Economics Marathon (2 Viewers)

[Sparcod]

Similar thing to those in the mathematics forums. Here are the rules.

The first person asks an economics question. The next answers it then posts another question for the next person then so on. This'll keep us busy and revising during the school holidays.

 

[Sparcod]

Question: How has globalisation impacted on the financial markets?

 

[klaw]

Spoiler

* Globalisation has led to a tremendous increase in the flow of money in financial markets.
* Portfolio investments have become more common than FDI.
* Globalisation also causes an increase in volatility of financial markets, e.g. Asian financial crisis

Explain in detail the balance of payments, and Australia's balance of payments performance

 

[Demandred]

Spoiler

4.4 The balance of payments

The balance of payments summarizes all the transactions that Australia has with the rest of the world. Shows the trade and money flows in and out of the Australian economy. Money in = credits, money out = debits. Presented in two accounts the current and financial/capital.

The current account

- Shows all the money flow from exports and imports of goods, services, income and current transfers for a period over a period of one year.

- Net goods
• Refers to what Australia receives when importing and exporting goods. Surplus, deficit
• Refers the purchase of services without people receiving any good at all. Credits, debits
• Combined to call balance of goods and services, can be surplus – exports larger than imports, deficit – imports larger than exports, balance – exports = imports
- Net Income
• Refers to the earnings on investments. Covers interest payments on borrowings and returns on other foreign investment.
• Represent the difference between the income flows in and out of Australia.
- Net current transfer
• Occur when products or financial resources are provided without a specific good or services.
• Small and technical account.

Capital and financial account

- This is concerned with financial assets and liabilities.
- The money flows that result from international borrowing, lending and purchases.
- Accounts are reversible.

- Capital account
• Consists of capital transfers with 3 main areas
o The capital from the movement of people between nations
o The capital gained from foreign aid
o Purchase and sale of non-produced, non-financial assets – copyrights and patents.
- Financial account
• Shows Australia’s transactions in foreign financial assets and liabilities.
• Australia is gaining more and more FDI which makes the balance positive, but long run FDI would increase net income deficit as FDI require repayments plus interest
• 4 types of investment
o Direct investment – covers financial transactions to fund new investment in Australia or overseas.
o Portfolio investment – Buying of land, shares and other marketable securities in existing companies. This is where most foreign debt is recorded.
o Other investment, residual category that catches any other things other that the 3 other types of investment. Covers like trade credits, financial leases.
o Reserve assets refer to those foreign financial assets that are available to and controlled by central authorities for financing or regulating payment imbalances.

Balance on capital and financial account

- Overall balance is determined by adding the two categories together.
- Should be approx equal to the deficit on the current account
- Net errors and omission are added to even the two accounts out




Current account - the balance of net good & services + net income + current transfers

The capital and financial account = capital account + direct investment + portfolio investment + other investment + reserve assets

- Net errors and omission are the discrepancies in the balance.
- Reported with capital and financial account

Links between key balance of payments categories

- Two accounts add up to zero. The deficit on the current account is equal to the surplus on the capital and financial account.


Supply of $A
Payments for imports on G&S (M)
Income/transfers overseas (Y debits)
Capital and financial outflow (K outflow)

=

Demand for $A
Receipts for exports of G&S (X)
Income/transfers overseas (Y credits)
Capital and financial inflow (K inflow

M + Y debits + K outflow = X + Y credits + K inflow

- This neoclassical theory relies on the notion that exchange rates will equalize the two accounts. High imports = high CAD = more funds pumped out of the economy than coming in = depreciation of exchange rate = more competitive exports and expensive imports = lower imports, higher exports = BOP comes back to equilibrium.
- What if... no body fucken wants your goods, even if it is cheap as dirt.
- What if... your production process cuts so many corners to make it more competitive but other economies can still beat you in price and reputation because they are subsidized (think EU/Africa).
- Increase in CAD will result in a rise in capital and financial account surplus


- Strongest link between the current account and the capital and financial account can been seen in net income part.
- Longer term, capital financial account surplus will result in a large deficit on net income account. Financial flows that come in must be repaid.
o Foreign capital inflow in form of overseas debt requires interest payments. Recorded on net income, big hitter.
o Foreign financial inflows in form of equity, requires returns on equity, purchase of land, shares or companies. Net income.
- Long run, high level of capital and financial account surpluses will result in a widening CAD because of its servicing costs. Lead to debt trap.
- Low level of savings is to blame, as we have to get funds elsewhere.
- Also lack of international competitiveness in 80s and mid 90s.

4.5 Australia’s balance of payments performance.
- Reflects the key features of the structure of the economy and highlights the imbalances in the relation between the global economies.
- Has significant effects of the confidence of consumers and investors.
- Degree of which high CAD is sustainable depends of several factors, e.g. high FDI can result in eco growth = sustainable.
- Australia’s current account moves in cycles, reflecting a mix of short term and longer term, domestic and external influences.
- G&S depend on cyclical factors.
- Long term structural aspect of CAD is very high. Income account is consistently high; this is due to the amount of FDI that comes in.

Question... how would the Australian government fix this chronic CAD?

 

[Sparcod]

Re: Economics Marathon - The 2006 Version

I can't answer this very well but here goes...
-Borrow from Aust. banks
-Encourage exports
-Lower interest rates to encourage financial inflow.
-Tell the RBA to do stuff to...


This forum is dead.
That question wasn't up to where we are at in the syllabus.

Easy Question: What are the effects of a subsidy on govt, industry and consumers?

 

[nickyroony]

Re: Economics Marathon - The 2006 Version

Spoiler

Subsidy is a form of protection, whereby some of the production costs are paid for by the government. While the consumers in the domestic economy and the subsidised industry will benefit from this subsidy (as prices will lower for consumers and lower production costs for the subsidised industry), it promotes inefficient allocation of resources.

(I know not really detailed enough but I can't be bothered at the moment =D)

Question: What are the trends in Australia's trade patterns, including the direction and composition of the trade flow.

 

[Sparcod]

Re: Economics Marathon - The 2006 Version

Question: What are the trends in Australia's trade patterns, including the direction and composition of the trade flow.[/quote]
I don't have the Stats though.

Main Trade partner, between the 50s to prsent, have shifted from UK to Japan. Further more, Europe has lost some of its importance as Australia's main trading partners whilst trade with Asia especially Japan has increased. Recently, trade with Asian NICs have increased and even more recently-China has become more important as a trade partner.

Exports is still mainly agricultual although there is a decline in the proportion of exports that are agricultural good. Manufactured goods, although small in composition, is on the rise. Minerals are steady over the past few decades.

Imports are mainly manufactured goods esp. capital goods.

Trade outflows are to USA and China. Trade inflows are mainly from USA, Europe and Japan.

Excuse me for my controversial answer. I'm .

Next Question:
Explain what a current account is and its features.

 

[Sparcod]

Re: Economics Marathon - The 2006 Version

Even for myself too, it took such a long time to answer this.. (3 months?)
Current Account
The recording of transactions between Australia and the rest of the world of goods/services, net incomes and current transfers.

Next Q- What are the costs of reducing protectionist policies?

 

[nickyroony]

Re: Economics Marathon - The 2006 Version

Next Q- What are the costs of reducing protectionist policies?

- Increased unemployment in the short term as inefficient industries fail to compete with foreign competitors.

- Fall in level of domestic production in the short term.

- Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection polices by governments.

- Economy subjected to possible dumping by other countries.

- Free trade can lead to pollution and environmental problems as companies fail to include these costs in the price of goods.

- Increased domestic economic instability from international trade cycles, as economies became dependent on global markets.

Next Question: Define external instability and how it affects the economy.

 

[Sparcod]

Re: Economics Marathon - The 2006 Version

Thanks Without-wings.
External instability is the failure of the economy to maintain the ability to interact with the rest of the world without a need for restricting internal objectives.

Measures include: CAD, foreign debt, foreign debt/liabilities, exchange rate stability.

*debt servicing and cycle of debt requires more funds and hence more debt. Snowballing
*Need for contractionary policies such as raised cash-rates and budget surpluses to increase saving rather than borrowing.
*possible decreased investor confidence in Australia.
*depreciation increases cost of imports and worsens CAD and increases debt in $Aus terms.





OUTLINE causes and effects of depreciation of $A against major currencies.

 

[AppleXY]

Re: Economics Marathon - The 2006 Version

I"m in year 10 and doing 1&2 economics next year.. but I'll have a go with my current knowledge

Depreciation of the $A against the major curriencies (aud/usd, aud/jpy, aud/eur, aud/gbp and aud/chf) will result in an increase of GDP and exports, because businesses would be greatly interested to produce there due to their inexpensive curriency, they could gain increased productivity (acquring more output for less input) similar to china's curriency. Also; it may observe a increase of domestic investment in the ask currency(eg. USD) , since derivative investors and other investors are showing a resistance force (selling force) against the AUD which causes the USD (for instance) to increase due to the high damand of their curriency, so in an pair perspective (AUDUSD) the price of the curriency would go down. Ummm...

Well thats all I know from my general knowledge of economics, Please correct me if i'm wrong (i know i'm wrong sumwhere )

Q: Outline briefly why the RBA would intervene in the FOREX market. (Sorry.. best question i could think of)

 

[Sparcod]

Re: Economics Marathon - The 2006 Version

I"m in year 10 and doing 1&2 economics next year.. but I'll have a go with my current knowledge

Depreciation of the $A against the major curriencies (aud/usd, aud/jpy, aud/eur, aud/gbp and aud/chf) will result in an increase of GDP and exports, because businesses would be greatly interested to produce there due to their inexpensive curriency, they could gain increased productivity (acquring more output for less input) similar to china's curriency. Also; it may observe a increase of domestic investment in the ask currency(eg. USD) , since derivative investors and other investors are showing a resistance force (selling force) against the AUD which causes the USD (for instance) to increase due to the high damand of their curriency, so in an pair perspective (AUDUSD) the price of the curriency would go down. Ummm...

Well thats all I know from my general knowledge of economics, Please correct me if i'm wrong (i know i'm wrong sumwhere )

Q: Outline briefly why the RBA would intervene in the FOREX market. (Sorry.. best question i could think of)

That's quite good.
Causes: Decreased demand/increased supply of $A due to:
-lower investor confidence
-less exports
-less tourists in Australia

What about it's effects on the balance of payments?
A depreciation temporarily causes a deteriotion in terms of trade as imported inflation occurs and the cost of imports rise and export prices fall. If the weakened currency is sustainible, international competitiveness will improve. You'll learn more... Also, investment will rise as Australia is a cheaper place. $A terms of foreign debt rises.


Back to that question..
RBA would intervene (dirty float) by managing the exchange rate. By buying or selling foreign currency, they can determine the value of $A to determine overseas transactions and stop fluctuations.

Next Question: List the causes of unemployment.

 

[AppleXY]

Re: Economics Marathon - The 2006 Version

What about it's effects on the balance of payments?
A depreciation temporarily causes a deteriotion in terms of trade as imported inflation occurs and the cost of imports rise and export prices fall. If the weakened currency is sustainible, international competitiveness will improve. You'll learn more... Also, investment will rise as Australia is a cheaper place. $A terms of foreign debt rises.
-less exports

hey, thanks man for correcting me and adding my knowledge about the Balance of payments appreciate it. I got this univeristy book from my 'rents about economics ("Principles of Economics") and it looks easy to understand, i'm gonna try to start reading that!

Part-Answer (Again.. my gen knowledge)
o Decreased Inflatory Pressures
o Decreased Consumer Confidence
o Decreased Business Confidence?? (Because firms are have lower expectations)
o Decreased Real GDP
o Increased Imports

umm... arghh.. I know more about I can't remeber if you what I mean

 

[passion89]

Re: Economics Marathon - The 2006 Version

Let's keep this thread alive since the trials are just around the corner.

Ummm...

Describe the main causes of inflation and state how it is measured.

 

[dunch]

Re: Economics Marathon - The 2006 Version

Inflation is caused by:
Demand- Pull- where aggreagte demand for products exceeds the economys productive capacity

Cost-Push- where the cost of producing goods[factors of production] increases and this is passed on to consumers, forcing up prices

Depreciation of Currency- the price of the $AUD depreciates realtive to the rest of the world and therefore import prices increase

Inflaltionary Expectations- If inflation is expected to rise then certain groups will move to cover themselves.

The rate of inflation is measured throught the CPI or Consumer Price Index. The CPI is a basket of prices of the most commonly traded goods and services in the economy, and is used as an average of these prices. The inflation rate is worked out by

[Current CPI- Previous Years CP1/Previous Years CPI] x [100/1]

This is the Headline Rate of Inflation and does not take into accoutn one off events, e.g. the GST. The more reliable inflation rate is the Underlying Rate of Inflation. Australias current inflation rate is 3.0% according to ABS March Quater (http://www.abs.gov.au/ausstats/abs%40.nsf/mf/6401.0)

What policies can the government use to maintain a low inflation rate?

 

[babiisapphire]

Re: Economics Marathon - The 2006 Version

What policies can the government use to maintain a low inflation rate?

if inflation is high then the rba will tighten monetary policy ie. increase interest rates which makes it more attractive to save and more expensive to spend.. ppl spend less so less inflationary pressures..

but maintaining low inflation.. probably through govt spending.. not spending heaps (in fiscal policy?) so there would'nt be increased consumption and less inflationary pressure in order to maintain low inflation??

thats my 2 cents

 

[dunch]

Re: Economics Marathon - The 2006 Version

http://community.boredofstudies.org/members/babiisapphire/ babiispahire you need to ask a question when you answer the one above. I will ask another question to get this going again.

How is the Distribution of Income and Wealth measured?

 

[man_p]

Re: Economics Marathon - The 2006 Version

the distribution of income and wealth is measured using the gini co-efficient and lorenz curve....

the lorezen curve... shows the inequality in the dristibution of income ..through a line which represents perfect equality...(45 degress) and the curve which shows the proportion of income to households..

the gini-co give a numerical figure...

Area A / (Area A + B )...the closer the number to zero the greater the equality...the further away the less equal...

these measures help equate how much income is going where...

and wealth is determined by income...they breed each other...

next q....outline the limitations of government economic policies

 

[Always]

Re: Economics Marathon - The 2006 Version

^ That is hard. Here's my 2c.

Outline the limitations of government economic policies:

* Govts face conflicts between achieving various economic objectives in the implementation of different economic policies. eg. Attempting to reduce unemployment could lead to higher inflation, reducing income inequality may restrict economic growth, higher growth could increase the CAD, etc.

* Govts face difficulties in implementing policies.
- Fiscal policy: only effective in the short term.
- Monetary policy: long time lag before the effects are felt on the economy.
- Microeconomic reform: drastic changes are held back by politicics.

I'm really not quite sure. Perhaps someone else will be able to give a better answer.


Next question: Outline the impact of expansionary fiscal policy on economic growth.

 

[babiisapphire]

Re: Economics Marathon - The 2006 Version

Outline the impact of expansionary fiscal policy on economic growth.

- since more money is being pumped into the economy (smaller surplus this yr compared to last yr) or the discretionary changes will mean that the govt. may encourage ppl to spend more, increase demand? (idk) the multiplier effect can kick in and leads to economic growth

someone else can answer that better ><

Q. What are automatic stabilisers and what do they do?