Economics Summary Notes1

HSCEconomics2010
SummaryNotes
JamieKennedy
LastUpdated22/12/2010
EconomicsSummaryNotes2010 JamieKennedy 2
D:\Documents\School\SchoolWork\Economics\EconomicsSummaryNotes.docx
TABLEOFCONTENTS
TheGlobalEconomy....................................................................................................................................................8
Featuresoftheglobaleconomy.............................................................................................................................8
Natureoftheglobaleconomyandglobalisation...............................................................................................8
TheGlobalEconomy........................................................................................................................................8
GrossWorldProduct.......................................................................................................................................8
Globalisation....................................................................................................................................................8
TheInternationalBusinessCycle...................................................................................................................10
Tradeandfinancialflows....................................................................................................................................11
ChangesInTheSize,PatternAndDirectionOfTradeAndInvestment........................................................11
TheForeignExchangeMarket........................................................................................................................11
TheMainParticipantsInForeignExchangeMarkets...................................................................................12
TheImpactOfChangesInTradeAndFinancialFlowsOnEconomies.........................................................12
Freetradeandprotection..................................................................................................................................12
TheBasisOfFreeTradeItsAdvantagesAndDisadvantages..................................................................12
ReasonsForProtection..................................................................................................................................13
MethodsOfProtectionAndTheEffectsOfProtectionistPoliciesOnTheDomesticAndGlobalEconomy
.........................................................................................................................................................................14
Contemporarytradingblocsandagreements..................................................................................................14
TheRole,ImportanceAndInfluenceInTheGlobalEconomyOfBlocsAndAgreements..........................14
EU,NAFTA,APEC,ASEAN,CERTA..................................................................................................................15
Internationalorganisations................................................................................................................................15
TheRole,ImportanceAndInfluenceInTheGlobalEconomyOfInternationalOrganisations..................15
WTO,IMF,WorldBank...................................................................................................................................16
ImpactOfGlobalisationOnTheStandardOfLivingInTheGlobalEconomy......................................................17
Variationsinthestandardoflivingintheglobaleconomy..............................................................................17
IncomeAndQualityOfLifeIndicators...........................................................................................................17
Contrastsinlevelsofdevelopment...................................................................................................................17
DifferenceBetweenGrowthAndDevelopment...........................................................................................17
ReasonsForDifferencesBetweenNations...................................................................................................17
DevelopingEconomies,NewlyIndustrialisedCountries(NICS),TransitionEconomies,HighIncome
Economies.......................................................................................................................................................19
Impactofglobalisation.......................................................................................................................................20
InternationalConvergence............................................................................................................................20
EconomicGrowth,DevelopmentAndTheQualityOfLife...........................................................................20
Trade,InvestmentAndTransnationalCorporations....................................................................................20
DistributionOfIncomeAndWealth..............................................................................................................21
EnvironmentalConsequences.......................................................................................................................21
FinancialMarkets............................................................................................................................................21
TheInternationalBusinessCycle...................................................................................................................21
ImplicationsForGovernmentEconomicPolicies..........................................................................................21
Casestudy...........................................................................................................................................................22
AcasestudyontheimpactofglobalisationonVietnam,alongwiththestrategiesthatVietnamisusing
topromoteeconomicgrowthanddevelopment.........................................................................................22
AustraliasPlaceintheGlobalEconomy....................................................................................................................23
AustraliasTradeAndFinancialFlows...................................................................................................................23
Value,CompositionAndDirectionOfAustraliasTradeAndFinancialFlows..................................................23
TrendsInAustraliasTradePattern...............................................................................................................23
TrendsInFinancialFlows...............................................................................................................................23
AustraliasBalanceofPayments........................................................................................................................24
Structure.........................................................................................................................................................24
LinksBetweenKeyBalanceOfPaymentsCategories..................................................................................25
TrendsInTheSizeAndCompositionOfAustraliasBalanceOfPayments..................................................25
ReasonsForTheseTrends.............................................................................................................................25
Issuesassociatedwithtrendsinthebalanceofpayments..............................................................................26
TermsOfTrade...............................................................................................................................................26
SizeOfTheCurrentAccountBalanceAsAPercentageOfGrossDomesticProduct..................................26
ForeignDebtAndForeignLiabilities.............................................................................................................27
InternationalCompetitiveness.......................................................................................................................27
StructuralChangeInTheAustralianEconomy..............................................................................................27
Exchangerates.......................................................................................................................................................29
measurementofrelativeexchangerates.....................................................................................................29
FactorsAffectingTheDemandForAndSupplyOfAustralianDollars.........................................................29
ChangesInExchangeRates..........................................................................................................................30
DeterminationOfExchangeRatesIncludingFixed,FlexibleAndManagedRates....................................30
TheInfluenceOfTheReserveBankOfAustraliaOnExchangeRates........................................................30
TheEffectsOfFluctuationsInExchangeRatesOnTheAustralianEconomy.............................................31
Freetradeandprotection......................................................................................................................................31
AustraliasPoliciesRegardingFreeTradeAndProtection...........................................................................31
TheImplicationsOfAustraliasPoliciesForIndividuals,FirmsAndGovernments......................................31
ImplicationsForAustraliaOfProtectionistPoliciesOfOtherCountriesAndInternationalOrganisations.
.........................................................................................................................................................................31
EconomicIssues.........................................................................................................................................................32
EconomicissuesintheAustralianeconomy.........................................................................................................32
EconomicGrowth...............................................................................................................................................32
AggregateDemandAndItsComponents:Y=C+I+G+XM..........................................................................32
InjectionsAndWithdrawals(I+G+X;S+T+M).................................................................................................33
TheSimpleMultiplier:K=1/(1MPC).............................................................................................................33
MeasurementOfGrowthThroughChangesInRealGrossDomesticProduct...........................................33
SourcesAndEffectsOfEconomicGrowthInAustralia................................................................................33
BusinessCycleTrends................................................................................................................................34
Unemployment...................................................................................................................................................34
Measurement..................................................................................................................................................34
Trends..............................................................................................................................................................35
TypesAndCauses:..........................................................................................................................................35
NaturalRateOfUnemployment...................................................................................................................36
MainGroupsAffectedByUnemployment...................................................................................................36
EffectsOfUnemploymentEconomicAndSocialCosts..........................................................................36
Inflation...............................................................................................................................................................37
MeasurementCurrentAustralianBureauOfStatisticsMeasure............................................................37
Trends..............................................................................................................................................................37
Causes............................................................................................................................................................38
Effects............................................................................................................................................................38
PoliciesToSustainLowInflation...................................................................................................................39
Externalstability.................................................................................................................................................39
Measurement..................................................................................................................................................39
Trends.............................................................................................................................................................40
CausesAndEffects.........................................................................................................................................41
Distributionofincomeandwealth....................................................................................................................41
MeasurementLorenzCurveAndGiniCoefficient....................................................................................41
SourcesOfIncomeAsAPercentageOfHouseholdIncome........................................................................42
SourcesOfWealth..........................................................................................................................................43
DimensionsAndTrends,AccordingToGender,Age,Occupation,EthnicBackgroundAndFamily
Structure.........................................................................................................................................................43
EconomicAndSocialCostsAndBenefitsOfInequality................................................................................43
GovernmentPoliciesToAddressInequality.................................................................................................44
Environmentalmanagement............................................................................................................................44
EcologicallySustainableDevelopment..........................................................................................................45
PrivateAndSocialCostsAndBenefitsMarketFailure.............................................................................45
PublicAndPrivateGoodsFreeRiders.......................................................................................................45
Issues:.............................................................................................................................................................46
EconomicPoliciesandManagement.........................................................................................................................47
Economicobjectives...............................................................................................................................................47
EconomicGrowth...........................................................................................................................................47
FullEmployment.............................................................................................................................................47
PriceStability..................................................................................................................................................47
ExternalStability.............................................................................................................................................47
Environment..................................................................................................................................................48
DistributionOfIncome..................................................................................................................................48
Goalsofgovernmentpolicyin2010..................................................................................................................48
SustainingEconomicGrowthDuringTheGlobalRecessions......................................................................48
SupportingEmploymentDuringTheGlobalDownturn..............................................................................48
MaintainingStabilityAndInternationalConfidenceInAustraliasEconomyAndFinancialSystem.........48
KeepingInflationStable,WithinTheRangeOf23%....................................................................................49
BoostingAustraliasProductivityGrowthAndInternationalCompetitiveness.........................................49
IncreasingTheSustainableRateOfGrowthInTheLongTerm..................................................................49
PromotingEnvironmentalSustainability......................................................................................................49
Potentialconflictsbetweenobjectives............................................................................................................49
AchievingASimultaneousReductionInUnemploymentAndInflation.....................................................49
AchievingEconomicGrowthAndExternalBalance.....................................................................................50
OtherConflicts...............................................................................................................................................50
Themainpoliciesavailableforeconomicmanagement......................................................................................50
Macroeconomicpolicies....................................................................................................................................50
RationaleForMacroeconomicPoliciesStabilisationAndShiftsInAggregateDemand.......................50
Microeconomicpolicies.....................................................................................................................................50
RationaleForMicroeconomicPoliciesIncludingShiftsInAggregateSupply,Efficiency..........................50
Fiscalpolicy.........................................................................................................................................................51
FederalGovernmentBudgetsAndBudgetOutcomes.................................................................................51
EffectsOfBudgetaryChangesOnResourceUse,IncomeDistributionAndEconomicActivity................51
MethodsOfFinancingDeficits.......................................................................................................................52
UseOfASurplus.............................................................................................................................................52
CurrentStanceOfFiscalPolicy......................................................................................................................52
ImpactOfRecentFiscalPolicy.......................................................................................................................52
Monetarypolicy..................................................................................................................................................53
PurposeOfMonetaryPolicy..........................................................................................................................53
ImplementationOfMonetaryPolicyReserveBankOfAustralia............................................................53
ImpactOfChangesInInterestRatesOnEconomicActivity,ExchangeRate..............................................53
CurrentStanceOfMonetaryPolicy...............................................................................................................54
Structuralchange...............................................................................................................................................54
EffectsOfMicroeconomicPoliciesOnIndividualProductAndFactorMarketsAndTheEconomy..........54
RegulationAndDeregulation.........................................................................................................................54
Tradepolicy.........................................................................................................................................................54
DirectAndIndirectPoliciesToPromoteOrRestrictTrade..........................................................................54
TradeAndIndustryPoliciesInAustralia........................................................................................................54
Pricesandincomespolicy..................................................................................................................................54
ReasonsForPricesAndIncomesPolicies......................................................................................................54
PossiblePricesAndIncomesPoliciesInAustralia.........................................................................................54
AdvantagesAndDisadvantagesOfCentralisedAndDecentralisedPolicies...............................................54
Labourmarketpolicies.......................................................................................................................................54
CurrentIndustrialRelationsFramework.......................................................................................................54
WorkPractices................................................................................................................................................54
DisputeResolution.........................................................................................................................................55
EducationAndTraining,EmploymentPrograms..........................................................................................55
Limitationsonpolicyimplementation...................................................................................................................55
TimeLags........................................................................................................................................................55
GlobalInfluences............................................................................................................................................55
PoliticalConstraints........................................................................................................................................55
Policyresponsesandtheireffectsindealingwiththeeconomicissues.............................................................55
EconomicGrowth...........................................................................................................................................55
Unemployment...............................................................................................................................................55
Inflation...........................................................................................................................................................55
ExternalStability.............................................................................................................................................55
DistributionOfIncomeAndWealth..............................................................................................................55
ManagementOfTheEnvironment................................................................................................................55

TheGlobalEconomy
FEATURESOFTHEGLOBALECONOMY
NATUREOFTHEGLOBALECONOMYANDGLOBALISATION
THE GLOBAL ECONOMY
TradeinGoodsandServiceshadgrownrapidlyincreasingfrom38%ofGWPin1990to63%ofGWPin
2007.
GWPisnow9timesthelevelin1950howeverthevolumeofworldtradehasgrown33timesits1950
level
Duringtimesofeconomicdownturns,thegrowthofglobaltradehascontractedfasterthanworld
economicoutputhighlightingthegreatervolatilityoftradecomparedtoGWP.
Importantdevelopmentthathascontributedtotheseflowsistheincreasedinfluenceof
TransnationalCorporations.
TransnationalCorporations:globalcompaniesthatdominateglobalproductandfactormarkets.TNCs
haveproductionfacilitiesinatleasttwocountriesandareownedbyresidentsofatleasttwo
countries.
Tradehasalsoliftedinresponsetomajortradeagreements:
o WorldTradeOrganisation(WTO):isanorganisationof153membercountriesthat
implementsandadvancesglobaltradeagreementsandresolvestradedisputesbetween
nations.Establishedin1995
o NorthAmericanFreeTradeAgreement(NAFTA)
o AssociationofSouthEastNations(ASEAN)
o EuropeanUnion(EU)
GROSS WORLD PRODUCT
GrossWorldProduct(GWP):thesumoftotaloutputofgoodsandservicesbyalleconomicsinthe
worldoveraperiodoftime.
Intheindustrialisedworldthevalueofwhatmanycountriesbuyandsellfromoverseasisgreaterthan
halfofthecountryseconomicoutput
GLOBALI SATI ON
Globalisation:theprocessofincreasedintegrationbetweendifferentcountriesandeconomiesand
theincreasedimpactofinternationalinfluencesonallaspectsoflifeandeconomicactivity.
Involveslayersofinfluencesinalldirections
Majorindicatorsofintegrationbetweeneconomicsinclude:
o Internationaltradeflows
o Internationalfinancialflows
o Internationalinvestmentflowsandtransfersoftechnology
o Themovementofworkersbetweencountries
InternationalFinance
Financeisthemostglobalisedfeatureoftheworldeconomyasmoneycanmoveinsecondsaround
theworld,farmorequicklythangoodsandservicesorpeople
Internationalfinanceflowshaveexpandedfollowingfinancialderegulationaroundtheworld(mainly
duringthe70sand80s)
Technologicalchangealsoplayedarolewithnewtechnologiesandglobalcommunicationallowing
financialmarketstobelinkedthroughouttheworld.
Internationalfinancialflowshaveallshownadramaticincreaseduringtheglobalisationera
Growthofinternationalinvestmentandtechnology
Anotherindicatorofglobalisationistherapidgrowthofinvestmentbetweencountriesoverthepast
20years.
OnemeasureofglobalisationinvestmentistheexpansionofForeignDirectInvestment(FDI).
o ForeignDirectInvestment(FDI):themovementoffundsbetweeneconomiesforthepurpose
ofestablishinganewcompanyofbuyingalargeportiononsharesinanexistingcompany
(10%+).FDIisconsideredtobealongterminvestment.
o FDIflowsarestronglyinfluencebythelevelofeconomicactivity.
o FDIflowshaveheavilyfavouredthedevelopednationsoftheOrganisationforEconomicCo
operationandDevelopment(OECD).
Asignificantcauseofthegrowthofinternationalinvestmentistheincreasedlevelofinternational
mergersandtakeovers.
However,FDIin2007onlyaccountedfor18%oftotalinvestment,80%stillcamefromwithinnational
economies.
Technologyhasplayedasignificantroleintheexpansionoftradeandinvestmentbetweencountries.
Countriescanexporttheirtechnologiesandothercountrieshavetopayroyaltiesforthemuntilthey
areabletoproducethetechnologythemselves.
TheInternationalisationofthelabourmarket
Labourmarketsarefarlessinternationalised.Peopledonotmovejobsfreely.
Arecenttrendinindustrialisedcountrieshastobecomemorerestrictiveaboutimmigrationofpeople
frompoorercountries.
WorldBankestimatesthat3%oftheworldspopulationhavemigratedtoworkindifferentcountriesin
theworld.
Movementappearstobeatthetopandlowendofthelabourmarket.
o Atthetopend,skilledworkersareattractedtojobsincountriesthatpayahigherincome
o Thebraindraineffectwhereskilledworkersleaveacountrytoworkinanothercountry.
o Atthelowend,thereisdemandofunskilledlabourtoperformjobsthatpeoplebornlocally
maynotwanttoperform
Therearemanyrestrictionstothemovementoflabourincluding:immigrationrestrictions,cultural
factors,andeducationandprofessionalqualifications.
Shiftofbusinessesbetweeneconomies:justaspeoplemovetofindjobs,businessesmaymoveto
othercountriestofindlabour.Producersmayoperateaglobalsupplychainwithproductionfacilities
inmanycountries.Thisiscalledoffshoringandallowsproducerstoreducecosts.Thismeansthat
exportorientedeconomiescancompeteduetolowlabourcosts.
Economic
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o Interestrates:aredeterminedbyeachcountry(butcanbeinfluencedbyothers)
o Fiscalpolicy:significanteffectoneconomicgrowthintheshorttomediumterm.Setby
individualgovernments(butmaybeinfluencedbyothers)
o Exchangerates:differbetweencountriesandimpactontheleveloftradecompetitiveness.
o Structuralfactors:differentlevelsofresilience,populationgrowthrates,regulations,
educationetc.
o Regionalfactors:someeconomiesarecloselyintegratedwiththeirneighboursandare
influencedbytheeconomicperformanceoftheirmajortradingpartners
TRADEANDFINANCIALFLOWS
CHANGES I N THE SI ZE, PATTERN AND DI RECTI ON OF TRADE AND I NVESTMENT
Globaltradeflowshavechangedduringtheglobalisationera,increasinginoverallsizeandasa
proportionofworldeconomicactivity.Thecompositionanddirectionoftradeflowshasalsochanged
duringrecentyears.
Compositionofinternationaltrade:themixofgoodsandservicesthatnationstradewitheachother.
Mainlymanufacturedgoods.
Directionoftradeflows:Duringtheglobalisationera,highincomeeconomiessawtheiroverallshare
fallwhichfastgrowingeconomiesinEastAsiaandthePacificsawtheirsharerise.
THE FOREI GN EXCHANGE MARKET
ForeignExchangeMarkets(FOREX):anetworkofbuyersandsellersexchangingoncecurrencyfor
anotherwherethevalueofacurrencyisexpressedintermsofanothercurrency(i.e.:theexchange
rate).
Thevalueofacountryscurrencyhassignificantimpactsupontheinternationalcompetitivenessof
thecountry.
o Countrieswithovervaluedeconomiestendtoexperienceadeclineinexports
o Currencyvaluescanalsoinfluencethelevelofinflationandinterestrates
o Changesinthevalueofexchangeratesalsohaveaneffectonfinancialflowsintheshortterm
o Ifalargernumberofinvestorsselltheirholdingsofacountryscurrencytomakeaquick
profit,itcandestabiliseanentireeconomy.
Factorsthatstrengthentheinternational
businesscycle
Factorstheweakentheinternational
businesscycle
Tradeflows Domesticinterestrates
Investmentflows,investor
sentiments
Governmentfiscalpolicies
Transnationalcorporations Otherdomesticeconomicpolicies
Financialflows Exchangerates
Technology Structuralfactors
Globalinterestrates Regionalfactors
Internationalorganisations
THE MAI N PARTI CI PANTS I N FOREI GN EXCHANGE MARKETS

Threemaincategories:speculators,traders,thosewhoaremakinglongterminvestments.
o Currenciesareboughtandsoldtomakepossiblethepurchaseandsaleofgoodsandservices
betweenaneconomyandothereconomies.Exportersinworldtradewanttobepaidintheir
owncurrency;importersneedtobeabletoconverttheircurrencyintoaforeigncurrencyto
makeapayment.Thisonlyrepresentsasmallportionofoverallforeignexchange
transactions.
o ForeignInvestors:purchaseassetsinanothercountrysuchaspropertyorsharesandneedto
convertintothelocalcurrency.Onlyrepresentsasmallamountofforeignexchange
transactions.
o Speculators:makeshorttermcurrencytradesthroughshiftingmoneyinandoutofacurrency
orthroughderivatives.Theaimistomakegainsfromshorttermmovementsinthecurrency.
Representsover95%ofthedailytradeonFOREXmarkets.
THE I MPACT OF CHANGES I N TRADE AND FI NANCI AL FLOWS ON ECONOMI ES
Shiftsintradewillaffectthestructureofadomesticeconomyovertime.
o Ifaneconomyisexperiencingincreaseddemandforparticularexports,resourcesinthat
economywillshifttowardsincreasingtheproductionofthegoodorservice
o Ifaneconomyisexperiencingadeclineinoverseasdemandforagoodorservice,producers
mayshiftresourcesawayfromtheproductionofthegoodorservice
o Trendsinthedirectionoftradecanhaveanimpactonindividualeconomies(i.e.:Australia
respondingtotheincreasingdirectionoftradetoChina)
Changesinfinancialflowsintheshorttermcanhaveaneffectonthefinancialmarketsbutinthelong
termtheycanhaveasubstantialeffectontherealeconomy.
Theyhaveaneffectonconfidencewithinacountry.Weakconfidencemayslowdowntherateof
economicgrowthandviceversa.
Largecurrencymovementscanalsodestabilisefinancialmarkets
FREETRADEANDPROTECTION
THE BASI S OF FREE TRADE I TS ADVANTAGES AND DI SADVANTAGES
Fundamentalassumptionthattradeisagoodthingandthateconomieswillachievethefastestlevel
ofgrowthinafreetradeenvironment.
Freetrade:asituationwheregovernmentsimposenoartificialbarrierstotradethatrestrictthefree
exchangeofgoodsandservicesbetweencountries.
Argumentforfreetradeisbasedontheideaofcomparativeadvantage:
o Comparativeadvantage:economicprinciplethatnationsshouldspecialiseinareasof
productioninwhichtheyhavethelowestopportunitycostandtradewithothernations.
o Opportunitycost:thealternativeuseofresources.Representsthecostofsatisfyingonewant
overanalternativewantthecostofthealternativeforegone.
Advantagesoffreetrade sadvantagesoffreetrade
Allowscountriestoobtaingoodsand
servicesthattheythemselvescannot
produceorinsufficientquantities.
Increaseinshorttermunemploymentas
domesticcompaniesfinditdifficultto
compete
Allowscountriestospecialiseinthe
productionofgoodsandservicesforwhich
theyaremoreefficient
Moredifficulttoestablishbusinesses
Encouragestheefficientallocationof
resources(allocationefficiency)when
specialising
Productionssurplusesmaybedumped
Specialisationleadstogreatereconomiesof
scaleloweringaveragecostsofproduction
Mayencourageenvironmentally
irresponsibleproductionmethodsifgoods
areproducedatalowercostdueto
environmentallydamagingpractices
Internationalcompetitivenesswillincrease
asdomesticbusinessesfacegreater
internationalpressureincreasedefficiency
Encouragesinnovationsthespreadof
technologyandproductionprocesses
Leadstohigherlivingstandards,increased
consumerchoice
REASONS FOR PROTECTI ON

Protection:anytypeofgovernmentactionthathastheeffectofgivingdomesticproducersan
artificialadvantageoverforeigncompetitors
Mainmethodsare:tariffs,importquotasandsubsidies
Mostcountriestendtohavesomesortofprotectionofprotecttheirlocalindustries
Thereareafewargumentsinfavourofprotection:
o Infantindustries:newindustriesfacemanydifficultiesandrisksintheirearlyyearsso
governmentsprotecttheseindustriesuntiltheyarelargeenoughtobemorecompetitive.
Thistypeofprotectionshouldonlybetemporary.
o Dumping:whenforeignfirmsattempttosellthisgoodsinanothercountrysmarketat
unrealisticallylowprices.Thiscouldbeusedtogetridoflargesurplusestoestablishamarket
positioninanothercountry.Usingprotectionistmethodstopreventdumpingisoneofthe
fewacceptedargumentsbyeconomists.However,theWTOhasbeenquestioningifsome
countrieshavebeenabusingtheirentitlementtopreventdumpingbyfalselyaccusinglow
costproducersofdumping.
o Protectionofdomesticemploymentisoneofthemostpopularargumentsinfavourof
protectionisthatitsaveslocaljobs.Iflocalfirmsareprotectedagainstcheaperforeign
importsthendemandforlocalgoodswillbegreaterleadingtomoredomesticemployment.
o Defenceandselfsufficiencyisoneofthenoneconomicreasonsthatacountrymaywantto
retaincertainindustries.Forexample,theUSwouldwanttoretainitsdefenceproductionin
timesofwartoensurethatithasreadyaccesstodefenceequipmentintimesofwar.Japan
placeshightariffsonriceimportsbecausetheywanttoprotecttheirlocalindustrytoensure
thattheyhaveareliablesupplyoffoodifeverablockadewereplacedonit.
Otherfactorscaninclude:
o Tradeunionsagainstlowcostlabourfromothercountries
o Environmentalfactorssuchastheenvironmentalhazardinvolvedintheproductionofsome
goods.
o Spillovereffectsthatcertainindustriesmayhaveonotherindustrieswithinacountry.
METHODS OF PROTECTI ON AND THE EFFECTS OF PROTECTI ONI ST POLI CI ES ON THE
DOMESTI C AND GLOBAL ECONOMY
Tariff:agovernmentimposedtaxonimports.Ithastheeffectofraisingthepriceoftheimported
goodmakingthedomesticproducermorecompetitive.
Quotas:controlthevolumeofagoodthatisallowedtobeimportedoveragivenperiodoftime.This
meansthatthedomesticproducersareguaranteedashareofthemarket
Subsidies:involvefinancialassistancetodomesticproducerswhichenablesthemtoreducetheir
sellingpriceandcompetemoreeffectivelywithimportedgoods.Economistsgenerallyprefer
subsidiesinsteadoftariffsasitisgovernmentexpenditureandnotataxsoitwillbemorelikelytobe
reviewed.
VoluntaryExportRestraints:Aspartoftradenegotiations,somecountriesmayvoluntarilyagreeto
restrictthenumberofexportstoanothercountryinreturnforasimilarconcession.
LocalContentRules:Specifythatagoodmustcontainaminimumpercentageoflocallymadeparts.In
return,theimportedgoodwillnotattractatariff.
Exportincentives:programsthatgivedomesticproducersassistancesuchasgrants,loansortechnical
advicetoencouragebusinessestopenetratetheglobalmarketorexpandtheirmarketshare.
CONTEMPORARYTRADINGBLOCSANDAGREEMENTS
THE ROLE, I MPORTANCE AND I NFLUENCE I N THE GLOBAL ECONOMY OF BLOCS AND
AGREEMENTS
Countrieshaveformedagreementstoattempttogainfromgrowingtradeopportunitiesandavoid
beingexcludedfromregionaltradingblocs.
Twomajortypesexist:
o Preferentialfreetradeagreements(regionalorbilateral)
o Multilateralagreementswhichareopentoallnations
Atradingblococcurswhenmultiplecountriesjointogetherandformapreferentialtradeagreement
totheexclusionofothercountriessuchastheEuropeanUnion
Freetradeagreementsareformalagreementsbetweencountriesdesignedtobreakdownbarriersto
tradebetweenthosenations.Theagreementissaidtobebilateralwhenitisbetweentwocountries
andregionalwhenitisbetweenthreeormorecountriesinclosegeographicalproximity.
Thesepreferentialfreetradeagreementsdonotbenefitnonmembersanddonotcreateabetter
environmentforfreetradeatallwhereasmultilateralagreementsconductedthroughtheWTOare
designedtobreakdownalltraderestrictionsandfreeupworldtrade.
Manyeconomistsarguethatregionalandbilateraltradeagreementsthatleadtotheformationof
tradingblocsandhindertheprogressofworldtradebecausetheyslicetheworldupintoseparate
tradingareas.Othereconomistsarguethatregionaltradingagreementsareasteppingstonetowards
freetrade.
RegionaltradeagreementshavegrowninrecentdecadeswithMongoliatheonlyWTOcountrythatis
notasignatorytoaregionalorbilateraltradeagreement.Economistshavetermedthisregionalisation
insteadofglobalisation.
Regionaltradeagreementshavenotdonemuchtohelpsmallerdevelopingcountriesaccessingrich
countriesmarkets.Regionaltradeagreementstendtoentrenchglobalinequalities.
EU, NAFTA, APEC, ASEAN, CERTA
APEC(AsiaPacificEconomicCooperation)Forum:madeupof21membernationsintheAsiaPacific
establishedinresponsetootherregionaltradingblocssuchastheEUandNAFTA.Accountsfor40%of
theworldspopulation,53%oftheworldGDPand48%ofworldtrade
EU(EuropeanUnion):MembercountriesspanacrossEuropewith27membercountries.Theaimisto
haveasinglemarketforEuropeangoodsandserviceshowevertheEUhasalsoraisedtariffsagainst
nonmembercountries(resultinginaccusationsthattheEUisaclosedtradingbloc).Itsprotectionist
methodshaveforcedotherlargerplayers(suchastheUS)toresponsewithsimilarmethodsforcing
outsmallerplayerssuchasAustralia.
NAFTA(NorthAmericanFreeTradeAgreement):wasestablishedin1994inwhichagricultural
protectionisbeingcompletelyeliminatedandothertariffsarebeingphasedoutoveraperiodof515
years.NAFTAhasresultedinasignificantincreaseintradeamongitsmemberswithaccesstotheUS
resultinginsignificantexportsforothermemberswhiletheUShasbenefittedbyaccessingthe
cheaperlabourmarketsavailableinsomeoftheothermembernationssuchasMexico.
BilateralTradeAgreements:agreementsbetweentwocountriessuchasCloserEconomicRelations
TradeAgreement(CERTA)betweenAustraliaandNZwhichhasledtotheeliminationoftrade
restrictionsbetweenthetwocountries.CERTAhasbeenextendedinrecentyearstoincludebusiness
regulationsandtaxlaws
ASEAN(AssociationofSouthEastAsianNations):coverstheNIEsinSouthEastAsiabutdoesnot
includeanyofthelargeeconomies.ASEANisacounterweighttoAPEC.
INTERNATIONALORGANISATIONS
THE ROLE, I MPORTANCE AND I NFLUENCE I N THE GLOBAL ECONOMY OF I NTERNATI ONAL
ORGANI SATI ONS
Oneoftheproblemscreatedbyglobalisationistheinabilityofdomesticinstitutionstoregulatethe
increasingcomplexnatureofbusinesstransactions.Manyeconomicproblemscanonlybeaddressed
atagloballevelsuchas:
o Managingglobalinstabilityinfinancialmarkets
o Providingeconomicassistance
o Developingglobalstandardsforenvironmentalprotection
o Freeingupworldtradeandresolvingtradedisputes
Inthelongterm,theglobaleconomywillneedastrongglobalinstitutiontodealwiththeseproblems.
However,todaytherearethreemajorinstitutionsintheglobaleconomy.Theseare:
o WTO:WorldTradeOrganisation
o IMF:InternationalMonetaryFund
o WorldBank
Inadditionthereareseveralothergroups:
o G8:GroupofEightnations
o WorldEconomicForum
o UNbodies
WTO, I MF, WORLD BANK
WTO(WorldTradeOrganisation):
o 153membernationsin2009
o RoleoftheWTOistoimplementandadvanceglobaltradeagreementsandtoresolvetrade
disputes.
o Generallyeffectiveinitstask.
o QuestionsraisedabouttheWTOdisputeresolutionmechanismasshownbytheUSandEU
lodgingappealsanddelayinganyrulings.
o RecentfocushasbeenontheDohaRoundoftradeliberalisationhowevertherehavebeen
manydisagreementsandtalksbrokedownin2008.
IMF(InternationalMonetaryFund):
o Consistsof186members
o Roleistomaintaininternationalfinancialstabilityparticularlyintheforexmarkets
o IMFplaysaroleinminimisingtheimpactsofafinancialcrisisanywherearoundtheworld
o Playedasignificantroleduringthe2008GFCbysuspendinginterestpayments,injectingcash
intotheglobaleconomytopromoteliquidity.
o IMFsupportsthefreetradeofgoodsandservicesandoftenrequirescountriestostructurally
changetheirpolicybeforereceivingfinancialassistancefromtheIMF.Thestructural
adjustmentpolicieshaveplayedakeyroleintheglobalisationprocess
o IMFhasbeencriticisedforsometimesformakingincorrectdecisionseg:demandingthat
governmentsadoptacontradictorymacroeconomicpolicyduringtheAsianFinancialCrisisof
the1990s
WorldBank:
o Roleisprimarilyconcernedwithhelpingpoorercountrieswiththeireconomicdevelopment.
Fundinvestmentforinfrastructure,reducepoverty,helpcountriesadjusttheireconomiesto
thedemandsofglobalisation
o Fundedbycontributionsfrommembercountriesanditsownborrowings
o Makesloanstodevelopingcountriesatbelowstandardrates
o Recently,themajoraim(aspertheMillenniumDevelopmentGoals)hasbeentoreducethe
proportionofpeoplelivingonlessthan$1/dayaswellasachieveuniversalprimaryeducation,
reducechildmortality,preservethenaturalenvironment,improvethestatusofwomen.
o SupportofHeavilyIndebtedPoorCountriestoreducedebtby2/3
oftheworldspoorest
countries.

IMPACTOFGLOBALISATIONONTHESTANDARDOFLIVINGINTHEGLOBAL
ECONOMY
VARIATIONSINTHESTANDARDOFLIVINGINTHEGLOBALECONOMY
Despitetheadvancesoverthepastcentury,thereareharshinequalitiesbetweenwealthyandpoor
countries:
o 1.4billionpeopleliveinextremepovertyonlessthanUS1.25/day
o Richest5%ofpeopleintheworldearn165xtheincomeofthepoorest5%
o 30,000childrendieeachdayfrompovertyrelatedpreventablediseases
However,livingstandardshavebeenimprovinginbothdevelopinganddevelopednations:
o Between19822005thoselivinginextremepovertyfellfrom52%to25%
o Lifeexpectancyindevelopingnationsfrom56to67yearsbetween1970and2007
o Primaryeducationcompletionrateincreasedindevelopingcountriesto85%in2007
I NCOME AND QUALI TY OF LI FE I NDI CATORS
Themostpopularmethodtocomparelivingstandardsbetweennationsistocompareincomeasit
measurestheabilityofcitizenstosatisfytheirneeds.
GrossNationalIncome(GNI)isthesumofvalueaddedbyallresidentproducersinaneconomyplus
receiptsofprimaryincomefromforeignsources.
RealGNIiscalculatedbyaccountingfortheeffectsofinflation
PurchasingPowerParity(PPP):usedtomakeadjustmentsbeforecomparingtheGNIbetween
countries.PPPadjustsmeasurementsofthesizeofaneconomytoreflectthepurchasingpowerof
currencieswithinanationaleconomy.
Thesizeofthepopulationandrateofpopulationgrowthvarybetweencountriesandallowancescan
bemadebydividingtherealGNIofeachcountrybyitspopulationGNIpercapita.
HumanDevelopmentIndex(HDI):AnalternativetotheGNIistheHDItomeasureeconomic
development.Ittakesintoaccount:
o Lifeexpectancyatbirth:Indicativeofthehealthandnutritionstandardsofacountry
o Levelsofeducationattainment:HDImeasuresadultliteracyandratioofpeoplethathave
completedprimary,secondaryandtertiaryeducation
o GDPpercapita:Usedasameasureofadecentstandardoflivingandisessentialin
determiningaccessthatpeoplehavetogoodsandservices
CONTRASTSINLEVELSOFDEVELOPMENT
DI FFERENCE BETWEEN GROWTH AND DEVELOPMENT
EconomicgrowthissimplyapercentageincreaseinGDP/capita
Economicdevelopmentisbroadmeasureofwelfareinanationthatincludesindicatorsofhealth,
education,andenvironmentalqualityaswellasmateriallivingstandards.
REASONS FOR DI FFERENCES BETWEEN NATI ONS
GlobalFactors:
GlobalTradeSystem:Somefeaturesoftheglobaltradesystemreinforceratherthanreduceglobal
inequalities
o Westerneconomiesprotecttheirdomesticagriculturesectorbecauseitisnotcompetitive
withproducersindevelopingnations.Developingcountriesexperiencehighlevelsofglobal
protectionismintheagriculturalsector.
o ExpandingregionaltradeblocssuchastheEUandNAFTAexcludepoorernationsfrom
accesstotheselucrativemarkets.Thishasanenormousimpactonpoorcountries.
o Highincomenationshaveresistedmakingconcessionsonissuesthatwouldprovidegreat
benefittodevelopingcountriessuchasattheDohaRound.Theycanthenuseregionaland
bilateralagreementstogainaccesstomarketswheredevelopingnationscannotbargainasa
group.
o Benefitsoffreetradeagreementsarenotalwaysavailabletodevelopingnationsduetothe
highcostsofadministrationandthecomplexityoftheWTOsprocedures.
GlobalFinancialArchitecture:
o Longterminternationalflowsofinvestmentheavilyfavourdevelopedcountries.Highincome
economiesreceivedaround2/3ofallFDIin2007
o Shorttermfinancialflowsoftenfavourthoseemergingmarketsthatofferbetterreturns
forspeculatorshowevertheseareasalsoexperiencethegreatesteconomicvolatilitywhich
cansetbackeconomicdevelopmentdecadeswhilespeculatorsmoveontoothermarkets.
o TheIMFiscriticisedthatitsstructuraladjustmentpoliciesservetheinterestsofhighincome
economies.
o Asaresultofgreateraccesstofinancialmarkets,manydevelopingcountrieshavemassive
foreigndebtburdensirresponsiblelendingpractisesbyrichcountryfinancialinstitutions.
GlobalAidandAssistance:
o Thetotallevelofdevelopmentaidprovidedbyhighincomeeconomieswasonly0.3%ofGWP
in2008.Thisleveliswellbelowthegoalof0.7%ofGDPthathighincomeeconomieshave
beencommittedto.Thereisalsoariskthathighincomeeconomiesmaycutaidtohelppay
offthedeficitscausedbytheGFC.
o Criticsclaimthatthemajorityoftheaidgivenisphantomaidaidthatdoesnotimprove
thelivesofthepoor.Moneyisspentonpayingfortechnicalcooperation(consultants)as
wellasbeingwastedonadministrationcosts
o Thedistributionofaidusuallyrepresentsstrategicandmilitaryconsiderationsratherthanthe
needoftheworldspoorestcountries.
GlobalTechnologyFlows:
o Highincomeeconomieschoosethepriorityareasofscientificresearchanddevelopment.
Muchofthistechnologydealswiththehealthproblemsofanageingpopulationinrich
countriesandlittletodowithpoornationswhosehealthrisksinvolvecommoninfectious
diseases.
o Developingnationsfinditdifficulttogainaccesstonewtechnology.IPrightsrestrictthe
benefitsoftechnologicaltransfertopoornationsbecausetheycannotpaydeveloped
countrypricesforthetechnology.

DomesticFactors:
EconomicResources:
o Naturalresources:areimportantinputsfortheproductionofhighervalueadded
manufacturedgoodsandservices.Economiesthathaveanabundantandreliablesupplyof
cheapnaturalresourceshavebetteropportunitiesforeconomicdevelopmentthanthose
whodonot.Abundanceofnaturalresourcesmayalsobeanegativewhichcanhampera
countryseconomicdevelopmentifitleadstoanovervaluedexchangerate,narrowexport
baseandbecomingoverreliantonasmallnumberofindustriestodriveeconomicgrowth
o Laboursupplyandquality:Labourisanimportantfactorinbecomingthemostimportant
inputtotheproductionprocess.Highincomeeconomiestendtohavehighlyeducatedand
skilledlabourresourceswhereaslowincomenationsarecharacterisedbyhighpopulation
growth,pooreducationlevelsandlowhealthstandardswhichreducesthequalityoflabour.
o Accesstocapitalandindebtedness:Difficultyingainingaccesstocapitalforinvestmentand
developmentinlowincomenationsalsocontributestoloweredlivingstandards.Lowlevels
ofsavingsarelargelyaresultoflowincomelevelsandthiscreatesaselfperpetuatingcycleof
lowinvestmentlevelsandslowexpansion.Enterprisesincountrieswithhighlevelsofforeign
debtoftenfinditdifficulttogainaccesstofunds.
Entrepreneurialculture:
o Evidencesuggeststhatacountryshistoryandsocialinstitutionscanimpactonitseconomic
successsuchasthevaluesofindividualresponsibility,enterprise,wealthcreationandastrong
workethic.Thesevaluescanassiststheindustrialisationprocesstowardssustainable
economicdevelopment
Institutionalfactors:
o Institutionalfactorsinindividualeconomiescanhaveinfluencesforbusinesses.Political
instability,corruption,andlawoflawenforcementtendtoundermineinvestorconfidence
whowillbereluctanttoundertakerisksiftheybusinessinterestsarethreatenedby
inadequatestructureforresolvinglegaldisputes.
DEVELOPI NG ECONOMI ES, NEWLY I NDUSTRI ALI SED COUNTRI ES (NI CS), TRANSI TI ON
ECONOMI ES, HI GH I NCOME ECONOMI ES
DevelopingEconomies:Thesecountriessufferfromlowincomelevels,weakhumanresourcesand
haveonlyexperiencedlimitedindustrialisation.Alargenumberofpeopleliveinabsolutepoverty(less
thanUS1.25/day).
o Highlevelsofincomeinequality
o Dependenceonagriculturalproductionforincome,employmentandtrade
o Relianceonforeignaidanddevelopmentassistance
o Lowlevelsoflabourproductivity,industrialisation,technologicalinnovationand
infrastructuredevelopment
o Weakpoliticalandeconomicinstitutions
NewlyIndustrialisedCountries:Economiesexperiencingrapideconomicchangeandintransitionfrom
beingdevelopingeconomiestohighincomeeconomies.NICshavebeenthefastestgrowinggroupof
economiespursuinggrowththroughexportleddevelopmentandencouraginglargeinwardflowsof
FDI.
TransitionEconomies:Weresocialisteconomiespriortothecollapseofsocialism.Theseeconomies
haveattemptedandextraordinarytransformationfromcentrallyplannedeconomiestomarket
economies.Reformsincludeprivatisationofstateownenterprises,financialmarketliberalisationand
shifttowardswesternstyleeconomicandpoliticalinstitutions
HighIncomeEconomies:Countrieswithhighlevelsofeconomicdevelopmentandcloseeconomicties
witheachotheraswellasliberaldemocraticpoliticalandeconomicinstitutions.Highincome
countrieshaveaGNIpercapitaaboutUS$11,906.Includes27/30oftheOECDcountries.
IMPACTOFGLOBALISATION
I NTERNATI ONAL CONVERGENCE
Globalisationappearstobecontributingtoaconvergenceinlivingstandards.Overthelastfew
decades,developingeconomieshavebeencatchinguptodevelopedhighincomeeconomies.
TransitioneconomiesarenowgrowingfasterandeconomicgrowthinthefirstwaveofNIEshas
slowednowthatlivingstandardsinthosecountrieshaverisentosimilarlevelsasforhighincome
economies.
ECONOMI C GROWTH, DEVELOPMENT AND THE QUALI TY OF LI FE
Globalisationissaidtoofferthenationsoftheworldtheopportunitytoexperienceeconomicgrowth
anddevelopmentandtoimprovethequalityoflifefortheircitizenshowever,notallcountrieshave
benefittedequallyfromglobalisation.
Thewinnersfromglobalisationarethosecountriesthathaveembracedinternationaltrade,foreign
investmentandtheparticipationofTNCshoweversomefeaturesofglobalisationhavehadnegative
impactsontheglobaleconomy.Forexample,countriesinAfricahavesufferednegativegrowthdueto
highlevelsofforeignindebtedness.
Ifglobalisationraiseseconomicgrowthandthereforeraisesincomelevelsthenthiscanhavea
positiveeffect.Ifhowever,thedistributionofincomeisuneventhenthiswillhaveanegativeeffecton
thequalityoflife.
TRADE, I NVESTMENT AND TRANSNATI ONAL CORPORATI ONS
Theprocessofglobalisationhasresultedinsubstantialincreasesinthesizeoftradeflowsandforeign
investment.BecauseofthekeyroleplayedbyTNCsintradeandinvestmentflows,theyare
increasinglydominatingbusinessactivityaroundtheworld.
Duetothenatureoftheglobaleconomy,therecanbemultipleinternationaltradetransactionsinthe
processofmanufacturingagood.
Theglobalisationoffinancialmarketshasseenanincreasedrelianceonforeignsourcesoffinancefor
investment.FDIisnowplayingagreaterroleincreatingmoreeconomicactivityaroundtheworld.
However,theflowisFDIfundsareusuallytargetedatthosecountrieswithfavourableeconomic
prospectsandonlyatrickletothoseLDCs(LeastDevelopedCountries).
AmajorcriticismofTNCsisthatbecausetheydonotoperateunderthelawsofonecountry,theycan
moveproductionfacilitiestocountrieswithweakgovernmentregulations.
DI STRI BUTI ON OF I NCOME AND WEALTH

Globalisationhasresultedinincreasedworldincomeandwealthbutthedistributionofthisincrease
hasbeenveryunequal.Anumberofcountrieshavegainedverylittleorevennothingfrom
globalisation.
EventhoughincreasedFDIflowsfueleconomicgrowth,theytendtobefocusedonthehigherskilled
andtechnologysectorsfavouringthosewhoarealreadybetteroffincreasedinequality.
Globalisationhasincreasedopennesstotradewhichprovidesmoreexportopportunitiesraisingthe
incomeofagriculturalworkersindevelopingcountries.Alowertariffonimportsreducesthepricesof
goodsandimproveslivingstandards.
ENVI RONMENTAL CONSEQUENCES
Globalisationcanhaveanegativeimpactontheenvironment.Developingcountriesmayengagein
economicbehaviourthatisdetrimentaltotheenvironmenttoattractforeigninvestors.
Globalisationalsooffersthechancetoprotecttheworldsenvironmentfromharmbyforcing
countriestoownuptotheirenvironmentalresponsibilities.
Itmakesthecostsofpreservationabletobesharedandfacilitatesthetransferofenvironmentally
friendlytechnology.
FI NANCI AL MARKETS
Financialmarketsshiftlargeamountsofmoneyveryquicklyandthiscansometimeshavedevastating
effectswhenasuddenlossinconfidencearises.Theexchangeratecancollageleadingtoashockin
theeconomy,recession,risingunemploymentandincreasedpoverty.
Thefinancialmarketsbehaveinunpredictablewaysandthiscanposealargethreattotheglobal
economylikeagiantwreckingball.
THE I NTERNATI ONAL BUSI NESS CYCLE
Closelinkagesbetweeneconomiesholdbothbenefitsandrisks:
o Benefits:achievefasterratesofgrowthbyspecialisationandengagingintrade
o Risks:exposedtodownturnsintheinternationalbusinesscyclesanddevelopmentsinthe
region.
I MPLI CATI ONS FOR GOVERNMENT ECONOMI C POLI CI ES
Globalisationhasledtogreatersimilarityofeconomicpoliciesaroundtheworld.TheWashington
Consensusoutlinesmarketfriendlypolicies:
o Fiscaldiscipline
o Redirectionofpublicexpendituretowardseducation,healthandinfrastructureinvestment.
o Taxreformbroadeningthetaxbaseandcuttingmarginaltaxrates
o Interestratesdeterminedbymarketforcesandarepositivebutmoderate
o Competitiveexchangerates
o Tradeliberalism
o Opennesstoforeigndirectinvestment
o Privatisationofstateenterprises
o Deregulation:suchasthosethatimpedeentryorrestrictcompetitionexceptforthose
justifiedonsafety,environmentalandconsumerprotectiongrounds.
o Legalsecurityforpropertyrights
CASESTUDY
A CASE STUDY ON THE I MPACT OF GLOBALI SATI ON ON VI ETNAM, ALONG WI TH THE
STRATEGI ES THAT VI ETNAM I S USI NG TO PROMOTE ECONOMI C GROWTH AND
DEVELOPMENT

AustraliasPlaceintheGlobal
Economy
AUSTRALIASTRADEANDFINANCIALFLOWS
VALUE,COMPOSITIONANDDIRECTIONOFAUSTRALIASTRADEAND
FINANCIALFLOWS
TradingPartner %ofAustralianImports %ofAustralianExports
USA 12 5
EU 21 10
ASEAN 20 9
China/HongKong 18 19
SouthKorea 3 8
Japan 8 23
NewZealand 3 4
TRENDS I N AUSTRALI A S TRADE PATTERN

AustraliaprimarilytradedagriculturalgoodsasacountrytonationssuchastheUnitedKingdomand
otherEuropeanNationsduetoourtraditionalroots.However,whentheUKjoinedtheEUitwas
requiredtoimposetariffsonAustralianexports.
Afterthis,AustraliachangedthefocusofexportstothedevelopingcountriesinSouthEastAsiawhich
requiredresourcestogrow.
Ourexportshavedecreasedintheagriculturalsector(asapercentageoftotalexports)buthave
increasedsignificantlyintheminingandresourcessectorwithashiftawayfromcountriessuchas
JapantowardsChinaandotherASEANcountries.
AlthoughwestillexporttotheEU,UKandUSwemainlyimportfromthesecountries(aswellas
countrieslikeChinaandJapan)
TRENDS I N FI NANCI AL FLOWS
Duetoglobalisationandthefloatingofcurrenciesaroundtheworld,therehasbeenanincreased
amountofforeigninvestmentintoAustralia.
Globalisationandtechnologyhasallowedthetransferofmoneyveryquicklyaroundtheglobe
benefittingforeigninvestment(ascapitalmoveseasilybetweennations).
Australiahasalwaysbeenanetcapitalimporter.ThefinancialflowsintoAustraliaareabouttwicethat
offlowsoutofAustraliareflectingonthelackofdomesticsavingsinAustralia.
Arecenttrendhasbeentheshiftinthecompositionoffinancialflowsbetweendirectinvestmentand
portfolioinvestment.Duringthe1980s,directinvestmentwasgreaterthanforeigninvestmentas
governmentsregulatedfinancialflows.Today,thereverseistruewiththeremovalofrestrictions
injectingmoneyintoAustraliancompaniesthroughloansandsharepurchases.
AUSTRALIASBALANCEOFPAYMENTS
ThebalanceofpaymentssummariesallthetransactionsthatAustraliahaswiththerestoftheworld
overaperiodoftime.
STRUCTURE
CurrentAccount
Thecapitalaccountshowsthemoneyflowfromallexportsandimportofgoodsandservices,income
andcurrenttransfersforaperiodoftimeinoneyear.Itessentiallycoversallexternaltransactionsthat
arenotreversible.
Netgoods:ReferstothedifferencebetweenwhatAustraliareceivesforitsexportsandpaysforits
imports.
Netservices:Referstotheservicesthatareboughtandsoldwithoutpeoplereceivinganactualgood
suchastransport,telephonecalls,accommodation.ServicesAustraliasellsareaninflowandservices
Australiabuysareanoutflow.
Balanceongoodsandservices:Arrivedatbyaddingnetgoodsandnetservices
NetIncome:Referstoearningsoninvestmentscoveringinterestpaymentsonborrowingsandreturns
onotherforeigninvestments.WhenforeignersinvestinAustralia,incomeflowsoverseas(debits).
WhenAustraliansinvestabroad,thereisaflowofmoneybackintotheAustralianeconomy(credit).
Netcurrenttransfers:occurwhenproductsorfinancialresourcesareprovidedwithoutaspecificgood
orservicebeingprovidedinreturn.
Balanceoncurrentaccount:Additionofthebalanceongoodsandservices,netincomeandnet
currenttransfers.
CapitalandFinancialAccount
TheCapitalandFinancialAccountisconcernedwithfinancialassetsandliabilitiesthemoneyflows
thatresultfrominternationalborrowing,lendingandpurchasingofassets.Thesetransactionsare
reversible.
CapitalAccount:Consistsofcapital(money)transferswiththreemainparts:
o CapitaltransfersfrompeoplemigratingintooroutofAustralia
o Capitaltransfersintheformofforeignaidtoothercountries
o Purchaseandsaleofnonproduced,nonfinancialassetssuchasintellectualproperty.
FinancialAccount:showsAustraliastransactionsinforeignfinancialassetsandliabilitiesandis
characterisedbyfourtypesofinvestment.Creditsrepresentnetinflowssuchasincreasedforeign
investmentinAustraliaorreducedforeigninvestmentoverseas.Debitsrepresentnetoutflowsand
Australiaconsistentlyrecordsapositivefinancialaccountbalanceaswedrawonthesavingsofthe
restoftheworldtofinanceadeficitonthecurrentaccount.
o Directinvestment:ForeignfinancialtransactionstofundnewinvestmentinAustraliaor
overseasortobuymorethan10%ofsharesinexistingAustraliancompanies
o PortfolioInvestment:Buyingofland,shareandothermarketablesecuritiesinexisting
companies(mostforeigndebtrecordedhere).
o Otherinvestment:investmentnotcapturedinothercategoriessuchasloans,deposits,trade
credits
o ReserveAssets:Foreignassetsthatareavailabletoandcontrolledbythecentralauthorities
forfinancingorregulatingpaymentimbalances.GoldheldbytheRBA,FOREXheldbythe
RBA,SpecialDrawingRights.
Balanceoncapitalandfinancialaccount:addingthecategoriestogether.Theamountshouldbe
approximatelyequaltothedeficitontheCA.
LI NKS BETWEEN KEY BALANCE OF PAYMENTS CATEGORI ES
Supply o $A = cmonJ or $A
Supplyisrepresentedby:
Paymentsforimportsofgoodsandservices(M)
Income/transfersoverseas(Ydebits)
Capitalandfinancialoutflow(Koutflow)
Demandisrepresentedby:
Receiptsforexportsofgoodsandservices(X)
Incometransfersoverseas(Ydebits)
Capitalandfinancialinflows(Kinflow)
H + Jcbits +K outlow = X + crcJits +K inlow
H X + Jcbits crcJits = K inlow K outlow
cicit on tc CA = Surplus on tc KFA
Overaperiodoftime,ahighlevelofKFAsurpluseswillresultinawideningCADbecauseofthe
servicingcostsassociatedwithincreasedforeignliabilities.TheViciousCycleofAccumulatingDebt.
TRENDS I N THE SI ZE AND COMPOSI TI ON OF AUSTRALI A S BALANCE OF PAYMENTS
TheBalanceofPaymentsisakeyindicatorofthehealthofaneconomy.Australiahasexperienced
consistentlylargeCADsincethemid1980s.Eachyear,Australiahaspaidoutmoreforgoods,services
andotherincomeandtransferpaymentsthanithasreceived.
ThedegreetowhichahighCADissustainableissubjectofgreatdebate.AhighCADcouldresultfrom
highlevelsofdirectinvestmentthatallowsforhighereconomicgrowthandexportsinthelongterm.
TheCurrentAccountBalanceandBalanceongoodsandservicesisheavilyinfluencebycyclicalfactors
suchaschangedinglobaldemandforcommoditieshoweverthelongtermstructuralcomponentof
theCAD,thenetincomedeficit,remainshighregardlessofthecyclicalswingsintheCAD.
REASONS FOR THESE TRENDS
TherearemanyreasonsforhavingahighCAD.Someeconomistsbelievethatduringthemid80sand
90sAustraliaslackofinternationalcompetitiveness(i.e.:thecurrentaccount)ledtothecurrent
situationweareinnow.
Recently,therehasbeenafocusonthelackofdomesticsavinglevelsbecauselowsavingsmeansthat
foreigncapitalinflowsarerequiredtofindinvestmentinAustralia(i.e.:acapitalandfinancialaccount
problem)
ISSUESASSOCIATEDWITHTRENDSINTHEBALANCEOFPAYMENTS
TherearesomeassociatedrisksofrunningahighCAD:
o Thegrowthofforeignliabilities:contributetoanincreasedlevelofforeignliabilityovertime.
LendersmaybecomemorereluctanttolendtoAustraliaorinvestinAustralia.Decisionsmade
thataffectAustraliawillbecomeincreasingmadebyinternationalbusinesses.
o Increasedservicecosts:Ahighlevelofforeignliabilityimposessubstantialservicingcosts
largernetincomedeficitonCAD.Higherlevelsofforeigndebtcanresultinforeignlenders
demandriskpremiumsonloans(i.e.:higherinterestrates).Thereisariskoffallingintothe
debttraporVCADwhereweneedtoborrowmoremoneytoserviceourforeignliabilities.
o Increasedvolatilityforexchangerates:Thismayunderminetheconfidenceofoverseas
investorsintheAustralianeconomy.Thisreduceddemandforcurrencymaydepreciatethe$A
leadingtoincreasedimport/decreasedexportpriceswhichinturnworsenstheCAD
o Constraintonfutureeconomicgrowth:ahighCADcansloweconomicgrowthinthefutureas
higheconomicgrowthusuallyinvolvesanincreaseinimportsleadingtodeteriorationinthe
CAD.EconomieswithaCADproblemlimitgrowthtokeeptheCADsustainable(knownasthe
balanceofpaymentsconstraint).
o Morecontractionaryeconomicpolicy:IftheCADneedstobereducedintheshortterm,
macroeconomicpolicyneedstobetightenedwhilemicroeconomicpolicyneedstobe
reformed.TighterfiscalpolicycanalsolowertheCADbutalsoreduceeconomicgrowth.In
thelongterm,sloweconomicgrowthcanleadtoincreasedunemployment.
o LossofInternationalInvestorsConfidence:Investorconfidencecanshiftrapidlyandcountries
withahighCADaremorevulnerabletoshifts.Theseshiftscanoftenhaveadramaticeffect
andsometimescantriggeramajorcrisis.
TERMS OF TRADE
ThetermsoftradeshowtherelationshipsbetweenthepricesAustraliareceivesforitsexportsandthe
pricesthatitpaysforitsimports.
Thetermsoftradeimprovewhenexportpricesarerisingrelativetoimportpricesanddeteriorate
whenimportpricesarerisingrelativetoexportprices
Icrms o IroJc InJcx =
Lxpot Pcc Indcx
Impot Pcc Indcx
100
1

ChangesintheTOTIcaninfluenceAustraliasbalanceofpayments.Ifthetermsoftradedeteriorate,
thenthesamevolumeofexportsbuysfewerimports.Thiscanleadtoalargedeficitonthebalanceof
goodsandservicesincreasingtheCADandforeignliabilities.
SI ZE OF THE CURRENT ACCOUNT BALANCE AS A PERCENTAGE OF GROSS DOMESTI C
PRODUCT
Byanycomparison(CADasaproportionofGDP),AustraliasustainsahighCADaveraging2.7%inthe
mid80stoover4%ofGDP.
FOREI GN DEBT AND FOREI GN LI ABI LI TI ES

AustraliasforeignliabilitiesarewhatAustraliaowestotherestoftheworld.Thisincludesthemoney
thatwehaveborrowedfromoverseas.Wemustpayinterestonthismoneyandthecostofservicing
theseloans(interestpayments)appearsasadebitontheCurrentAccount.
Ifwehavelargeforeignliabilitiesthenthismeansthatwehavelargerdebitsonthecurrentaccount.If
thisdebitexceedsthebalanceongoodsandservicesandthecreditonthenetincometransfersthen
havewillhaveaCAD.
AprolongedCADcanresultinthedebttrapwheremoneyneedstobeborrowedtofundthecostsof
servicingtheloansandthenmoreneedstobeborrowedagainresultingingreaterforeignliabilities
andahigherCADetc.theVCAD
Lowlevelsofnationalsavingscontributetohigherlevelsofforeignliabilitiesaswell.Overthelast
twentyyears,thelevelofnationalsavingshasbeendroppingfrom15%ofhouseholdincomein1980/81
to3%in2002/03andbackupto3%in2008/09.
BecauseofthelowlevelofsavingswithinAustralia,wemustrelyonthesavingsofothercountriesto
fundlocalinvestmentandbudgetdeficits.Byborrowingfromoverseaswemustthenservicethese
loansandtheinterestpaymentontheseloansmakeupasignificantportionofourCAD.
Foreignborrowingsaresubjecttochangesinoverseasinterestratesandotherfluctuationsinthe
exchangerateofthe$Aunlikelikedomesticborrowings.
DebtandEquity
NetForeignDebt:isthetotalstocksofleansowedbyAustralianstoforeignersminusthetotalstock
ofloansowedbyforeignerstoAustralians
NetForeignEquity:isthetotalvalueofassetsinAustralia(land,shares)minusthetotalvalueofassets
overseasthatareownedbyAustralians.
I NTERNATI ONAL COMPETI TI VENESS
STRUCTURAL CHANGE I N THE AUSTRALI AN ECONOMY

ToimproveAustraliasCADweneedtodiversifytheexportbaseandmovefrommainlycommodity
basedexportsintootherareassuchasservicesandElaboratelyTransformedManufactures(ETMs).
Microeconomicreformintheshorttomediumtermcanalsoimproveourinternational
competitivenessbyloweringcostsandimprovingthequalityandreliabilityofAustralianproducts.
Microeconomicreformmeasuresinclude:
o Reducingtheinflationratetothatofonebelowcountrieswecompetewith.Thisadvantages
ourexportersbyreducingtheircostsofproduction.
o Innovationrequiresahighlyeducated,highlyskilledworkforce.Highlevelsofinvestmentin
R&Dforexportsuccessinhighvalueaddedservices.
o Tocompeteinternationally,Australiamustsustainproductivitygrowthtouseresourcesand
theworkforcemoreefficiently.
o Competitivelabourcostsaslabouristhelargestcomponentofbusinesscosts.Excessive
wagegrowth(when Rcol wogc > ProJucti:ity)willincreasethecostsofproduction.
o Changeroleofgovernmentandmoreefficientpublicsectorincludingkeepingbudgetdeficits
undercontrolandaminimallevelofgovernmentownershipinbusiness.

EXCHANGERATES
MEASUREMENT OF RELATI VE EXCHANGE RATES
Exchangeratesarenecessarybecauseexportingfirmswanttobepaidintheirowncurrencyso
importersneedtobeabletoconverttheirdomesticcurrencyintotheforeigncurrency.
Theexchangerateworksduetothefloatingexchangeratemechanisminwhichthevalueofa
countryscurrencyisdeterminedbythefactorsofdemandandsupplyinforeignexchangemarkets.
ToOtherIndividualCurrencies
TheexchangerateisthepriceofAustraliascurrencyintermsofanothercountryscurrencye.g.:1AUD
=0.97USD.
TradeWeightedIndex
TheTradeWeightedIndexgivesanindicationofhowthevalueofthe$Aismovingagainstall
currenciesingeneral.Itiscalculatedbymeasuringthevalueofthe$Aagainstthecurrenciesof
Australiasmajortradingpartnerscomparedwithabaseyear.
ThecurrenciesofthecountriesthataremoreprominentinAustraliastradearegivenahigher
weightingsothattheyhaveagreaterinfluenceontheTWI.
OneweaknessoftheTWIisthatitisweightedaccordingtovolumesoftraderegardlessofthe
currencyinwhichexportandimportcontractsareinvoiced.Mustofourtradeisin$USandthe$A/$US
exchangerateismoreimportantthantheweightitreceivesintheTWI.
FACTORS AFFECTI NG THE DEMAND FOR AND SUPPLY OF AUSTRALI AN DOLLARS
Demandfor$Aisrepresentedbyallthosepeoplewhowishtobuy$A.Demandisaffectedby:
o ThesizeoffinancialflowsintoAustraliafromforeigninvestorswhowishtoinvestinAustralia
andneedtoconverttheircurrencyinto$A.
ThelevelofAustralianinterestratesrelativetooverseasinterestrates.
Theavailabilityofinvestmentopportunities.
o Expectationsofafutureappreciationofthe$Awillincreasedemandbyspeculators.
o ThedemandforAustralianexports:
Changesincommoditypricesandinthetermsoftrade
Demandforexportsinfluencedbythedegreeofinternationalcompetitiveness
Changesinglobaleconomicconditions.
Tastesandpreferencesofoverseasconsumers.
Supplyfor$Aisrepresentedbythosepeoplewhowishtosell$A.
o TheleveloffinancialflowsoutofAustraliabyAustralianinvestorswhowishtoinvest
overseasandmustsell$Atopurchaseforeigncurrency.
ThelevelofAustralianinterestratesrelativetooverseasinterestrates
Theavailabilityofinvestmentopportunities.
o Expectationsofafuturedepreciationofthe$Awillfuelspeculatorstosell$Acontributingto
theexpecteddepreciation.
o Domesticdemandforimports:
Levelofdomesticincome
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EconomicIssues
ECONOMICISSUESINTHEAUSTRALIANECONOMY
ECONOMICGROWTHL
Economicgrowthcreatesjobs,allowsindividualstoincreasetheirconsumption
Economicgrowthisusuallyseenasthesinglemostimportantmeasureofaneconomysperformance.
Economicgrowth:anincreaseinthevolumeofgoodsandservicesthataneconomyproducesovera
periodoftime.
AGGREGATE DEMAND AND I TS COMPONENTS: Y = C+I +G+XM
Aggregatedemandisthetotallevelofexpenditureintheeconomyoveraperiodoftimeincluding
consumption,investment,governmentspendingandnetexportspending(exportsimports)
AD=C+I+G+(XM)
AggregateDemand=Consumption+Investment+GovernmentSpending+(eXportsiMports)
EconomyisinequilibriumwhenAD=AS
Factorsinfluencingconsumerconsumption:
o Consumerexpectations:ifconsumersexpectpricestorise,highrealincomesorfuture
shortages,theywilltendtospendmoreandsaveless.Appliesinreverse.
o Levelofinterestrates:increaseininterestrateswilldiscourageindividualsfromspending
theirmoneyandencouragesaving.Adecreasewillhaveanoppositeeffect.
o Distributionofincome:themoreequitablethedistributionofincome,thehighertherateof
spendingandviceversa.PeopleonlowerincomeshaveahigherMPCthanthoseonhigher
incomes.
Factorsinfluencingbusinessinvestmentarethecostofcapitalequipmentandbusinessexpectations:
o Changesininterestrates:lowerratesmakesitcheapertoborrowfundstopurchasecapital
equipmentandviceversa
o Governmentpolicies:relatingtoinvestmentallowancesandtaxconcessionsoncapitalgoods.
Ahigherratesofdepreciationoncapitalmeansthatcapitalbecomesrelativelycheaper
o Priceorproductivityoflabour:relativecostsoflabourcomparedwithcapitalandlabourisa
capitalsubstitute.Ifthecostoflabourincreasedwhilepriceofcapitalremainedthesame,
capitalhasbecomerelativelycheaper
o Businessexpectations:Ifbusinessesexpectmoredemandforaproducttheywillinvestment
toboostproduction.Iftheeconomyisexpandingthenbusinesseswillinvesttoasrisk
associatedisdeclining.Newertechnologieswouldencouragegreaterbusinessinvestment.
Inflationleadstouncertaintyaboutthefutureleadingtoreducedinvestment
Factorsinfluencinggovernmentspendingandtaxation:thegovernmentwishtochangetheirlevelof
spendingtoinfluenceADdependingontheeconomicactivityinaneconomy.
FactorsinfluencingExportsandImports:Thelevelofoverseasanddomesticincome,exchangerates,
consumertrendsandpreferences.
Economic
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omesrise
Employment:economicgrowthcreatesjobsandcanensurethateveryonewhoiswillingandableto
workisableto.
Inflation:highlevelsofeconomicgrowthcanresultinpricesincreasesandlargerwageclaims
contributingtoinflation.HappenswhengrowthinAScannotkeeppacewithgrowthinAD.
ExternalStability:strongereconomicgrowthisusuallyassociatedwithincreasedconsumerand
businessspendingleadingtohigherlevelsofimports.Duetoproportionallyhigherspendingon
imports,thiscanresultinariseintheCADposingarisktotheexternalstabilityoftheeconomy.
Incomedistribution:economicgrowthcontributestohigherlivingstandardsandbetteroutcomesbut
notnecessarilyforeveryone.Somebenefitsofeconomicgrowthmayonlyflowtoacertainsector.
Environmentalimpacts:canhaveanegativeimpactontheenvironmentifpursuedwithout
consideringitsimpact.Suchaspollution,depletionofresourcesanddamagetolocalenvironment.
Policiesareneededthataddressecologicallysustainabledevelopment.
BUSI NESS CYCLE TRENDS
Businesscycle:thefluctuationsinthelevelofeconomicgrowthduetoeitherdomesticor
internationalfactors.
Countercyclicalpoliciesaredesignedtominimisethefluctuationsinthebusinesscyclesothatthe
economyexperienceslowinflation,unemploymentandstableeconomicgrowth.
Australiaseconomicgrowthperformanceoverrecenttimeshasbeenstableandsustainedoveralong
periodoftimeparticularlyduring19912008.Duringthe2008GFC,Australiaavoidedatechnical
recessionwithonlyonequarterofnegativegrowth.
UNEMPLOYMENT
MEASUREMENT
LabourForce
Thelabourforceisthesectionofthepopulation15yearsoldandabovewhoareeitherworking(1hour
+)orseekingwork.Includesselfemployedpersonsbutexcludesnonworkingstudents15years+,
peoplewhoperformdomesticduties,retiredpersons,andpersonsnotlookingforwork.
ParticipationRate
Thepercentageofthepopulationaged15+inthelabourforceeitheremployedorunemployed
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Lubou Pocc
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UnemploymentRate
Apersonisunemployedwhentheyareoutofworkbutactivelyseekingwork.
uncmploymcnt Rotc(%) =
Numbc o] pcsons uncmpIocd
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TRENDS
Underemployment:employedpersonswithalimitedamountofworkwhowantstoworkmorehours.
Hiddenunemployed:peoplewhohavenotbeenabletofindworkandhaveleftthelabourforceor
discouragedjobseekers
Thelasttimeunemploymentwasaslowasitwasduring200607wasin197576
Unemploymentfellsteadilyduringtheyearsafter2000untiltheonsetoftheGFCthatreducedthe
demandforlabourcausingunemploymenttoheadbackupwards.
Okunslaw:explainstherelationshipbetweenunemploymentandeconomicgrowth.Itstatesthatto
reduceunemployment,theannualrateofeconomicgrowthmustexceedthesumofpercentage
growthinproductivityplusincreaseinthesizeofthelabourforceinanyoneyear.
TYPES AND CAUSES:
Thelevelofeconomicgrowth:demandforlabourisderiveddemandfromthatofgoodsandservices
Stanceofmacroeconomicpolicy:caninfluencethelevelofcyclicalunemploymentintheshortto
mediumtermthroughtheinfluenceonthebusinesscycle
Constraintsoneconomicgrowth:ifthereareconstraintsoneconomicgrowththeeconomywill
struggletocreateenoughjobstoreduceunemployment.IncludesCADandinflationaryconcerns.
Risingparticipationrates:anincreaseinlabourforceparticipationwillincreaseunemploymentinthe
shorttermasmorepeoplestartactivelyseekingwork.
Structuralchange:ofteninvolvessignificantshorttermcosts(lossofjobs)inlessefficientindustries
andareasundergoingreforms.
Technologicalchange:rapidtechnologicalchangecancauseshorttermunemployment.
Labour/Capitalsubstitutioncancausesomeworkerstobecomeredundant.
Productivity:highproductivitygrowthwillleadtoslowemploymentgrowthasfeweremployeesare
requiredperunitofoutputintheshortterm.
Inadequatetrainingandinvestment:structuralunemploymentrelatedtothemismatchbetweenthe
skillsoftheunemployedandskillsdemandedbyemployers.
Rapidincreaseinlabourcosts:unemploymentmayrisebecauseofasuddenincreaseinlabourcosts.
Inflexibilityinthelabourmarket:highlabourcostscanresultfromtheinflexibilityofthelabour
market.Deregulationmayleadtolowerminimumwagesandlowerunemployment.
Cyclical
Occursbecauseofadownturninthelevelofeconomicactivityandfallsduringstrongeconomic
growth
Hasincreasedinrecentyearsasaresultofdeterioratingeconomicconditions.
Structural
Occursbecauseofstructuralchangesintheeconomy
Causedbychangesintechnologyorthepatternofdemandforgoodsandservices
MostofAustraliaslongtermunemploymentisattributedtostructuralunemployment

Frictional
Thepeoplewhoaretemporarilyunemployedastheychangejobs
Frictionalunemploymentisinevitableaspeoplechangejobs
Seasonal
Occursatpredictableandregulartimesthroughouttheyearduetotheseasonalnatureofsometypes
ofwork(eg:fruitpicking)
AlsoaccountsforinfluxofstudentsfinishingschoolinDecember
Hidden
ThosepeopleconsideredunemployedbutdonotfitintotheABSdefinitionofunemployedandnot
includedinthestatisticseg:discouragedjobsseekers
Presenceisshownthroughadeclineinlabourforceparticipationrate.
LongTerm
Thosepeoplewhohavebeenoutofworkfor12months+andusuallyapartofstructural
unemployment.
Oneofthemostentrenchedpartsofunemploymentsince1990s
NATURAL RATE OF UNEMPLOYMENT
Thenaturalrateofunemploymentreferstothelevelofunemploymentatwhichthereisnotcyclical
unemployment(i.e.:wheretheeconomyisatfullemployment).Itincludesfrictional,seasonal,
structuralandhardcoreunemployment
NAIRU(NonacceleratingInflationofUnemployment):Thenaturalraterepresentsthesupply
constraintoftheeconomy.Oncethenaturalrateisreachedandfurthercutsinwagesorstimulusto
aggregatedemandwillnotleadtopermanentreductionsintherateofunemploymentinsteadleading
tohighinflationaswagesgrowthaccelerates.TheNAIRUcanonlybereducedthroughstructural
reformssuchaseducationandtrainingpolicies.
MAI N GROUPS AFFECTED BY UNEMPLOYMENT
Youth:becauseemployersareseekingworkerswithgreaterskillandexperienceandasaresult
studentsareremainingineducationforlongerperiodsoftime
IndigenousAustralians
Olderworkers
Specificregionsthatexperiencehigherunemploymentrates
PeoplebornoutsideAustralia
EFFECTS OF UNEMPLOYMENT ECONOMI C AND SOCI AL COSTS
EconomicCosts:
o OpportunityCosts:Unemploymentmeansthattheeconomysresourcesarenotbeingused
totheirfullcapacity,thereforeoutputisbelowwhatitcouldbe.Loweroutputmeanslower
householdincomeandexpenditureleadingtolowersalesandprofits
o Lowerlivingstandards:Unemployedpeopleareunabletocontributetotheproduction
process.Higherratesofunemploymentreductioningoodsproductionreductionin
economicgrowthlowerlivingstandards.
o Declineinlabourmarketskillsforthelongtermunemployed:Unemploymentleadstoaloss
ofskillsamongexistingworkers.Persistentunemploymentwillleadthoseworkerstolose
theirskillsandbecomelessemployable.Cyclicalorshorttermunemploymentcanturninto
longtermstructuralunemployment.
o Coststothegovernment:Highlevelsofunemploymentcanhaveanimpactonthe
governmentsrevenueandexpenditure.Fallingincomesmeanslesstaxrevenueandhigher
unemploymentmeansgreaterwelfareexpenditure.
o Lowerwagegrowth:Highlevelsofunemploymentmeanthatthereisanexcessofsupplyof
labourthatshouldleadtoafallinthewagelevel.Regulationsrestrictingwagemovements
meanthathigherunemploymentleadstoslowerwagegrowthinsteadofreductions.
Socialcosts:
o Increasedinequality:Unemploymenttendstooccurmorefrequentlyamongthelower
incomeearnerssuchastheyoungandunskilled.Asunemploymentmeansalossofincome
forthesepeople,theybecomerelativelyworseoffcomparedtohigherincomeearners.
o Othersocialcosts:Unemploymentisalsoassociatedwithsocialproblemssuchasfinancial
hardshipandpoverty,increasedlevelsofdebt,homelessnessandhousingproblems,lossof
workskills,andincreasedlevelsofcrime.Economiccostsresultfromthisasresourcesneeds
tobedivertedtodealwiththeseproblems.
INFLATION
Inflationisasustainedincreaseinthegenerallevelsofpricesinaneconomy.
MEASUREMENT CURRENT AUSTRALI AN BUREAU OF STATI STI CS MEASURE
InflationismeasuredinAustraliausingtheConsumerPriceIndex(CPI)
TheCPIsummariesthemovementinthepricesofabasketofgoodsandservices,weightedaccording
totheirsignificancefortheaverageAustralianhousehold.
Inlotion Rotc(%) =
CPI
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prcicus jccr

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TheCPIcoversawideselectionofgoodsandservicesthatreflectaveragehouseholdspending
patternsandthismeansthatitgivesagoodindicationoftheoverallmovementinthepricesof
consumergoodsandreflectsgeneralchangesinthecostofliving.
Underlyinginflationremovestheeffectsofoneofforvolatilepricemovementsandasaresultthe
measureofunderlyinginflationtendstobelessvariablethantheheadlinerate.
TRENDS
Peaksininflationduring:198687,198990,200001
TheRBAtargetinflationrateis23%overthecourseofthebusinesscycle.

CAUSES
DemandInflation
WhenADexceedstheproductivecapacityoftheeconomy,pricesrise,asoutputcannotexpandany
furtherintheshortterm.Consumerforcepricesupbybiddingagainsteachotherforthelimited
supplyavailable,astheyarewillingtopayahigherprice.
CostInflation
Causedbyanincreaseinthecostsofthefactorsofproduction.Whencostsrise,firmsattempttopass
ontoconsumersthesecostsbyincreasingthepricesoftheirproductsthusraisingtherateofinflation.
ImportedInflation
InflationtransferredtoAustraliathroughinternationaltransactions.Eg:risingimportpriceswill
increaseinflationinasimilarwaytoanincreaseindomesticprices.Changesintheexchangeratewill
affectthedomesticpriceofimportswhichwillimpactoninflation
InflationaryExpectations
Ifindividualsexpecthigherinflation,theymayactinawaythatcausesanincrease.Eg:ifpricesof
goodsandservicesareexpectedtorise,consumerswillattempttopurchasebeforetheriseincreasing
consumptionanddemandpullinflation.
EFFECTS
EconomicGrowth:
o Inflationisthemainconstraintoneconomicgrowth.
o Excessiveeconomicgrowthtendstoraiseinflationarypressuresdemandonwagesand
consumerbidding.
o Lower,sustainedinflationallowsformoremoderateeconomicgrowthwithoutneeding
higherinterestrates.
o Higherinflationdistortseconomicgrowth,discouragesbusinessinvestment,andreduces
futureprofitlevels.
o Lowinflationhasapositiveimpact,incentivetoinvestinbigtermproductiveassets.
o Highinflationmaydistortconsumersdecisionstospend
Wages:Duringperiodsofhigherinflation,employeeswillseeklargerwageincreasesinordertobe
compensatedfortheerosioninthepurchasingpoweroftheirnominalwage.Emergenceofawage
priceinflationaryspiral.
Incomedistribution:Highinflationtendstohaveanegativeimpactonthedistributionofincome
becauselowincomeearnersfindtheirincomesdonotriseasquicklyasprices.Mayfacehigher
interestratesonborrowings.Highinflationhurtsthosewhosewageisnotindexedtoinflation.
Unemployment:Inflationandunemploymentarecloselyrelatedespeciallyintheshortterm.Higher
inflationleadstocontractionarymonetaryandfiscalpolicyleadingtoslowereconomicgrowthand
higherunemploymentintheshorttomediumterm.Stagflation:wheninflationandunemployment
risesimultaneously.
Exchangerateimpacts:highinflationmayresultinanappreciationoftheexchangerateintheshort
term.Maycausethecurrencytodepreciateinthelongterm.
Economic
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CAUSES AND EFFECTS

Duringthe1980sthecommonviewwasthatcauseofAustraliasCADwereasaresultofexport
problemsandlackofexportcompetitiveness.
Duringthe1990s,theviewwasthattheCADwasduetoanexcessofdomesticinvestmentover
domesticsavings.
Australiaisayoungeconomywithasmallpopulationbutlargelandmassandextensiveresources.To
developtheeconomy,wehavereliedonoverseascapitaltofillthegapbetweendomesticsavingsand
investment.
Problemswithcausingrunningconsistentdeficits:causestheincreaseinnetforeignliabilitiessuchas
thoseexperiencedbyAustraliaoverthelastcoupleofdecades.Andforeignliabilitieshaveservicing
coststhatcreateanadditionalburdenontheCAinthefuture.
Aslongastheinvestmentthatisbeingfundedbyoverseascapitalgeneratessignificantreturntopay
fortheservicingcostsinthefuture,theincreaseinforeignliabilitiesshouldbeviewedassustainablein
thelongterm.
Pitchfordthesis:notedthatAustraliasCADandforeignliabilitiesarealmostentirelygeneratedbythe
privatesector.Foreignborrowingshelpedtofundprivateinvestmentprojectsoraredirect
investments.Aslongasprivatesectordecisionmakingisnotdistortedbyotherfactorsandthe
borrowersandlendersareresponsible.Noneedtothegovernmenttobetooconcernedaboutthe
levelofforeignliabilitiesanymorethanthelevelofdomesticliabilities.Ifsomeprojectsarenot
successful,thefirmwillgobankruptandtherewouldbenoneedtorepaythisforeigndebt.
AchangeintheexchangerateaffectstheBoPbyaffectinginternationalcompetitivenessandthesize
ofservicingcostsofourforeigndebt.IftheAUDconstantlychanges(volatile)thismayundermine
domesticconfidence.
Externalstabilityisnowaddressedthroughthegeneraleconomicframework(promotinginternational
competitiveness,increasingexports,encouragingsavings,containingforeigndebtgrowth,
maintaininginvestorconfidence,reducingfluctuationsintheexchangerate)ratherthanbeing
addresseddirectlybyfiscalandmonetarypolicy.
DISTRIBUTIONOFINCOMEANDWEALTH
Mainchallengefacinggovernments:topromotestructuralchangecreatingamoreefficientand
competitiveeconomy.Buttoalsoensurethatthecostsofadjustmentsandbenefitsofprosperityare
sharedfairlybetweendifferentgroupsinsociety.
MEASUREMENT LORENZ CURVE AND GI NI COEFFI CI ENT
Personalincome:istheamountofduns,orotherbenefitsmeasuredinmoneyterms,thatflowto
individualsorhouseholdsoveraperiodoftime.
Incomeinequality:thedegreetowhichincomeisunevenlydistributedamongpeopleintheeconomy
LorenzCurve:isconstructedbyplottingthecumulativepercentageoftotalincomereceivedagainst
thecumulativepercentageofincomerecipients
Lineofequality:thelinethatshowsanevendistributionofincomeacrossthewholepopulation
Gap:ThefurthertheLorenzcurveinfromthelineofequalityisthegreaterthedegreeofinequalityin
society.
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goods
o Inequalitycreates(relative)povertyandsocialproblems,whichwillresultintheeconomynot
workingatfullcapacity.
o Inequalityincreasesthecostofwelfaresupportaspeopleonlowerincomesreceivebenefits
fromthegovernment
Benefits:
o Inequalityencouragesthelabourforcetoincreaseeducationandskilllevelstogainhigher
rewards
o Inequalityencouragesthelabourforcetoworklongerandhardertoearnhigherincomes
o Inequalitymakesthelabourforcemoremobileasitcanactasanincentivetomovetowhere
jobsarerequiredmost
o Inequalityencouragesentrepreneurstoacceptrisksmorereadilyduetotheprospectof
higherrewards
o Inequalitycreatesthepotentialforhighersavingsandcapitalformationasthehigherthe
incomeearnedthegreatertheproportionsaved.
Social
Costs:
o Socialclassdivision:distributionofincomeandwealthcreatesclassdistinctions,whichcan
resultintensionsbetweenpeopleanddifferentreligions.Divisionscanleadtosocialand
economicinstability
o Ahighlevelofrelativepoverty:viciouscycleoflowincomes
Benefits:
o Itcouldbearguedthatthepotentialbenefitsoninequality(suchassavings)couldproducea
largerpiefromwhichallsocietycanbenefit.Theremaybesocialfromaneconomicsystem
thatencouragesinequality
GOVERNMENT POLI CI ES TO ADDRESS I NEQUALI TY
Redistributingincome:thegovernmentreducesinequalitybyhavinghighertaxesonwealthyand
redistributingittolowerincomegroups
Compulsorysuperannuation:reducingwealthinequalityandemployersmustmakea9%minimum
contributionandthesefundscannotbeaccesseduntilretirement
Monetarypolicy:interestraterisesmayleadtogreaterinequality
Microeconomicreform:maycauseshorttermunemploymentandtheclosureofsomeindustries.
ENVIRONMENTALMANAGEMENT
Inrecenttimes,environmentalissueshaveassumedgreaterprominencewithinthestudyof
economicsandhavehadagreaterinfluenceonpolicydecisions

ECOLOGI CALLY SUSTAI NABLE DEVELOPMENT

Environmentaleconomicsemphasisestheviewthatweneedtopursueasustainablelevelofgrowth,
takingintoaccounttheeffectsthateconomicactivityhasontheeconomy.Unlessthehiddencostsof
economicgrowtharetakenintoaccount,fastgrowthmayleadtoarapiddepreciationofresources
anddecreasedqualityoflife.
Ecologicallysustainabledevelopmentinvolvesconservingandenhancingthecommunityresourcesso
thatecologicalprocessesandqualityoflifearemaintained.Alevelofeconomicactivitywhichis
compatiblewiththelongtermpreservationoftheenvironmentratherthanthemaximumlevelof
growthpossibleintheshortterm.
Problemsarisingfromadepletednaturalenvironmentinclude:harmfuleffectsonthehealthof
humansandlessenjoyablelivingenvironment,depletionofnaturalenvironmentreducespotential
futuregrowthbylimititsnaturalresources
Keyprinciplesofecologicallysustainabledevelopment:
o Integratingeconomicandenvironmentalgoalsinpoliciesandactivities
o Ensuringthatenvironmentalassetsareappropriatelyvalued
o Ensuringfairnessintheshiftingofcostsandassetswithinandbetweengenerators
o Managingenvironmentalriskswithcaution
o Takingintoaccounttheglobaleffectsofenvironmentalissues
PRI VATE AND SOCI AL COSTS AND BENEFI TS MARKET FAI LURE
Marketfailureoccurswhenthepricemechanismtakesaccountofprivatebenefitsandcostsof
productiontoconsumersandproducersbutfailstotakeintoaccountindirectcostssuchasdamageto
theenvironment.
Thepricemechanismdoesnottakeintoaccounttheprivatecostsandindirectcostssuchasdamage
totheenvironment.
Thepricemechanismdoesnottakeintoaccountfuturedemandforgoodsandservicesthatmaynot
besatisfiedorhowtheeconomysabilitytogrowinthefuturemaybeaffectedbecausearesource
hasbeenusedupordestroyed.
Whenenvironmentalresourcesbecomescarce,thecostofnaturalresourcesincreasesreducingthe
numberofresourcesconsumed.However,thepricemechanismdoesnotapplytotheallocationof
resourcesthatarefree(eg:theatmosphere)
PUBLI C AND PRI VATE GOODS FREE RI DERS
Publicgoodsarenonexcludable:onepublicgoodsareprovided,theproducercannotexclude
consumersfromenjoyingthebenefitofthatgoodeveniftheyarenotpreparedtopayeg:national
defences,streetlights.
Publicgoodsarenonrival:consumptionofthegoodbyoneindividualconsumerdoesnotreducethe
quantityofthegoodavailableforotherconsumerseg:theuseofaparkbyonepersondoesnot
excludeanotherpersonfromusingthepark.
Freeriding:groupsorindividualswhobenefitfromagoodorservicewithoutcontributingtothecost
ofsupplyingthegoodorservice.Asaresult,thegoodorserviceislikelytobeundersuppliedin
relationtototaldemand
I SSUES:
Preservationofnaturalenvironments
Measuresthatcanbetaken:restrictionsondevelopmentinenvironmentallyfriendlysensitiveareas,
controlsoveremissionsofwasteproducts,requiringnewplantationinareaswherelogginghas
occurred,activelyprotectingthenaturalenvironmentfromthreatssuchasnonnativeplantsand
animals.
Problemsfaced:shorttermreductionineconomicgrowththatmaycausehigherpricesorreduced
supply.Certainindustriesmayfacehighercosts,whichmaymakeuslessinternationalcompetitive
missingoutonexportandgrowthopportunities.Costofrepairingenvironmentaldamageisoften
bornebytaxpayersnotthosewhohavedonethedamage.
Pollutioncontrol
Pollution:occurswhenthenaturalenvironmentisdegradedinsomewayeg:harmfulchemicals,noise
Canbesolvedbytheintroductionofanemissionstradingsystem(capandtrade,ETS,CPRS)
Externalities
Externalitiesarethesocialandenvironmentalcostsassociatedwiththeeconomicproductionthatare
notreflectedintheprivatecostsofproduction.
o Negativeexternalities:adversespillovereffects.Eg:theuseofroadinsteadofrailmaybe
cheaperbutsocialmustbearthecostofroaddamage,noiseandairpollution
o Positiveexternalities:beneficialspillovereffects.Eg:newjobopportunities
Depletionofrenewableandnonrenewableresources
Renewableresources:cannaturallyregenerateorreplacethemselvesinarelativelyshortperiodof
timebutcandepletetothepointwhentheybecomenonrenewableeg:overfishing
Nonrenewableresources:therearelimitedinsupplybecausetheycanonlybereplenishedoveralong
periodoftimeorcannotbereplenishedatalleg:fossilfuels
EconomicPoliciesand
Management
ECONOMICOBJECTIVES
ECONOMI C GROWTH
EconomicgrowthinvolvesanincreaseintheannualrateofchangeinrealGDP.Economicgrowth
offersacountrysubstantialbenefitsincluding:
o Increasedstandardoflivingforthepopulation
o Improvedjobprospectsforthelabourforce
o Opportunityforincreasedinvestmentininfrastructureandpublicservices
FULL EMPLOYMENT
Thefullemploymentoflabour
Doesnotmeanthatthereisnounemploymentratherthananeconomyisatthenaturalrateof
unemployment(therewillalwaysbeacertainlevelofnoncyclicalunemploymentintheeconomy)
Naturalratecanbereducedthroughtheuseofmacroeconomicpoliciesormicroeconomicreform
overthelongterm.
Benefitsoffullemploymentinclude:
o Maximisingtheeconomyscapacitytoproduce,andthereforemaximisinglivingstandards
o Minimisingtheadverseeconomicandsocialproblemsassociatedwithunemployment
PRI CE STABI LI TY
Referstokeepinginflation,orthesustainedincreaseinthegeneralpricelevel,atanacceptablelevel.
Doesnotmeanthatthegovernmentaimstoeliminateinflationaltogetherratheraimstokeep
inflationatasustainablelevel.
ThegovernmentandRBAaimtokeepinflationwithinatargetbandof23%overthecourseofthe
businesscycle.
Highinflationmay:
o Reducetherealvalueofincomeandwealth
o Reduceourinternationalcompetitiveness
o Causeadepreciatedintheexchangerate
o Createuncertaintyaboutfuturecosts
o Distortthepatternofresourceallocation
EXTERNAL STABI LI TY
Involvesacountrymeetingitslongtermfinancialobligationstotherestoftheworld.
Threeelements:
o Achievingasustainablepositiononthecurrentaccountofthebalanceofpayments
o MaintaininginternationalconfidenceintheAustralianeconomy(includingtheAUD)
o Maintaininganacceptablelevelofforeigndebt(bestmeasure,thedebtservicingratio)
AustraliahasalargeCADwhichcanimpactonitsabilityinmaintainingexternalstability
ENVI RONMENT
Intheprocessofachievingeconomicobjectives,economicactivitymaycreatesideeffectssuchas
pollution,resourcedepletion.
Governmentsestablishenvironmentalregulationsandobjectstoaddresssomeoftheseproblems.
Withgrowingrecognitionoftheimpactofclimatechangeoneconomicactivity,agrowingfocuson
ecologicallysustainabledevelopment.
DI STRI BUTI ON OF I NCOME
Overallobjectiveofgovernmentpolicyistocreateafairerdistributionofincomeandwealthinthe
economy.
Governmentsdonotaimtoremovealloftheinequalitiesbutmakesprovisionsforthosewhoarenot
abletoprovideforthemselves
Aimstoreducethegapbetweenhighandlowincomeearnersthroughtheredistributivetaxsystem
Recentyears,therehasbeenafocusonlowinflation,sustainedgrowthandlowunemploymentwhich
canprovidebenefitstolow,middleandhighincomeearners
GOALSOFGOVERNMENTPOLICYIN2010
SUSTAI NI NG ECONOMI C GROWTH DURI NG THE GLOBAL RECESSI ONS
AftertheGFCof2008,thegovernmentchangeditspolicysettingsfrommildlycontractionaryto
stronglyexpansionary
Consistentwithmediumtermgoalofachieving34%growth
Reducedinterestratesandincreasedgovernmentexpenditureaimedtokeeptheeconomyoutof
recessions
SUPPORTI NG EMPLOYMENT DURI NG THE GLOBAL DOWNTURN
UnemploymentfellduringtheGFC
Higherunemploymenttendstoincreasetheseverityofaneconomicdownturn
Expansionarymeasuresofthe200910budgetaimedtosupport210,000jobs
Expansionofreskillingprogramstoreducedurationofunemployment
MAI NTAI NI NG STABI LI TY AND I NTERNATI ONAL CONFI DENCE I N AUSTRALI A S ECONOMY
AND FI NANCI AL SYSTEM
Ensuringanavailabilityofcreditinthefinancialmarketssothatfinancialinstitutionscanlendsto
householdsandbusinesses
In2008,thegovernmentestablishedaschemetoguaranteetheoverseasborrowingsofAustralias
bankstosureanongoingsupplyoffinds.
Aimtoreturnthebudgettosurplusby2013announcedinthe201011budget.
AimstostrengthenlongtermconfidenceintheAustralianeconomy
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ACHI EVI NG ECONOMI C GROWTH AND EXTERNAL BALANCE

Strongeconomicgrowthoftenresultsindeteriorationinthecurrentaccountonthebalanceof
payments.Highereconomicgrowthisassociatedwithincreasedconsumptionandinvestmentwhich
willcausethevolumeofimportstoruse.
Thisisthebalanceofpaymentsconstraintandreferstothelimitationsontherateofgrowthbecause
oftheimpacthighgrowthplacesontheCAD
OTHER CONFLI CTS
EconomicGrowthvs.EnvironmentalDamage
EconomicGrowthvs.GreaterInequalityinIncomeDistribution
THEMAINPOLICIESAVAILABLEFORECONOMICMANAGEMENT
MACROECONOMICPOLICIES
Mainroleofmacroeconomicpolicyistomanagethebusinesscycle
Isdesignedtominimisefluctuationsinthebusinesscyclesothataneconomywillenjoylowratesof
inflationandunemploymentandrelativelystablegrowth
Useofgovernmentpoliciestoinfluencetheeconomywiththeaimsofreducinglargefluctuationsin
thelevelofeconomicactivityandachievingcertaineconomicgoals
RATI ONALE FOR MACROECONOMI C POLI CI ES STABI LI SATI ON AND SHI FTS I N
AGGREGATE DEMAND
Canhelpstabilisethelevelofeconomicgrowthbysmoothingthepeaksandtroughsoftheeconomic
cycle(countercyclical)
Macroeconomicpoliciesworkbychangingthelevelofaggregatedemandintheeconomysuchas
stimulatingtheeconomy(taxcutsetc.)toincreaseeconomicactivity.
Worksintheshortterm
Ineffectiveindealingwithlongertermproblemssuchaslackofinternationalcompetitiveness
MICROECONOMICPOLICIES
Microeconomicpolicyisactiontakenbythegovernmenttoimproveresourceallocationinorderto
maximiseoutputfromscarceresources(solveseconomicproblem?)
Longtermaim:addressingpotentialconstraintsongrowthsuchastheCADandinflation
RATI ONALE FOR MI CROECONOMI C POLI CI ES I NCLUDI NG SHI FTS I N AGGREGATE SUPPLY,
EFFI CI ENCY
Duetolimitedeffectivenessofmacroeconomicpoliciesinthelongterm,ashifttofocusingonsupply
sideeconomics.
Increaseaggregatesupplybyimprovingcompetitiveness,productivityandefficiencyofAustralian
industries
Theoverallaimofmicroeconomicpolicyistoencouragetheefficientoperationofmarkets.
FISCALPOLICY
FiscalpolicyisamacroeconomicpolicyinvolvingtheuseoftheCommonwealthGovernmentsBudget
inordertoachievethegovernmentseconomicobjectives.
Byvaryingtheamountofgovernmentexpenditureandrevenue,thegovernmentcanalterthelevelof
economicactivityintheeconomy;thisinturnwillinfluencegrowth,inflation,unemploymentand
externalindicators.
Macroeconomicpolicythatcaninfluenceresourceallocation,redistributeincomeandreducethe
fluctuationsofthebusinesscycle.
Donemainlythroughthefederalbudget(tableofexpenditureandrevenuefortheAustralian
government)
Historically,fiscalpolicyhasplayedasupportingroletomonetarypolicyhoweverithasbecomea
muchmoreimportantweaponsincethe2008GFC.
FEDERAL GOVERNMENT BUDGETS AND BUDGET OUTCOMES
Threepossiblebudgetoutcomes:
o Fiscalsurplus(budgetsurplus):Revenue>Expenditure
o Fiscaldeficit(budgetdeficit):Expenditure>Revenue
o Fiscalbalance(balancedbudget):Expenditure=Revenue
Twowaysofmeasuringthebudgetoutcome:
o Fiscaloutcome:(eg:budgetsurplus)iscalculatedusingtheaccrualmethodandexcludesone
offitems.Itisthebetterlongtermindicatoroffiscalpolicy.
o Underlyingcashoutcome(eg:cashsurplus)iscalculatedusingthecashaccountingmethod
andexcludesoneoffitems.Itisthebettershorttermindicatoroftheimpactoffiscalpolicy.
Oneofftransactionsareshownontheheadlinecashbudgetoutcome.
Aimtoachievefiscalbalance,onaverage,overthecourseoftheeconomiccycle.
EFFECTS OF BUDGETARY CHANGES ON RESOURCE USE, I NCOME DI STRI BUTI ON AND
ECONOMI C ACTI VI TY
Twokeyfactorswhichcanchangethebudgetoutcome:
o Changingeconomicconditions(cyclicalornondiscretionary):changesinthebudgetoutcome
duetochangesinthelevelofeconomicactivity
o Changesinfiscalpolicy(structuralordiscretionary):deliberatechangestochangesinfiscal
policysuchaschangesintaxationrates.
Alsoinfluencebyautomaticstabilisersinthebudget,thetwomainonesbeingunemploymentbenefits
andtheprogressivetaxationsystem.Theseactcountercyclicallyhowevertheeffectthattheyhaveis
notenoughtocounterthefulleffectsofaboomorrecessionbutcanreducetheseverity.The
governmentstillneedstomakediscretionarychanges.
Impactoneconomicactivity:Threestancesbeing:
o Expansionary:Whenexpenditure>revenue(comparedtopreviousyear)leadingtoan
increaseinconsumptionandstimulatedaggregatedemand.Thisleadstoanincreaseinthe
levelofeconomicactivity.
o Contractionary:whenrevenue>expenditurewhichleadstoadecreaseinconsumptionand
investment,dampeningaggregatedemandandleadingtoreducedeconomicgrowth.
o Neutral:whenrevenue=expenditure.Shouldhavenoimpactonthelevelofeconomic
activity.
Impactonresourceallocation:
o Directimpactsuchasspendingonroads.Canbeusedtoprovideresourcesthatmarketsmay
notortoprovidepublicgoods.
o Indirectimpactsuchasplacingataxonagoodorservice(cigarettes)todiscourage
consumption.Indirectmethodsareusedtochangehowresourcesareused(eg:petrol)
Incomedistribution:Progressivetaxsystemdesignedtoredistributemoneyfromtherichtothepoor.
TheintroductionoftheGSTwasreducedincomedistributionbecauseitwasaregressivetax.
Budgetarychangessuchasspendingonhealthandeducationandreducetheincomedistributiongap.
ImpactonsavingsandCAD:Budgetdeficitdecreasesnationalsavings(duetoprivatesectormoney
beingusedtofundthedeficit).Withreducednationalsavings,thiscanleadtothecrowdingouteffect
whichmeansthatthereismorecompetitionforfundsplacingupwardspressureoninterestrates.
FundsthenneedtocomefromoverseasandtheseappearontheKFAincreasingnetforeignliabilities.
LongtermdeficitscanleadtoanincreasedCAD(duetoincreasedservicingcosts).
METHODS OF FI NANCI NG DEFI CI TS
Borrowingfromprivatesector:throughtheissuingoftreasurybondsbutthiscanleadtothe
crowdingouteffect.
Borrowingfromoverseas:iftheexchangeratemeansthatitisactuallycheapercomparedtodomestic
costs.
BorrowingfromRBA(monetaryfunding):whentheRBAprintsmoneyhoweverthisleadstoincreased
moneysupplyleadingtoupwardspressureoninflationandinterestratesresultinginreduction
economicgrowth.
SellingassetssuchasthesaleofTelstra.
USE OF A SURPLUS
Thegovernmentcanuseasurplusinanumberofways.Itcaneither:
o DeposititwiththeRBA
o Payoffpublicsectordebt
o PlaceitinaninvestmentfundsuchastheFutureFund
CURRENT STANCE OF FI SCAL POLI CY
DuringtheGFC,thegovtusedheavilyexpansionarypolicytoincreaseAD.
Expansionarymacroeconomicstancewiththebudgettoremainindeficituntil2013
Cyclicalfactors:reductionintaxationreceiptsandincreaseinunemploymentbenefits
Structuralfactors:JobsandEducationprogram,stimuluspackagesincludingtheBER,DERetc
OffsetbysomesavingsinthebudgetsuchasareductioninthePrivateHealthinsurancerebatefor
higherincomeearners.
I MPACT OF RECENT FI SCAL POLI CY
Shorttermimpact:increasedADandeconomicgrowth
Longterm:externalstability,incomedistributionandenvironmentaloutcomes
Economicgrowth:KeynesianpoliciesofincreasedspendingtostimulateADhaveledtoincreased
economicgrowth(andisalsotrueforthereverse).Overthelongterm,thereisatheoryofareverse
crowdingouteffectinwhichasurplusleadstolowerinflation,interestrates,increasedinvestment.In
turnthisleadstoincreasedeconomicactivity.
Unemploymentandworkforceparticipation:StimulatingADcanhelpreduceunemploymentin
particularreducecyclicalunemployment.Longtermstructuralmeasuressuchasretrainingprograms
andpaidparentalleavecanhelptoreducestructuralunemployment.
NationalsavingsandCAD:IncreasednationalsavingscanleadtoareductionintheCAD.Thebudgetis
usedtoensurefiscalstabilitysothatthegovernmentdoesnotaddtothesavingsimbalance.
Distributionofincome:reductionininequalityisachievedduetostructuralmeasuresaswellas
specificincentivessuchastheincreaseinthepension.
MONETARYPOLICY
MonetarypolicyinvolvesactionbytheRBA,onbehalfofthegovernmenttoinfluencethecostand
availabilityofmoneyandcreditintheeconomy.
Monetaryismacroeconomicpolicythatmaybeusedtosmooththeeffectsoffluctuationsinthe
businesscycleandinfluencethelevelofeconomicactivity,employmentandprices.
Tighteningofmonetarypolicy:Higherinterestratesslowdowneconomicactivityreductionin
consumerspendingfallinaggregatedemand
Looseningofmonetarypolicy:lowerinterestratesincreaseconsumerandbusinessspending
increaseinaggregatedemandincreaseineconomicactivity.
PURPOSE OF MONETARY POLI CY
TheformalobjectivesaslaidoutintheReserveBankAct1959:
o ThestabilityofAustraliascurrencymaintaininglowinflationandminimisingfluctuationsin
thevalueoftheAustraliandollar.
o ThemaintenanceoffullemploymentinAustraliareducingthelevelofunemployment
o PromotingeconomicprosperityandwelfareofthepeopleofAustraliaencouraginga
sustainedlevelofeconomicgrowth.
Inflationtargeting:Wherethecentralbanksetsatargetrateforinflationandthenoperates
independentlyofthegovernmentindeterminingtheinterestratemovementstokeepinflationinthis
range.
I MPLEMENTATI ON OF MONETARY POLI CY RESERVE BANK OF AUSTRALI A
Monetarypolicyinvolvesinfluencingthecostandavailabilityofmoneyintheeconomy.
TheRBAmaycontrolthegrowthinthemoneysupplyintheeconomythroughitscontroloverthe
moneybaseorbyinfluencingthegenerallevelofinterestratesintheeconomybysettingtheshort
runcashrate.
DomesticMarketOperations:
o Cashrate:theinterestratepaidonovernightloansintheshorttermmoneymarket.
o
I MPACT OF CHANGES I N I NTEREST RATES ON ECONOMI C ACTI VI TY, EXCHANGE RATE
CURRENT STANCE OF MONETARY POLI CY
STRUCTURALCHANGE
EFFECTS OF MI CROECONOMI C POLI CI ES ON I NDI VI DUAL PRODUCT AND FACTOR
MARKETS AND THE ECONOMY
REGULATI ON AND DEREGULATI ON
TRADEPOLICY
DI RECT AND I NDI RECT POLI CI ES TO PROMOTE OR RESTRI CT TRADE
TRADE AND I NDUSTRY POLI CI ES I N AUSTRALI A
PRICESANDINCOMESPOLICY
REASONS FOR PRI CES AND I NCOMES POLI CI ES
POSSI BLE PRI CES AND I NCOMES POLI CI ES I N AUSTRALI A
ADVANTAGES AND DI SADVANTAGES OF CENTRALI SED AND DECENTRALI SED POLI CI ES
LABOURMARKETPOLICIES
CURRENT I NDUSTRI AL RELATI ONS FRAMEWORK
Safetynet,wagecases,enterprisebargaining,workplaceagreements,individualcontracts
Roleofthecourts,tribunalsandtheemploymentadvocate
Argumentsforandagainstthecurrentmixofmarketandnonmarketforcesusedto
determinethereturnstolabour
WORK PRACTI CES
DI SPUTE RESOLUTI ON
EDUCATI ON AND TRAI NI NG, EMPLOYMENT PROGRAMS
LIMITATIONSONPOLICYIMPLEMENTATION
TI ME LAGS
GLOBAL I NFLUENCES
POLI TI CAL CONSTRAI NTS
POLICYRESPONSESANDTHEIREFFECTSINDEALINGWITHTHEECONOMICISSUES
ECONOMI C GROWTH
UNEMPLOYMENT
I NFLATI ON
EXTERNAL STABI LI TY
DI STRI BUTI ON OF I NCOME AND WEALTH
MANAGEMENT OF THE ENVI RONMENT

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HSCEconomics2010

THE MAI N PARTI CI PANTS I N FOREI GN EXCHANGE MARKETS

REASONS FOR PROTECTI ON

DI STRI BUTI ON OF I NCOME AND WEALTH

TRENDS I N AUSTRALI A S TRADE PATTERN

FOREI GN DEBT AND FOREI GN LI ABI LI TI ES

STRUCTURAL CHANGE I N THE AUSTRALI AN ECONOMY

CAUSES AND EFFECTS

ECOLOGI CALLY SUSTAI NABLE DEVELOPMENT

ACHI EVI NG ECONOMI C GROWTH AND EXTERNAL BALANCE

CURRENT STANCE OF MONETARY POLI CY

REGULATI ON AND DEREGULATI ON

POSSI BLE PRI CES AND I NCOMES POLI CI ES I N AUSTRALI A

ADVANTAGES AND DI SADVANTAGES OF CENTRALI SED AND DECENTRALI SED POLI CI ES

EDUCATI ON AND TRAI NI NG, EMPLOYMENT PROGRAMS

POLI TI CAL CONSTRAI NTS

DI STRI BUTI ON OF I NCOME AND WEALTH

MANAGEMENT OF THE ENVI RONMENT

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