SCSA Economics Economic knowledge and understanding

expansionary/expansion phase/upswing/recovery

＄90bn

Answers could include:

• increased net exports
• lower unemployment leading to higher household income and higher consumer spending
• increased AD: government, consumer, investment spending, increased exports.
• expansionary monetary and fiscal policies.

Answers could include:

• RBA would use expansionary monetary policy and lower the cash stance to stimulate economic activity
• The lower cash rate will stimulate economic activity via the transmission mechanism.
• This will increase GDP, lower unemployment, increase consumption and investment spending and lower AUD, causing increase in exports
• There is consideration of the multiplier and a clear reference to the model.

Answer(s) could include:

Tariff diagram:

• price – Y axis, quantity – X axis
• tariff originally set to raise price in market and raise government revenue eliminated
• domestic supply falls, imported supply rises
• domestic consumption expands.

Tariff explanation and short-term effects:

• reduction in price for consumers and expansion in domestic consumption
• switches consumption from domestic producers to imports
• decrease the cost for domestic producers if an imported capital item
• domestic suppliers sell less for less
• possible reduction of government revenue from tariff
• reference to DWL and market effects (CS, PS, TS).

Subsidy diagram:

• price – Y axis, quantity – X axis
• supply curve shifts to the left for domestic suppliers (decrease)
• increased gap between local supply and local demand
• price remains at world price
• domestic consumption is unchanged.

Subsidy explanation and short-term effects:

• increased domestic costs as subsidy removed
• lower competitiveness against imports
• decreased domestic production
• imports increase
• reduction of Government subsidy cost.
• reference to DWL and market effects (CS, PS, TS).

Longer term effects of tariff elimination:

• reduction in retaliatory tariffs
• less Government revenue for spending in other areas
• increase in economic output and employment through increased free trade
• structural change in the economy as resources such as labour shift from uncompetitive trade exposed industries to competitive industries
• higher national income.

Longer term effects of subsidy elimination:

• efficient producers are advantaged
• decreased burden on the tax payer
• promotes innovation in the economy
• government expenditure can be re-allocated to more effective areas of social need.

Answers could include:

Definition of foreign liabilities:

Foreign liability – foreign debt:

• the stock of foreign borrowing where Australian residents (public and private) have borrowed from the rest of the world
• most of Australia's net foreign debt consists of private debt, incurred by companies with the profit motive in mind and has been beneficial in raising living standards.
• Government bonds issued to foreign residents and the borrowing by Australian firms from overseas institutions are examples of Australian foreign debt
• foreign debt comprises of 63% of foreign investment
• foreign debt accounts for all of Australia's net foreign liabilities
• most of Australia's foreign debt is private (approximately 74%).

Foreign liability – foreign equity:

• the stock of Australian assets owned by foreign residents
• there is a distinction between direct and portfolio investment with a clear description and example of each
• equity involves the selling of assets (shares of companies, resources) to overseas residents
• equity comprises a small proportion of foreign investment
• foreign direct investment is when a foreign investor acquires more than 10% of an Australian company resulting in a significant influence over that enterprise and is thus associated with either ownership/control of the asset.

Influence on the current account:

• the Australian current account records income flows associated with foreign liabilities. Often, the large primary income deficits in the current account are associated with the servicing costs linked to these foreign liabilities

Answers could include:

Savings-Investment Gap

• Foreign investment supplements domestic savings (I-S Gap)
• Australia normally runs a CAD because I>S to offset the Current account surplus

Mining Sector

• foreign investment into industries such as mining has generated growth in new mining infrastructure, employment, and export revenue for Australia
• technology transfer, management, marketing, other knowledge transfers
• has allowed new high-capital industries to be established
• higher foreign ownership

Balance of payments

• Foreign investment is recorded in the primary income account of the current account
• costs of servicing debt.

Macroeconomy

• Increasing economic growth
• Increasing employment
• increased government revenue via taxes, royalties, etc. have funded government infrastructure, welfare expenditure etc.
• multiplier effect from productive investment, increasing GDP
• improvements in productivity and efficiency.