Global
What is the difference between Economic Growth and Economic Development
Eco growth - refers to the increase in GDP over time Eco Development - quality of life/living standards, measured by HDI
Define Terms of Trade
The relative price of exports in terms of imports
What does external stability measure?
The ability of an economy to service its international liabilities. There are many different measures: Current Account Deficit (CAD) as a percentage of GDP. Net Foreign Debt as a percentage of GDP.
Explain the Pitchford thesis
As long as a CAD is the result of savings and investment decisions by the private sector that are not the result of distortions to normal market mechanisms, then there is no cause for concern about an economy’s external stability
How will a depreciation in the AUD impact trade?
X increase; more internationally competitive
M decrease; too expensive
Identify characteristics of developing, emerging and advanced economies
Developing: low income levels, around half population in absolute poverty
Emerging: income levels vary, in process of industrialisation and experiencing sustained levels of high economic growth, examples
Advanced: high income levels, large service industries, slower eco growth in recent decades
Describe the role of the International Monetary Fund
Promote international monetary cooperation, financial stability, high employment, sustainable economic growth
What is the rationale for macroeconomic policy?
Strong and sustainable eco growth 3-4%.
State one POSITIVE effect of inflation and one NEGATIVE effect of inflation.
Positive:
Moderate inflation allows for adjustment of real wages
Inflation is more favourable than deflation
Higher inflation may result in an appreciation of the exchange rate (as speculators anticipate the RBA raising interest rates in response) attracting greater financial flows
Negative:
Inflation is a constraint on economic growth
A wage-price inflationary spiral
Higher levels of inflation may result in contractionary fiscal and monetary policies – slows economic growth, higher unemployment in the short to medium term
Lack of stability and certainty – lack of FDI
If the TWI changes from 76.0 to 68.7; what has happened to the relative price of imports and exports?
Export price has fallen, import price has increased
Outline a disadvantage of free trade
Disadvantages:
Structural unemployment may occur in the short term
Increased domestic economic instability from international trade cycles, as economies become dependent on global markets
International markets are not a level playing field - dumping may occur
Developing or new industries may find it difficult to become established in a competitive environment
Free trade can lead to pollution and other environmental problems
Examine how changes to protection levels in Australia have impacted Australia's trade performance and economic growth.
S/T increasing structural unemployment
cheaper imports leading to lower inflation and increased consumer choice
Explain impact of covid on gov macroeconomic policy?
Expansionary monetary policy as well as unconventional mp in order to not have interest rates go negative. Expansionary fiscal policy with tax cuts and rapid increase in spending eg job keeper or covid 19 disaster payments in nsw.
Distinguish between demand-pull and cost-push inflation.
Demand-pull: increase in AD = consumers compete for scarce G&S = drives prices up = increase demand-pull inflation
Cost-push: increase in the factors of production (LLCE) = firms pass on the extra costs to consumers = increase cost-push inflation
If Country A can produce 100 units of shoes and 50 units of boots What is the opportunity cost of producing each shoe?
100:50
=100/100:50/100
=0.5 boot
Explain one effect of Globalisation
Example 1 - Access to financial markets (allows access to financial funds as well as the opportunity to invest in foreign assets)
Explain the relationship btw TOT, BOGS and ExR.
TOT affects both BOGS and ExR
Higher TOT increases export revenue and improves BOGS, also reflects an increase in demand for Aus X → appreciation of AUD
Imports more competitive compared to domestically produced goods
A pro and con for decentralised wage determination
More productive workforce as employees work harder for higher wages BUT those in low skill industries have less bargaining power against employees.
State ONE social cost and ONE social benefit of inequitable distribution of income/wealth.
Benefit: Generally no benefits except that there are high savings and productivity improvements
Cost: Social class divisions which creates tension and cause instability, high rates of poverty
How can the Government reduce unemployment without increasing inflation?
By providing training and subsidised apprenticeships
What is the difference between absolute advantage and comparative advantage
Absolute - make it better and more of it (volume) - a country with a given level of resources can produce more output than a country with the same level of resources
Comparative - opportunity cost - if a country can produce a good with greater comparative efficiency (measured by lower opportunity cost) it should specialise in it
Explain Okun’s Law
In the short term → Okun’s Law → decrease in productivity growth can improve unemployment, more workers increase output.
In the long term → if productivity is higher than economic growth less job creation → higher unemployment
Economic growth is higher than productivity, more jobs being made → unemployment rate decreased
Current unemployment rate - 4.9%
Explain forward guidance as a part of unconventional monetary policy.
RBA communicates about the future stance of monetary policy to influence current interest rates on longer term assets therefore influencing spending on assets without actually changing interest rates using corridor or open market operations.
Explain market failure.
Market failure occurs because the price mechanism doesn’t account for social costs and benefits (externalities)
If C=200+0.5Y and the change in I=75; What is the new equilibrium level of income?
MPC=0.5
So MPS=0.5
K=1/MPS=2
Y=k*AD
=2*75
=150