Free trade & Protection
What is the main economic rationale behind protectionist measures such as tariffs and quotas?
To shield domestic industries from foreign competition and promote local production.
What are Australia's main exports and how do they contribute to the economy?
Main exports include minerals (like iron ore), agricultural products (such as wheat), and services (like education and tourism), which generate income and employment.
Define the components of the current account in the balance of payments.
It includes trade balance (exports minus imports), net income from abroad, and net transfers (such as foreign aid).
How does expansionary fiscal policy aim to stimulate economic growth during a recession?
It involves increasing government spending and/or reducing taxes to boost aggregate demand and encourage economic activity.
Describe how the Reserve Bank of Australia (RBA) uses interest rates as a tool of monetary policy.
The RBA adjusts interest rates to influence borrowing costs, inflation rates, and overall economic activity.
Name two types of trade barriers and explain how each affects international trade.
Examples include tariffs (taxes on imports) and quotas (limits on quantities of imports), which can reduce foreign competition and protect domestic industries.
Explain the significance of the terms of trade for Australia's economy.
The terms of trade measure the ratio of export prices to import prices; an improvement benefits Australia by increasing export income relative to import expenditure.
What does a current account surplus indicate about an economy's international trade position?
It suggests that a country is exporting more goods and services than it imports, leading to a net inflow of foreign currency and potentially strengthening the domestic currency.
Discuss the potential trade-offs involved in implementing contractionary fiscal policy during an economic boom.
Contractionary fiscal policy aims to reduce inflationary pressures by decreasing government spending and/or increasing taxes, potentially slowing down economic growth.
Discuss the transmission mechanisms through which changes in interest rates affect the broader economy.
Changes in interest rates impact consumption, investment, and exchange rates, thereby influencing aggregate demand and economic growth.
Describe the concept of comparative advantage and its role in advocating for free trade.
Comparative advantage suggests that countries should specialize in producing goods where they have the lowest opportunity cost, leading to overall efficiency gains from trade.
How does Australia's exchange rate affect its trade balance and economic stability?
A lower exchange rate can improve export competitiveness but may increase import costs, impacting the trade balance and inflation.
Explain the relationship between the current account and the capital account in the balance of payments.
The current account and capital account together form the balance of payments; while the current account tracks trade, the capital account records financial flows (like investments and loans).
Explain how automatic stabilizers function in the context of fiscal policy.
Automatic stabilizers, like unemployment benefits and progressive taxes, automatically adjust to economic conditions, stabilizing aggregate demand without direct government intervention.
What are the limitations of using monetary policy to stabilize the economy during periods of economic downturn?
Constraints include inability to address supply-side issues, liquidity traps, and the potential ineffectiveness of rate cuts in stimulating demand.
What are the potential disadvantages of protectionist policies for an economy?
They can lead to higher consumer prices, reduce efficiency, and provoke retaliation from trading partners.
What role do trade agreements, such as Free Trade Agreements (FTAs), play in shaping Australia's trade relationships?
FTAs reduce trade barriers, enhance market access for Australian goods and services, and promote economic integration with partner countries.
How does a deficit in the current account impact a country's economy?
It may lead to a need for foreign borrowing or selling assets to finance the deficit, potentially affecting exchange rates and economic stability.
What role does the government debt-to-GDP ratio play in assessing the sustainability of fiscal policy?
A high ratio indicates a larger burden of debt relative to the size of the economy, potentially affecting future fiscal flexibility and economic stability.
Explain the concept of quantitative easing (QE) and its purpose in unconventional monetary policy.
QE involves central banks purchasing financial assets to increase money supply and stimulate lending and investment during economic crises.
How does the World Trade Organization (WTO) contribute to promoting free trade globally?
It sets rules for international trade, resolves disputes, and encourages countries to reduce trade barriers through negotiations.
Discuss the economic implications of Australia's reliance on China as a major trading partner.
It provides economic benefits but also exposes Australia to risks, such as economic dependence and potential political tensions affecting trade relations.
What strategies can a country use to correct a persistent current account deficit?
Strategies may include promoting export competitiveness, attracting foreign investment, and implementing fiscal and monetary policies to rebalance the economy.
Compare discretionary fiscal policy with automatic stabilizers in terms of their responsiveness to economic fluctuations.
Discretionary fiscal policy involves deliberate government actions, while automatic stabilizers operate passively in response to economic conditions, providing stability.
How does the RBA balance its dual mandate of price stability and full employment when setting monetary policy?
The RBA aims to achieve low and stable inflation while supporting maximum sustainable employment through its monetary policy decisions.