Eco Analyses (Impacts)

Impacts of global trade fows

Resources in economy will shift towards increasing the production of the
good or service that is experiencing increased demand e.g. mining boom
Decline in overseas demand for good or service or if imports tae a higher
proportion of the domestic maret! producers may cease production and
economy will shift production away from that item e.g. vehicle
manufacturing
"rends in the direction of trade can also have impact e.g. increasing
priority on relationship with #hina therefore $"As etc.
Impacts of global fnancial fows
Rapid and large shifts in the value of exchange rates have more
signi%cant to %nancial marets than to the real economy short term but in
the medium to longer term can have substantial e&ect.
A&ects con%dence. "o some extent! the value of currency is seen as
indication of overseas con%dence in the economy's future. (hen money
)owing out and exchange rate falling! can weaen domestic con%dence
and slow rate of economic growth. *igher interest rates may help stabilise
%nancial )ows short term but liely to reduce level of real economic
activity in the medium term.
(hen large currency movements occur! %nancial marets can become
destabilised. +enders may be reluctant to loan further funds unless
borrowers pay higher interest rates.
Factors that STRENGTHEN the
international business cycle
"rade )ows
Investment )ows and investor
sentiments
"ransnational corporations
$inancial )ows
"echnology
,lobal interest rates
International organisations
Factors that WEAKEN the
international business cycle
Domestic interest rates
,overnment %scal policies
-ther domestic economic policies
Exchange rates
.tructural factors
Regional factors
Advantages of free trade
Allows countries to obtain goods and services that they cannot produce
themselves
Allows specialisation to improve e/ciency. "his leads to better allocation
of resources and increased production.
Encourages the e/cient allocation of resources because countries have a
comparative advantage.
Economies of scale lowers average costs of production.
International competitiveness will improve as domestic businesses face
Eco Analyses (Impacts)
greater competitive pressures from foreign producers.
Encourages innovation and spread of new technology and production
processes.
*igher living standards as a result of lower prices! increased production
and increased consumer choice.
Disadvantages of free trade
Increase in short term unemployment may occur as some domestic
businesses may %nd it hard to compete with imports. In the long term! as
the domestic economy redirects resources to areas of production in which
it has comparative advantage! the rise in unemployment should correct
itself.
0ew industries may %nd it more di/cult to establish themselves.
1roduction surpluses from some countries may be 2dumped' (sold at
unrealistically low prices) on the domestic maret which may hurt e/cient
domestic industries.
Impact of globalisation
*igh income and newly industrialised economies have gained from fast
economic growth and closer relationships built on increased trade and
investment )ows.
Expected convergence of economic performance but last decade has
actually shown a divergence of growth trends.
$oreign indebtedness (Africa)! exchange rate volatility (+atin America) and
%nancial integration (in)exibility of the common euro currency) may
destabilise or constrain economic growth.
Impacts on economic development mainly via economic growth3 lift in
economic growth rate raises income levels and provides more resources
for education and health care! and for programs to clean up the
environment but also causes income ine4uality to increase and causes
damage to natural environment.
Consequences of High CAD
,rowth of foreign liabilities so lenders might become more reluctant to
lend to or invest in Australia.
Increased servicing costs could lead to 2debt trap' (borrowing money
simply to service existing foreign liabilities)
Increased volatility for exchange rates as high #AD may undermine the
con%dence of overseas investors in the Australian economy! reducing
demand for A5D. .hort term worsen #AD problem as prices of imports
increase.
#onstraint on future economic growth also nown as balance of payments
constraint.
6ore contractionary economic policy however in short to medium term!
Eco Analyses (Impacts)
the combination of tighter macroeconomic policies and accelerated
microeconomic reform is liely to slow down economic growth and raise
unemployment.
.udden loss of international investor con%dence could trigger a ma7or
crisis e.g. ,reece.
Appreciation of echange rate
!ositive e"ects
Increased 2purchasing power'
Decreases the interest servicing
cost on Australia's foreign debt
Reduce the value of foreign debt
that has been borrowed in foreign
currency
In)ationary pressures reduced
due to imports becoming cheaper
#egative e"ects
Exports more expensive
Encourages import spending and
worsens the #AD
+ower %nancial in)ows because
more expensive unless expects
A5D to continue rising
Reduces value of foreign income
earned on Australia's investments
abroad as well as foreign assets
(nown as 2valuation e&ect')
Depreciation of echange rates
!ositive e"ects
Exports become cheaper
therefore more competitive!
leading to an increase in export
income and improve #AD in
medium term
Discourages import spending
Increases value of foreign income
earned on investments abroad
and foreign assets
,reater %nancial in)ows unless
investors expect currency to
continue falling
#egative e"ects
Reduced 2purchasing power'
Increases interest servicing cost
on foreign debt
Raise dollar value of foreign debt
borrowed in foreign currency
In)ationary pressures will
increase as imports more
expensive
Implications of reduction in protection levels on FI$%&
+ess competitive individual %rms in marginal! import8competing industries
will shrin
.ectors of economy may die out e.g. vehicle manufacturing and
manufacturing in general because relatively low silled labour is re4uired
and we can't compete with the lower wage costs of industrialising
economies e.g. #hina.
Restructuring their operations with aim of staying in business or focus on
one particular aspect of production
.purs innovation and productivity growth through increased competitive
pressure
Eco Analyses (Impacts)
+ower input costs for many %rms! maing export %rms more
internationally competitive
,lobal resources boom in recent years has seen Australia shift bac to a
heavily commodity8focused export base
.ubstantial overall growth in export volumes
Implications of reduction in protection levels on I#DI'ID(A)&
,ains and losses distributed unevenly
#an experience substantial dislocation! particularly through increase in
unemployment associated with restructuring of industries and cuts in local
production
Import8competing industries are concentrated in particular regions so
unemployment in these areas climbed dramatically9 also relatively low8
silled 7obs so structural unemployment
+onger term! the lost employment opportunities should be more than
recouped by the growth experience by sectors that are e/cient and
internationally competitive
Improved living standards3 greater variety! higher 4uality
Implications of reduction in protection levels on *+',$#%,#-&
Reduction in government revenue
6ay a&ect levels of government spending because has to assist the
structural ad7ustment process and provide %nancial support
1olitical conse4uences because generally unpopular with wider
community due to short term e&ects
"herefore better to phase out
Impact of international protection levels on Australia
Australian exports less competitive and will struggle to penetrate foreign
marets
1articular disadvantage as result of protectionist policies of other nations
and trading blocs e.g. E5 has heavily subsidised agricultural production
6ining and resources sector more liely to face export restrictions to
secure energy supplies for domestic economy
$or manufacturing industries! there are non8tari& barriers e.g. technical
restrictions and licensing act that are disguised barriers
.ervice industries arguably face the most prohibitive barriers but are
simply natural barriers caused by geography! language and cultural
di&erences etc. Also regulations or foreign ownership restrictions!
licensing laws and rules relating to government procurement
Impacts of unemployment
Economy's resources are not being used to full capacity therefore
operating below production possibility frontier and total output is below
Eco Analyses (Impacts)
what it could be therefore lower household income and expenditure! lower
sales and pro%ts! higher unemployment levels! reduced business
investment! production and employment
0ot contributing to production process so reduction in economy's living
standards
Decline in labour maret sills for long term unemployed. In this way
cyclical or short term unemployment can turn into long term structural
employment! nown as hysteresis.
+ess tax revenue and more transfer payments as well as funding training
and labour maret programs so decreases government revenue
Excess of supply of labour so slower wage growth
Increased ine4uality because tends to occur more fre4uently among lower
income earners
#rime! social isolation! debt! homelessness! family tensions and
breadown! boredom! loss of sills! self esteem! poor health! psychological
disorders. 6ore resources directed towards dealing with these social
problems.
,"ects of infation
6ain constraint on economic growth
Distorts economic decision maing because producers and consumers
change spending and investment decisions to minimise e&ect on
themselves therefore low in)ation is better because it removes distortion
to investment and savings decisions
*igher in)ation also distort consumers' decisions to spend or save
disposable income
0ominal wage demands during high in)ation due to eroded purchasing
power therefore wage8price in)ationary spiral
0et wealth decline
*igher levels of in)ation result in more contractionary %scal and monetary
policies therefore slower economic growth and higher unemployment
*igher in)ation results in increased prices for exports! reducing
international competitiveness and 4uantity of exports
*igh in)ation cases currency to depreciate over time
.ustained low in)ation may foster greater international con%dence in
economy! strengthening value of dollar
+ower in)ation normally brings about reductions in nominal interest rates
since they are based on real rate of returns plus in)ation. *igher in)ation
usually results in higher interest rates as R:A tries to reduce demand
pressures
,conomic e"ects of inequality
.enefts
6ainly derived from incentive
Costs
Reduces overall utility
Eco Analyses (Impacts)
e&ects
Encourages increased education
and sill levels
(or longer and harder
6ore e/cient allocation of
resources due to higher mobility
Entrepreneurs accept riss more
readily
1otential for higher savings and
capital formation
(satisfaction)
Reduce economic growth
Reduces consumption and
investment
2conspicuous consumption' i.e.
higher income earners buy
expensive stu& for displaying
wealth
1overty and social problems
Increases cost of welfare support
&ocial e"ects of inequality
.enefts
*igher levels of saving or
productivity
Encourages hard wor! ris8taing
and social mobility
Costs
Ine4uality of opportunity
.ocial class divisions
poverty
Conficts in government policy ob/ectives
simultaneous reduction in unemployment and in)ation
achieving economic growth and external balance i.e. balance of
payments constraint which refers to limitation on rate of growth from
impact of high growth on #AD
environmental damage and greater ine4uality in income distribution
policies aimed at long term goals often involve signi%cant structural
change and substantial costs in shorter term e.g. higher unemployment
so often focus on shorter term due to political considerations
Impacts of fscal policy
Economic activity3
8 Expansionary3 increase level of activity through reduction in taxation
revenue and;or increase in government expenditure to stimulate
aggregate demand and multiplied increase in consumption and
investment
8 #ontractionary3 decrease activity through increase in taxation
revenue and;or decrease in government expenditure to dampen
aggregate demand and multiplied decrease in consumption and
investment
8 0eutral3 maintain gap between revenue and spending at same level
as previous year! no e&ect
Resource use3
8 ,ovt. spending in particular area of economy where marets will not
provide resources 4uicly enough without government intervention
e.g. natural disaster9 or public good.
Eco Analyses (Impacts)
8 .peci%c taxing and spending policies e.g. to discourage consumption
of products without banning e.g. tobacco
Income distribution3
8 "axing e.g. if reduce tax rates at upper end of income scale or
increase rate of ,."! less progressive
8 Reductions in spending on community services or transfer payments
also widen ine4uality
.avings and #AD3
8 :udget de%cit decreases national savings! therefore upward pressure
on interest rates and private sector investment will be 2crowded out'
8 "win de%cits theorem i.e. budget de%cit means more in)ow of funds
from overseas for investment and to %nance investment which
increase the si<e of foreign debt! increase debits on income
component of current account therefore increased #AD
Impact of changes in interest rates
#hanges demand for credit
6onetary policy3
8 "ighten3 upward pressure on interest rates! dampen consumer and
investment spending! lower economic activity! lower in)ation!
possibly higher unemployment
8 +oosen3 downward pressure on interest rates! boost consumer and
investment spending! higher level of economic activity! falling
unemployment! increased in)ation
Impacts of microeconomic reform
.hort term costs3 7ob cuts! subsidies withdrawn! ine/cient industries
closed down
+ifted productivity growth due to greater )exibility and incentives to
improve production processes and business management
,reater economic activity and lower unemployment! higher living
standards
+ower in)ation because of the greater competitive pressures
.enefts
,reater e/ciency and
productivity growth
0ew business and 7ob
opportunities
*igher economic growth and
living standards
+ower in)ation
Costs
*igher unemployment in short
term
#losure of ine/cient businesses
,reater wor intensity
+ess e4ual distribution of
income