UNIT 3 Economics Year 12 ATAR
Define 'Globalisation'
"The freer movement of goods, services, people, investments and ideas around the world" Refers to the opening of international borders to the flows of trade, workers, tourists and investment.
World trade in goods increased from $10 Trillion to?
$16.5 Trillion
How is the CAD measured? What is it's goal percentage?
% of GDP, less than 5%
Cross elasticity of demand formula
%∆Qa Eab= -------- %∆Pb
Income elasticity of demand formula
%∆Qd Ey= -------- %∆Y
Define 'Competitiveness'
'The degree to which a country can produce goods and services which meet the test of international markets while maintaining and increasing the real incomes of its people' ie. a measurement of how a country can keep up with foreign producers and consumers without neglecting its own people.
What could be an argument for Globalisation?
- Access to wider variety of merchandise - Lowers prices of goods - Increases economic growth -Raises living standards -Enables access to foreign investment -Increases multiculturalism
What determines Trade Competitiveness?
- Real Unit Labour Cost -Trade Weighted Index -Inflation -Changes in wages (RULC) -Economic performance -Business and government efficiency (productivity) -Level of infrastructure
What has helped the world undergo globalisation?
-Economic growth of countries -Multinational Corporations -Increased interdependence -Higher prices for agricultural goods -Presence of GATT, IMF, WTO -Improved transport and communication
What are some characteristics of an imperfect market?
-a small number of firms -product differentiation -price-setting firms -barriers to entry
What are some factors affecting price elasticity of demand?
-availability of substitutes -whether the good is a necessity or a luxury -the proportion of income spent -time
What are the four types of market failure?
-common property goods -public goods -negative externalities -monopoly or oligopoly power
What are some barriers to entry?
-control of a scarce resource -a government license granting a legal monopoly -technological advantage -patents -product differentiation -economies of scale (large setup costs) -collussion (illegal)
What are some non-price factors affecting supply?
-cost of production -technology -price of other goods -number of sellers -expectations of producers
What are some non-price factors affecting demand?
-level of disposable income -tastes and preferences -expectations of consumers -price of related goods -demographic factors
What are some government policies that reduce efficiency?
-market restrictions -price controls (floor/ceiling) -taxes -subsidies (in certain industries)
When do imperfect markets exist?
-there is a small number of firms -firms have market power -firms use product differentiation -barriers to entry exist
What are some factors affecting price elasticity of supply?
-time -nature of the industry
What are the steps to comparing advantage?
1) Production possibility table 2) Opportunity cost table 3) PPF curve 4) Before specialisation (countries independently producing both) table 5) After specialisation (each country only producing one item) table 6) Table of what each country has after trading
By what percentage of Australia's GDP is from Exports?
20%
How many Australian workers are involved in Trade?
22% of the population
By what percentage of GDP does Tourism contribute to worldwide?
30%
By how much has exports increased by between 1991-2015?
350%
What is the theory behind the J-curve?
A depreciation will at first make the trade deficit larger, but long term will make us more competitive and hence make it smaller again
Free good
A good which is not relatively scarce
What is trade protection?
A government action that gives local producers an artificial advantage in the production of a product over another
Economic model
A model which illustrates the economic problem
What 4 factors facilitate globalisation?
Advancement in tech, multi-national corporation, trade liberalisation, financial integration
Ceteris paribus
All other things being equal
Law of increasing cost
As more of a product is produced, the per unit opportunity cost of producing that product increases
Explain the cheap foreign labor argument, and disprove it.
Aus can't compete with cheap labor in other countries. Aus has more efficient workers, with better tech and capital
Explain the favorable balance of trade argument, and disprove it.
Aus has a trade deficit, and this could be eliminated with protection. Trade deficits aren't bad - both imports and exports are beneficial for the economy.
Explain the diversity argument, and disprove it.
Australia should keep its industries diverse, as those industries may become internationally competitive later. It requires protecting the industries in some way.
What are international 5 gains from free trade?
Better allocation of world's resources, higher world GWP, equalisation of resource prices, higher income and living standards, lower prices of G&S
Name the current THREE largest economies
China, Germany, United States
What are our 4 top trading partners?
China, Japan, USA, Korea
Who are 5 losers in depreciation?
Consumers, importers, overseas travellers, debtors, industries
What are the two roles of an economic system?
Distribute income and allocate resources
What 7 things is globalisation characterised by?
Economic, technological, media, migratory, political, cultural, and legal changes
What are 6 factors impacting international competitiveness?
Exchange rates, world economic growth, domestic economic growth, relative inflation rate, interest rate differential, productivity
Between 1991-2015, how much has World Export as % of GDP increase by?
From 20% to 30% between 1991 and 2015
What are 8 positive economic effects of globalisation?
Higher growth, higher material living standards, higher tax revenue, lower inflation, higher levels of employment, filling the investment-savings gap, political co-operation, multi-culturalism
What are 5 linkages between economies?
Immigration & emigration, trade, foreign investment, and tourism
What are domestic 5 gains from free trade?
Increased output and employment, increased quantity and quality of G&S for consumers, greater allocative efficiency, lower consumer prices, encourages innovation
Explain the infant industries argument, and disprove it.
Infant industries can't become internationally competitive without protection. The industry becomes used to no competition, and so doesn't develop, and can't compete when the protection is removed anyway
What are the 7 arguments against free trade called?
Infant industries, diversity, anti-dumping, national defense, higher employment, cheap foreign labor, favourable balance of trade
What are the 6 factors effecting the exchange rate?
Interest rate differential, commodity prices, overseas growth, movements of the ToT, relative inflation rate, domestic economic growth
What are 2 structural factors for the CAD? What do these majorly effect?
Investment, savings - basically the investment-savings gap The income balance
What are our 3 major exports?
Iron ore - 20% Coal - 11.5% Education related travel - 5.4%
What is the terms of trade? What is the formula for the Terms of Trade?
It compares the relative movements of prices of exports and imports of a country. ToT = (export price index / import price index) x100
What are 2 negative economic effects of globalisation?
Loss of national and economic sovereignty, gains not shared evenly
Explain the anti-dumping argument, and disprove it.
Other countries 'dump' their unsold stocks by selling it at an insanely low price on the international market, and driving out competition. It's difficult to prove it's happening.
What are our 3 major imports?
Personal travel - 8.4% Passenger motor vehicles - 6.3% Refined petroleum - 4.3%
Explain the higher employment argument, and disprove it.
Protection would shift consumer spending from foreign to domestic, and raise employment in those industries. Those industries that have died out here aren't efficient, and all of that employment could be more efficiently used in other industries
Explain the national defense argument, and disprove it.
Some industries may be vital to have domestically in case of wartime emergency, and should be protected. It's hard to identify which industries we should protect, and also war is fairly rare now - trade fosters international co-operation
What are 4 kinds of trade protection? Explain what they are.
Tariff: a tax on an imported good Subsidy: a grant paid to a local producer by the gov Embargo: a ban on imported goods Quota: a limit on the quantity of an imported good that can enter a country
What is an unfavourable movement in the ToT?
The ToT decreases. The MPI rises faster than the XPI, or the XPI falls faster than the MPI
What is a favourable movement in the ToT?
The ToT increases. The XPI rises faster than the MPI, or the MPI falls faster than the XPI
What is comparative advantage?
The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
What is absolute advantage?
The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
Labour
The human effort required to produce goods and services
Enterprise
The resource which represents the ideas and skills necessary to create products.
Market economy
The type of economics system in which the price system allocates resources
Opportunity cost
The value of the next best alternative
What 4 assumptions must be made when comparing advantage?
There are only 2 countries; there are only 2 products; all resources are fully mobile (applicable to any product); and all resources are fully utilised
What are 3 international flows?
Trade flows, financial flows, and worker flows
Economic problem
Unlimited wants but limited resources - this creates scarcity.
What are the four questions an economy must answer?
What to produce, how to produce, how much to produce and for whom to produce
What are economies of scale?
When output is more than input
What are 5 cyclical reasons for the CAD? What do these majorly effect?
World economic growth, exchange rate (appreciation), Terms of trade, commodity prices, domestic (home) economic growth The balance of trade
Substitute
a good that can be consumed in place of another good.
Inferior good
a good that consumers demand less of when their incomes increase
Normal good
a good that consumers demand more of when their income increases
Complementary good
a good that is used together with another good
Collective boycott
a group of competitors agree to not acquire goods or services from, or not supply goods or services to, a business with whom the group is negotiating
Collusion
agreements between firms, reduces competition and increases profits
Externality
economic side effect that affects an uninvolved third party. Can be negative or positive
Who are 5 winners in depreciation?
farmers, miners, overseas visitors and our tourism industry, investors, manufacturers
Subsidy
government payment to encourage or protect a certain economic activity
Production Possibility Frontier
illustrates the trade-offs facing an economy that produces only two goods (illustrates the economic problem)
Predatory pricing
pricing competitors out of the market, even at a loss. Walmart did this in Germany in 2001. They were forced to up prices and left the German market place as a result in 2006.
Consumer surplus
the difference between how much buyers are prepared to pay for a good and what they actually pay
Producer surplus
the difference between the current market price and the cost of production for the firm
Scarcity
the economic problem of having unlimited needs and wants with only limited means to satisfy them
Equity
the fair distribution of society's production. Efficiency increases the size of the economic pie but equity is concerned with equally dividing it for all of society.
Market sharing
the market is divided into smaller markets, reducing competition
Tax
the money that people and businesses pay to support the activities of the government
What is a movement in supply or demand?
the price moves up or down along the curve, the curve remains constant
Resale price maintenance
the producer sets a resale price for the seller
Deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
Income elasticity of demand
the responsiveness of demand to a change in income
Cross elasticity of demand
the responsiveness of quantity demanded of one good to a change in price of another good
Price elasticity of demand
the responsiveness of quantity demanded to a change in price
Price elasticity of supply
the responsiveness of quantity supplied to a change in price
Merger
two or more firms join together- horizontal integration. best example is John D. Rockerfeller and Standard Oil Co.
Cartel
when firms work together instead of competing
Exclusive dealing
when one person trading with another imposes some restrictions on the other's freedoms to choose with whom or where they want to deal. Toys'R'Us has tried to do this with Mattel to attempt to be a sole retailer of Mattel products.
What is a shift in supply or demand?
where the entire curve shifts, changing the amount demanded or supplied and creating a new equilibrium. Caused by non-price factors.
Price elasticity of demand formula
∆Qs ∆P Ed= −− ÷ −− Qs P
Price elasticity of supply formula
∆Qs ∆P Es= −− ÷ −− Qs P