VCAA Economics Australia and the international economy

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.

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.

Answers may include:

Foreign assets:

• foreign assets are the value of Australian ownership of overseas assets and Australian lending to overseas residents
• Australian residents lend money overseas (debt) or purchase foreign assets (equity) (Australian investment abroad)
• when Australian residents invest overseas, this increases Australia's foreign assets.

Foreign liabilities:

• foreign liabilities are the stock of domestic assets owned by overseas residents (foreign equity) and the total amount of money Australia borrows from overseas residents (foreign debt)
• Australian residents borrow from overseas (debt) or sell assets such as shares to foreign residents (equity)
• when foreign residents invest in Australia, this increases Australia's foreign liabilities.

International investment position (IIP):

• the IIP measures the stock of Australia's foreign financial liabilities and foreign financial assets at a point in time. The difference between foreign financial liabilities and foreign financial assets is referred to as Australia's net IIP
• Australia's IIP was a liability of ＄836.6b at 31 December 2023
• all of Australia's net foreign liabilities are in the form of foreign debt.

Costs of foreign investment:

• short term portfolio investment can be speculative and therefore destabilising. May be withdrawn at any time – interest rates are a key factor
• 'selling' of Australian assets, foreign ownership can lead to a loss of control
• outflow of primary income through dividend payments and repatriated profits.

Benefits of foreign investment (FI):

• FI can supplement national savings and close a savings-investment gap
• FI can be used to fund domestic investment, increasing AD and GDP
• FI increases productivity and capacity – production possibilities increase by increasing stock of physical capital leading to an increase in AS
• development of Australian industries and resources, e.g. mining
• foreign direct investment can bring new technology and managerial expertise, e.g. USA, UK and Japan invest in Australia and their skills and knowledge can improve efficiency resulting in an increase in AS
• foreign firms establishing subsidiaries may increase employment which promotes economic growth through an increase in income and spending which may lead to an increase in government taxation revenue.