Zane's Notes

Economics Seminar Notes

Zane Fitzgerald, Oct 01, 2023

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Exam

  • Important to focus on Section 3

  • Section 3 has the lowest mean out of all sections in the exam

  • Questions are actually straightforward

  • Mainly focused on information retrieval

  • Most Common/key Verbs

    • Explain
      • You start off with defining, and then explain, Do not just list things, in a question that has “explain” as the commanding word, e.g;
        • explain 3 factors of current account balance dont just list them, thats minimum marks
    • Describe
      • Define then add some characteristics You must always define the concept that you use, prior to anything else. e.g. What is the Current Account

  • In a Describe, you must explain, dicuss, define etc.

    • Pop in some examples too

  • in unit 3, you must revise the Demand and Supply Model, you likely cant use an AD/AS or AE model etc.#seminar-icons

    • Revise the labelling on this old models

  • On axis for Exchange Rate Supply Demand Model;

    • Explicitly state price of Australian Dollers,
    • quantity of australian dollers etc. not just $AUD and “Quantity”, otherwise they mark u down

Unit 3

They can not ask all 7, there is a maximum of 4 in the exam. The most important

These ones are pretty much always on the exam.

Global Trade

Pattern Of Trade

use this when talking about australias imports & exports

  • Expors & Imports
    • Accounts for 50% of GDP
    • Exports = 28%
    • Improts = 21%
    • increased ovre time
  • Top three partners
    1. China
    2. Japan
    3. United States
  • Main Exports
  1. Iron Ore
  2. Coal
  3. Natural Gas
  • Imports
    1. Refined petrol
    2. Motor Vehicles
    3. Freight

Comparative Advantage

  • Uses Production Possibility Frontier
  • Example question: country b has a comparative advantage in iron ore, it is 3x mroe efficient in iron ore, it is much less comparatively advantaged in coal.
  • When figuring the rate of exchange (in country A, 1 coal exchanges for 2 iron ore typa question)
    • Pick one in the middle, e.g. Terms of Trade if one country exchanges 1 coal for 4 iron ore, then 1 coal trades for 3 iron ore or 1 iron ore trades for 0.33 coal.#seminar-icons
  • We can use demand supply modelex to sshow exports & imports
    • When a coutnry exports the world price is above the domestic price, meaning quantity supplied is more than quantity demanded
      • Producer Surplus Increases
      • Consumer Surplus decreases
      • Total Surplus Increases
    • When a country imports the world price below domestic price, therefore domestic quantity supplied is less than domestic quantity demanded
      • Producer surplus decreases
      • Consumer Surplus increases
      • Total Surplus Increases This means there is a net benefit either way, you talk about both improts and exports in a benefits of trade.#econs-seminar
      • e.g. real income increases, etc.

Protection - Tariffs & Subsidies

Balance of Payments

Trade Balance

  • Write down three examples of australian commodities (our main export)
  • Increases in commiditty pries -> increase value of exports -> increas the Trade Balance.
  • Commodity prices is a cyclical factor
  • If world economic growth increases (especially china), -> Increase in Exports & increase in Trade Balance
    • has something to do with China being a cyclical factor lmao)#econs-seminar

Ceteris paribus;

  • Increase in Consumption will cause imports to increase & trade balance will decrease
  • Investment increase, imports will increase therefore trade balance will decrease Cyclical Factors
  • Australia’s Growth rate is cyclical
  • Movements in exchange rate is cyclical Structural Factors

review/revise cyclical and structural factors#econs-seminar

  • Savings Investment Gap

    • If Investment is grater than Savings 100% do have deficit
    • obv opposite applies see, this for proof of cab = S-I gap

  • Reason for the CAB Surplus

    • COVID caused Recession
      • Savings Increases due to economic uncertainty
      • therefore, S was greater than I
      • Causing a CAB Surplus

  • If Australia started to grow faster, Investment would rise, making Investment greater than Savings

    • Pushing us back to deficit
    • We are still in a CAB surplus for now, prob wont last

  • Reasons for Trade Surplus

    • Record levels of Commodity Levels
    • Low Australia Dollar (~mid 60s)

  • Key question: why does AUS have a Current Account Surplus#econs-seminar ^^^ see above for why

  • Why has the trade balance increased (See graph in paper)

    • Same reasons as Trade Surplus

  • Income Balance

    • Interest Payments
    • Dividend Payment

  • Why has the income balane increased up to Sep 21

    • Economy is in recession therefore;
    • Companies do not pay out dividends to foreign investment
    • Incoem balance approaches zero as investment decreases due to low dividends.

  • Why has the income b

  • Sep 22 - Highest income deficit in Australia

    • This is good, since it represents investment

  • Why is income balance always negative

  • Trade balance overtook Incoem balance to create Savings Investment Gap giving CAS (double check)

Review - 2022 exam

Part a, question, we are receiving money still.

  • Recorded in financial account not current acount since we are selling a asset Answer is c

  • In the Terms of Trade graph;

  • Oil will affect Import Price Index

Practise the Terms of Trade graph in the booklet#econs-seminar

Why has terms of trade risen since 2020

  • 48% rise in export prices from 2020 to 2023

  • Rise in Import prices, but export prices rose a greater proportion

  • Four factors effecting Terms of Trade

    • Commodity Prices <— Obvious one (XPI Factor)

    • Could talk about oil prices (MPI factor)

    • Freight Prices (MPI Factor though maybe both)

    • Agriculture Price resulting from drought (MPI Factor)

    • Ukraine war (MPI Factor)

    • China Supply

  • Four effects of a rise in the terms of trade

    • Appreciation of Exchange Rate
    • Increase in the Trade Balance
    • Increase Aggregate Demand (why)
    • Increase GDP/national income An increase in the Terms of Trade is very positive for hte economy

Exchange Rate

  • What has happened to the $AUD in relation to the Trade-Weighted Index

    • This is mostly gonna covcern, china, japan, and the euro, since they are the main currencies the TWI is weighted against, know them.#econs-seminar

  • Factors driving the $AUD

  • Effects of a depreciation/appreciation

  • March 2022 13% full, $US 0.75 -> TWI 63.6

  • May 2023: $USD.0.65; TWI 60.1 6% against the TWI

  • Sicne TWI is an average, its less volatile then the actual currency changes.

  • something else abotu this

  • refer to pics

  • Imports Effect Supply, increase in improts causes a Shift to the right in the Supply Curve.

    • Include a fake number. e.g. 0.65

  • Simple questions show the shift on the curve that influences the dolalr changing.

Interest Rates on the Exchange Rate

  • A fall in Australian Interest Rates (Interest Rate Differential), causing a fall in the Interest Rate Differential, moving both of the curves to shift.

    • This causes the Supply curve to shift to the right
      • There is more AUd in the market for some reason
    • Demand curve will shift to the left
      • less demand for investment since other countries are comparatively better.

  • Why has the AUD fallen despite high commodity prices

    • Interest Rates in the US have risen much mroe than us
Depreciation

Foreign Investment

The buying and selling of Financial Assets.

  • Includes;
  • Debt & Equity
  • Borrowling & Lending
  • Assets Write Foreign Invesmtnet, not Investment this could cause entire response to get 0 marks
  • Investment refers to capital ivnestment,
    • an Increase in Interest Rates decreases capital investment
  • Where as in foreign investment
  • This differentiates them

Foreign Investment heavily relates to the Savings Investment Gap Foreign Ivnestment benefits te econonomy by;

  • Filling I-S gap
  • Developing Aust’s mining industry
  • Promoting technology transfer
  • Increasing real GDP and employment
  • Increasing Aust’s net wealth & living stds.

Foreign Ivnestments and the Balance of Payments

See graph on booklet

  • Net Foreign Liabilities has declined significantly recently
    • Net foreign equity is negative, therefore it’s actually a asset (when negative is asset)

revise Net foreign liabilities, mainly the terminology#econs-seminar

Unit 4

All topics discussed.

  • All models discussed obviously
  • AD/AS model is the key model
  • Extended answer probably going to beon;
    • AD/AS Model
    • Fiscal Policy
    • Monetary
    • something involving the multiplier
      • AE Model is best to show off the multiplier
  • Structural Change & productivity is largely seperate to the others.

The Busienss Cycle

  • Indicators of T.B.C;

    • GDP
    • Unemployment
      • Indicated by opposite of Real GDP, rising Real GDP indicates lowering Unemployment
    • Inflation The AD/AS Model shows changes in all COVID = biggest demand & supply shock in the past century

  • The longest phase in the business cycle is the expansion phase.

  • Current Phase: Boom (prob approaching peak)

    • Unemployment: <4% Below
    • Inflation: High
      • Capacity of economy reached
    • GDP:

  • Lookign at Real GDP as a line graph, looks linear, as real gdp generally increases.

  • Looking at % change in GDP shows us more detail into the business cycle

Key Indicators
  • Real GDP growth rate
    • 2.3% (March 2023)
      • It is below target due to reaching economic capacity (not enough labour)
        • Will decrease further as economy slows.
  • Inflation Rate
    • 7% (March 2023)
  • Unemployment Rate
    • 3.5%
      • .5% below Full Employment.
        • Likely to increase in the future as the economy slows.
  • Cash Rate
    • 4.1%
  • Exhcnage Rate
    • 0.66AUD/USD
      • Depends on com. prices. and Interest Rate Differential in the near future.

For Busienss Cycle Question: AD/AS For Multiplier: AE

Still practise showing either in both. they may ask to show multipler in AD/AS just to throw you off

Aggregate Expenditure Model

  • Equilibrium occurs where Total Spending = Total Production
    • If this is not true, then a change in inventorieso ccurs
  • If spending < output, ivnentories increase & output will decrease.
  • See AE Components

The Multiplier

  • Can be evaluated as
  • Or from the Multiplier Formula.
  • also can get the MPC from Multiplier Value but subbing into equation

Effect of change on the AE Model

  • If there is a change in Real GDP
    • There is a movement along the AE Line, there is no shift in the curve

AD/AS Model

  • AD is downwards sloping because AD/AS model includes the price level

  • Factors of production

    • Labour
    • Capital
      • Technology / Technological advancemenets
    • Costs of Production

  • is equal to Potential GDP

  • Production Costs are not linked?#econs-seminar <--- check that

Shifts on AD/AS Model

  • Iron ore prices increase - Usually, in most econoies SRAS decreases, as increased Iron ore prices means costs of production rises - In Australia manufacture is a much lesser proportion of GDP, Iron ore prices increase cause AD increase as our NX increases, since we sell lots of iron ore.
  • Share prices fall
    • AD decreases (confidence fall in investors)
  • Productivity Increase
    • SRAS & LAS increase
  • Govt. Investment Increases
    • AD increases

Government / Private Investment leads to increase in “Capital stock”, which is linked to aggregat esupply. thus all 3 curves move to the right, since it improves capital stock, which therefore improves capital stock This is why ”investment is the driver of growth”

Increase in AD: - Real GDP increase - Inflation Increase - Uenemloyment decrease

What is the effect of a derease in SAS

  • Real gdp decrease

  • Ifnlation Increase

  • Unemloyment increase

  • Recovery from recession results in;

  • Massive increase in AD compoennts

  • SRAS decrease

    • Oil price bottleneck
    • resultign in a SRAS decrease
    • look at minhs on elater#econs-seminar

Fiscal Policy

Tools of Fiscal Policy

must mention both of these.

Financing a Deficit

Transclude of block methods-to-finance-a-deficit-boarba
Main method is: 1; Selling government Bonds

  • The government can gain the revenue they need to spend.
  • Private Sector gets guarranteed bonds.
  • Government Pays Interest but
    • Private Sector spends that as consumption, so is re-injected into the economy.
  • (crowdingo ut is issue)

The Budget Balance

  • Usually around 25% <— i think mabe heard that wrong (but looks accurate from graph)

  • Giant red spike in the budget balance graph (on booklet) is due to COVID

  • 2022/23 Surplus?????? <----

    • I Double checked, this si the predicated surplus for the curren tyear 2022/23

  • We shuld have a massive surplus in 2022/23, but we have a very small surplus

    • This is due to bad fiscal policy, (excess government spending causing inflationary pressure)

  • Why did spending increase so much in 2022-23

    • Mainly due to Automatic Stabilisers,

      • (could’ve reduced by cutting certain things? maybe)

  • Fiscal Policy can affect the SAS & LAS curve

  • Increases in government investment increase the capital stock & shift the AS curve to the right

  • An increase in govenrment spending on education & training will increase productivity & shift AS curve to the right

  • Reducing income tax rates can increase the labour supply and shift the AS curves to the rigth.

Monetary Policy

Monetary Policy is go to Essay Question;

  • Cash Rate from 0.1% in April 2022 to 4.1% in june
  • Contractionary Monetary Stance

Influence Aggregate Demand (AD) curve

  1. Increases the cost of borrowing
  2. Increase loan repayments
  3. Decrease Asset Prices
    • Asset Prices have inverse relation to asset prices
  4. Appreciate the exchange rate

Graph Desc: When the economy is above potential GDP, Mon. Raises interest rates to decrease AD, thereby reducing inflation.

Exchange Rate / Interest Rates Relationship

The AUD exchange rate & the Itnerest Rate have a very strong relationship.

Comparing Fiscal & Monetary Policy

  • Whih policy is best to use to stbilise the business cycle?
    • Both
  • Which policy works best in a contraction?
    • Fiscal
  • Which policy works best in a boom?
    • Monetary
  • Which policy is the most direcT?
    • Fiscal
  • Which policy the most flexible?
    • Monetary
  • Which policy hast eh shortest effect lag?
    • Fiscal
  • Which policy has the shorest decision lag?
    • Monetary

Structural Change & Productiy

out of booklet graph, the most significant change is;

  • Manufcturing
    • 1981 = 14% of output
    • 2023 = 6% of Output
    • Due to : Aging population
  • Services
    • Due to improvements in technology
  • Mining
    • Due to Globalisation, and improvements in Technology

I guessed which ones apply to each specifically above ^^^, the oens on the slide are:

  • Globalisation
  • Technology
  • Ageing population
  • Climate Change

Productivity

  • Why is producitivty important
    • Its the main way to icnrease real income and living standards.
      • Only other things that can increase GDP per capita / real income (they’re the same) is a favourable Terms of Trade.

Use a simple example to show how productivity might change as a result of something?

Labour Productivity consists of;

  1. Capital Deepening - Increases K/L Ratio
    • Capital Investment that gives worker capital to make them mroe productive
  2. Multifactor productivity - improving qualtiy of lbour
    • Education, make people better at what they do.

Government can improve productivity b focusing on the above, by investment into stuff

Questions

  • Will producitivty shift both curves?
    • Productivity shifts both curves, and leads to higher real wages,
      • (probably improves multilier effect since he said it will influence consumption in the long-run)
  • Tax Reform will influence productivity, but not too much.)

Graph View

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