Few Questions (1 Viewer)

[Sparcod]

Hi.
I need some help here from past papers.

1. What is the relationship between CAD and net foreign debt and liabilities?
2. Why does the Capital/financial account surplus equal to the current account deficit under a floating exchange rate?
3. Why are subsidies the preferred over tariffs?
4. Outline the relationship between economic growth and unemployment. (4)
5. Outline one advantage and one disadvantage of low inflation.

Also, is there anything else I can do this late?
Thanks for all help.

 

[P_Dilemma]

Hi.
I need some help here from past papers.

1. What is the relationship between CAD and net foreign debt and liabilities?
2. Why does the Capital/financial account surplus equal to the current account deficit under a floating exchange rate?
3. Why are subsidies the preferred over tariffs?
4. Outline the relationship between economic growth and unemployment. (4)
5. Outline one advantage and one disadvantage of low inflation.

Also, is there anything else I can do this late?
Thanks for all help.

1/ Foreign liabilities consist of foreign debt + foreign equity. Both are registered as debits in the CA part of the BOP.

2/ Supply of $A: represented by imports (M), income transfers to oversead (Y debit) and Capital/Financial outflows (K out)

Demand for $A: represented by exports (X), Y credits and K inflows

In floating exchange market, Supply$A = Demand $A

which implies: M + Y debits + K outflow = X + Y credits + K innflow

Rearrange: M - X - Y debits = K inflow - K Outflow

Deficit on current account = Surplus on KAS

3/ Subsidies > Tarrifs? Really?

4/ You would probably know this already, just link the relationships and concepts in economics altogether.

5/Advantage: Prices kept relatively low
Disadvantages: Disincentive to spend money

Other things to do: Keep asking yourself these questions, but try to search for the answers yourself.

-P_D

 

[MoonLiteDreamz]

hehe I'll try to answer these questions... at least try. haha

1. ... TBC... (I dunno how to explain that...)

2. under a floating exchange rate,
Demand for AUD = Supply for AUD
Demand for AUD = M + Y debt + K outflow
Supply for AUD = X + Y Credit + K inflow.

and when u re-arrange the equation. it becomes
M - X + Y Debt - Y Credit = K inflow + K outflow
CAD = Capital and financial account

3. Subsidies are preferred because basically subsidies don't rise the price of the product while tariff does. Therefore using subsidies will benefit consumers as the prices are cheaper (or did not rise from the tariff)...

4. ugh.. lol I'll see what others say...

5. Adv: improve standard of living as everything's cheaper
Disadv: I dunno. haha.

Man I suck >_<

 

[zedzed]

1. foreign debt and liabilities incur servicing repayments. these are recorded on the net income component of the current account.

2. i hope you didn't get this question from a past hsc paper :S i'll attempt to explain it.

under a floating exchange rate the supply of AUD is equal to the demand for AUD.
supply = M (because aust pays for our imports using AUD) + Y debits (we transfer money overseas) + capital and financial outlow
demand = X (overseas demand AUD to pay for exports) + Y credits + capital and financial inflow

M + Y debits + capital/financial outflow = X + Y credits + capital/financial inflow
.: M - X + Y debits - Y credits = capital/financial inflow - capital/financial outflow
.: CAD = KAFAS

3. subsidies lower prices so they don't cause inflation. the govt is also more likely to remove subsidies because it's a cost to them, whereas tariffs are a form of revenue. tariffs don't necessarily make domestic industries more competitive but subsidies actively help them become more competitive.

4. just briefly: as an economy grows more factors of production are needed in order to support growth. economic growth means that more labour will be demanded which will have the effect of decreasing cyclical unemployment. however, in the aust economy the predominant cause of unemployment is because of structural problems. this means that even if economic growth leads to greater demand for labour, those who are unemployed may not have the skills to be employable. (is there such a word?)

5. adv: higher sustainable economic growth because of low inflationary expectation which will assist business investment and consumer spending.
disadv: OOPS, what i wrote before was VERY wrong.

 

[MoonLiteDreamz]

zedzed.. I'm not sure. for q 5.. would economics growth generally decrease in a low inflation?

OO.. I know. low inflation, high unemployment... Phillips curve.. dun ask me why haha.

and.. question 3.. both the tariff and subsidies help industries to become internationally competitive.. artificially. Because one is artficially decreasing the price of dom. product, the other is artificially increasing import price...? hmm.. lol

 

[babiisapphire]

ill try the last 3

Why are subsidies the preferred over tariffs?
Subsidies are cash payments to producers, its an expense to the govt. so they would be more likely to review the need for it. Tariffs on the other hand is a revenue creator so they wont review it as much.

Outline the relationship between economic growth and unemployment.
During periods of ec. growth aggregate demand is high. Consumers have rising incomes. They are able to purchase more g/s. Since labour is a derived demand employment is created. Thus economic growth reduces the level of unemployment. However if ec. growth is excessive, inflationary pressures start to arise. Workers would demand wage rises to compensate for the loss of thier real Y. Labour becomes too costly. Firms shed labour replacing workers with technology. Thus unemployment.

Outline one advantage and one disadvantage of low inflation.
Adv- low inflation increases Australia's international competitiveness
Disadv- low inflation is a good thing!

 

[zedzed]

zedzed.. I'm not sure. for q 5.. would economics growth generally decrease in a low inflation?

OO.. I know. low inflation, high unemployment... Phillips curve.. dun ask me why haha.

and.. question 3.. both the tariff and subsidies help industries to become internationally competitive.. artificially. Because one is artficially decreasing the price of dom. product, the other is artificially increasing import price...? hmm.. lol

if there is no inflation at all then that will obviously constrain growth but a low inflation environment is ideal for growth. the reason australia has been able to maintain years of sustained economic growth is because of our low inflation record. it is also the reason why govts around the world now target inflation over other objectives.

tariffs just mean that overseas goods are a little dearer on our market. if our domestic industries still aren't competitive then they're not going to be able to compete with these firms anyway, despite the tariffs. take the agriculture industry for example. why are they so heavily subsidised? because countries in the EU are just not competitive in this area. even if there were high tariffs domestic producers will still not be able to survive. but subsidies provide them with funds to allow them to continue producing, etc. that was a shit explanation because i don't really understand it myself. all i know is that subsidies are supposed to be better.

 

[MoonLiteDreamz]

Subsidies are better because like u said before, it doesn't put upward pressure on inflation, where tariffs do. tarrifs push import price, which means the equlibrium price will be higher than before. thus consumers will have to pay more for the same product.. etc... lowing living standard..

About eco growth... My teacher told us. For australia to have a sustained economics growth while still maintain low inflation (...) is quite rare actaully. It should all thanks to the high global price for commodity and china's cheap manufactured ETM imports.

But generally, low inflation is a sign of low eco growth. from what I see. Because low inflation occurs either due to the supply end (imports are cheap) which is bad for eco growth as it means our dom. production is very difficult to compete with the cheap imports. or due to the demand end, where the Aggregate demand is low. low AD usually means low eco activity and low eco. growth rate..?

 

[del pietro]

i have a question regarding the relationship between inflation and unemployment..
I know stagflation is the term used to identify a simultaneous increase in inflation and unemployment.. but what is the term to describe them simulaneously decreasing?? which is what the Australian economy has managed to achieve..

 

[MoonLiteDreamz]

I think so. stagflation is for both increase and decrease..

 

[Sparcod]

Disadvantage of low inflation: for wealth-holders, borrowers since real value of loan is stable.

 

[zedzed]

no, stagflation just means high inflation and unemployment at the same time.

i don't think there's a term for low infation and unemployment - good economic management perhaps?

 

[onebytwo]

high inflation is good for the government if its in a net debt position, right?

also, can someone clarify the relationship between inflation and exchange rates.
i dont know if i got it right.
high inflation means a depreciation because consumers import more from overseas which represents increased supply of $A..is that the main reason?
low inflation means exports are more competitve since costs of production are lower for domestic industries, :.more exports means more demand for $A
​

 

[onebytwo]

another question,
how do we interpret the overall macroeco. management at the moment
because the RBA is tightening (contractionary) but the federal gov. is handing out tax cuts (expansionary)
also, i dont get the difference between the natural rate of unemploymenty and the NAIRU, if there is a diff.
thanks

 

[mitsui]

NAIRU is just another word for it



btw, does "disadvantage of low inflation" means "disadvantage of deflation"??? =@

 

[Sparcod]

natural rate of unemployment is unemployment when there is no inflation.