australians face large inequalities - More likely to be in rural areas - Lower levels of education - Approx. \$200 less disposable income than general population [Family Structure:] - Couple (no children) \> Couple (children) \> Average \> Single person \> Single parent - Economic and social costs and benefits of inequality (3.5.6) **Economic benefits of inequality** **Economic Costs of inequality** ------------------------------------------------------------------------------ --------------------------------------------------------------------------------------- Incentive to upskill: increase in education Decreased utility: high income earner save i.e. less utility of earning these incomes Incentive to become productive: productivity growth. Decreases economic growth: higher incomes have a lower propensity to consume Incentive to mobilise: move somewhere better increases allocative efficiency Creates conspicuous consumption: increase in demand for expensive goods Potential for savings from high earners Increased welfare support: budget deficit - Social class divisions can increase tension (crime and social disorder), which increases social and economic instability - Poverty: can create poverty traps or increase crime, suicide, disease and reduce life expectancy. ***Environmental Sustainability*** (3.6) - Ecologically sustainable development (3.6.1) - Private and social costs and benefits - externalities, market failure (3.6.2) - Private cost: expenditure by producers on resources to produce output and the costs incurred by consumers in spending their income to buy g/s - Social cost: costs imposed on or borne by society as a result of private actions. **Externality:** the unintended effect of production/consumption. - Positive externality: social benefits of promotion which are unintended positive outcomes from economic activity (EDUCATION) - Negative externality: social costs of production which are unintended negative outcomes from economic activity. (POLLUTION) - Public and private goods - free riders\* (3.6.3) **Private goods:** most g/s that you have to pay for. - [Rival:] one person's consumption inhibits others from using it.[] - [Excludable:] people can be excluded.[] **Public goods:** no direct payment (STREETLIGHTS, DEFENCE FORCE) - [Non-rival] - [Non-excludable] - Public goods attract free riders hence private businesses have no incentive to produce them - As a result [market failure occurs] since the value of the good cannot be accurately measured - If its existence is necessary for society (e.g. Sydney water or defence force) government will produce it itself or subsidise firms to produce it. - Environmental issues: (3.6.4) - Preservation of natural environments - Restriction on development in environmentally sensitive areas - Protecting native plant and animal species - Control over emissions - HOWEVER these measures usually come at a short-term cost to economic growth - Pollution, climate change - Laws banning environmentally damaging production techniques (asbestos) - Quotas to restrict emission of pollutants (ETS) - Subsidies to encourage environmentally friendly practices - Taxes to discourage some forms of economic activity. - Worsened by high levels of fossil fuels to meet electricity and transport needs - Close link between economic growth and higher carbon emissions - CO2 emissions increase from 2001-2020 estimated at 1.9%p.a. - Skin cancer increases by 140% - Environmental refugees increase to up to 200 million - Tourism impacted (Great barrier reef dead) - Depletion of renewable and non-renewable resources Non-renewable resourcesL resources that are in limited supply or cannot be replenished at all - Impact of depletion is greatest on future generations. - Reliance on non-renewable sources will create terrible impacts (Climate Change) **HSC TOPIC FOUR: Economic Policies and Management** *Students learn to:* #### Examine economic issues - Analyse the opportunity cost of government decisions in addressing specific economic problems or issues - Investigate structural changes in the Australian economy resulting from microeconomic policies - Apply economic theory to explain how a government could address an economic problem or issue in hypothetical situations - Analyse alternative ways to finance a budget deficit. #### Apply Economic Skills - Explain how govs are restricted in their ability to simultaneously achieve economic objectives - Use (simple) multiplier analysis to explain how governments can solve economic problems - Identify limitations of the effectiveness of economic policies - Explain the impact of key economic policies on an economy - Propose and evaluate alternative policies to address an economic problem in hypothetical and contemporary Australian contexts. - Use economic theory to explain the general effects of macroeconomic and microeconomic policies - **Select an appropriate policy mix to address a specific economic problem** **Economic Objectives in relation to:** - Economic growth and quality of life - Full employment (internal stability) - Price stability (internal stability) - External stability - Environmental sustainability - Distribution of income - To decrease unemployment Gov needs to use expansionary policy to increase AD - Increasing AD can increase demand-pull and cost-push inflation. - Strong AD and high GNI per capita can lead to increase in expenditure on imports - Deteriorates trade balance and external stability - Increase eco growth involves producing more g/s using more resources as inputs - This depletes natural resources and manufacturing plants can produce pollution **Macroeconomic policies:** - Rationale for macroeconomic policies - stabilisation and shifts in AD - Macro deal mostly with AD - Multiplier effect is important as it explains why the gov can achieve goals - Resource allocation - Redistribution of income - Fluctuations in the business cycle. - Federal Government budgets and budget outcomes - Direct tax (personal income tax, company tax) - Indirect tax (custom and excise duties + GST) - Other revenues (dividends from public trading enterprises) Major items of expenditure: - Social welfare - Health - Education - General public services - Defence - Budget surplus T \> G - Budget Deficit G \> T - Balanced Budget G = T - Underlying cash balance (most commonly used measure) shows the budget's short term impact on the country - Headline cash balance: Underlying cash balance **+** government's purchase or sale of assets **+** future fund earnings - Fiscal outcome: revenue - expenses - net capital investment (excludes one off items) - Effects of budgetary changes on resource use, income distribution and economic activity [Changes in budget outcomes]/Components of fiscal policy:[] Discretionary changes: - Legislated - Involve deliberate changes to fiscal policy such as reduced spending or increased taxation - Influence the [structural component] of the budget outcome[] Automatic stabilisers: - Changes in the level of government revenue and expenditure [as a result of change] of[] changes in the level of economic activity. - Unemployment benefits: transfer payments are affected by business cycle - Progressive income tax system: high eco growth means more tax can be earnt EFFECTS OF THE BUDGET: [Economic Growth:] - Expansionary stimulates economic activity through the multiplier effect - Expansionary stance throughout GFC - **Expansionary stance right now** [Resource Use:] - Direct intervention: Gov can allocate expenditure to particular sectors in order to increase production i.e. \$18.6bn to education in the 2017-18 - Indirect intervention: - Taxation: e.g. 15% excise tax on cigarettes in the 2016 budget to reduce quantity produced - Subsidies - Providing goods and services through public goods that are non-rival and non-excludable that attract free riders (public transport, national defence, lighthouses etc.) [Income Distribution:] - Progressive income tax - Transfer payments [Unemployment:] - JobKeeper - JobSeeker - Methods of financing deficits [Borrowing from the private sector:] - Sells treasury bonds to private purchasers - Advantage is that it is certain it can fully finance its debt but disadvantage is the *crowding out effect* as people are buying bonds instead of saving which create competition for a limited amount of savings to finance domestic consumption and investment causing an increase in interest rates and businesses have to borrow from overseas worsening the CAD. Ross Gittins; "*With inflation at 1.7% this means its costing us nothing to borrow."* [Borrowing from overseas:] - Interest repayments however are recorded as debits on the primary income account worsening the CAD. [Borrowing from the Reserve Bank:] - Quantitative easing or monetize the deficit the RBA can print money - However, this increases the money supply without changing the quantity of goods and services causing demand pull inflation (germany remember bad) [Selling assets/privatising:] - Selling shares in businesses like Australia Post - Privatising Medibank, Telstra etc. - Does not reduce the underlying cash deficit because that removes one-off transactions. - Has not occurred since market deregulation in 1982 - Use of a surplus - Depositing it with the Reserve Bank - Using it to pay off existing public sector debt - Placing the money in a specially established investment fund - Future Fund set up by Howard and Costello - UEFO (because we didn't get a budget) - No new policies announced except for updates to Job Keeper and Seeker Budget 2020/21: -\$185bn deficit **(10** **% of GDP)** *biggest deficit since WWII* - Job Keeper contributes \$20bn - Business support contributes \$15bn - Jobseeker contributes \$6bn - Have avoided the 'fiscal cliff' that was predicted in September when JobKeeper was apparently going to end - *When the Economic Society of Australia polled 50 leading economists recently, 88 per cent of them agreed that governments should provide ongoing budgetary support to boost demand during the economic crisis and recovery, \"even if it means a substantial increase in public debt\".* - *Dr Shane Oliver has said, \"it makes sense for the public sector to borrow from households and businesses at a time when they have cut their spending, and to give the borrowed funds to help those businesses and individuals that need help\"* - Purpose of monetary policy 1. [Stability of the currency] (maintaining low inflation and ensuring the AUD does not fluctuate) 2. [Full employment] (4% u/e)[] 3. [Economic prosperity] and welfare (maintain high rate of eco growth) 4. Medium-term [inflation] target (2-3% inflation) - Can take up to 18 months to work (disadvantage) - Independent of the Government (advantage) - Interest rates are monthly and quick and easy to implement (advantage) - Cannot target regions (disadvantage) - Implementation of monetary policy by the RBA - Impact of changes in interest rates on economic activity and the exchange rate. ### MICRO #### - Rationale for microeconomic policies including shifts in aggregate supply efficiency - **Structural change**: refers to shifts in the pattern of production that reflect changes in technology, consumer demand, policy and global competitiveness. **Productivity:** refers to the level of output per given *unit* of input. - Multifactor productivity refers to productivity across labour and capital whereas Labour productivity just measures labour. - *Allocative Efficiency:* ensuring resources are distributed to the most valued production. - Promotes structural change by allowing resources to flow to those areas where they are used most efficiently. - *Technical Efficiency:* maximising production from fixed resources through increasing productivity. - Greater productivity means that businesses can produce output more cheaply, leading to greater competitiveness in domestic and international markets. - *Dynamic efficiency:* the ability of the economy to adapt to changing conditions. - Elimination of distortions such as government regulation and subsidies improve dynamic efficiency. - Major way to address this is through increasing competition in industries, which will force producers to be more responsive to changes in demand and supply. #### - Effects of microeconomic policies on individual product and factor markets, individual industries and the economy Efficiency gains should lead to a rise in *national income* and *living standards.* - Annual productivity growth averaged 2.2% between 1990-2001, with productivity growth being a major source. - Productivity growth has led to a \$25 billion boost to GDP and increased incomes by an average of \$1200 throughout Australia. - Productivity growth has slowed throughout the 2000s due to the heavy investment in the mining industry. - Australia's labour productivity growth dropped by 2.2% in the June quarter of 2020 compared to a drop of 0.25% in the previous year's quarter. - Lower and more sustained inflation because increased competition pressures reduces prices. - 1980s removal of RBA control of domestic bank lending and interest rates to increase competition in the market - Floating of the exchange rate in 1983 to allow market forces to determine the value of the dollar. - Creation of mortgage finance lenders. - Royal Commision into Misconduct in the Banking, Superannuation and Financial Services Industry 2019 Effectiveness of reforms: - 22% increase in capital expenditure between 1990-2012 - Financial/insurance services now account for 10% of output up from 6% in 1990 (allocative efficiency). - Move from centralised wage determination towards a decentralised determination system to achieve greater productivity of labour. - Workers incentivised to increase output in order to receive greater returns on labour. - Linking wage increases to productivity growth allows companies to increase wages without the need to raise prices of g/s (inflation). - 1991 introduction of enterprise bargaining at the workplace level - Workplace Relations Act (1996) - Reduction in the power of unions by ending compulsory unionism. - Relaxing Unfair Dismissal Laws to promote greater flexibility for employers hiring labour. - Replacement of state industrial relations system with a national system (Fair Work Australia \> Fair Work Act 2009). - More affordable labour saw unemployment fall in the *longer term.* - 11% in the 1980s to 5.1% in 2019 (pre-Covid stat). - Labour productivity grew by 2.2% annually from 1990-2014 considered above the OECD average. - [Agriculture]: removal of single government-owned businesses, industry cooperatives having a monopoly on buying farmers' produce, the wool industry having a floor price which led to overproduction and the milk industry having quotas which inflated prices. - Deregulation incentivised innovation and productivity growth - Over the past decade, farm production has increased almost 50% whilst the number of farms has fallen by over 30%. - However, productivity growth is falling likely due to worsening climate conditions. - [Transport]:[] Domestic aviation deregulated in 1990 ended the Two Airline Policy allowing new (often foreign) competition into the Australian market such as Virgin providing consumers with greater levels of choice. - Since removal of Two Airline Policy the cost of the London to Sydney Flight has reduced by 89%. - [Telecommunications]: P

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