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• Gains from international trade

  • Australians prosperity depends on the world's economy and interactions w others
  • Mutual benefits: enhancing both material and non-material living standards
• Exports


  • Allow Australia to have a bigger/new market to sell to allow the taking advantage of Australia's competitive advantages
• Imports


  • Allow Australians to purchase goods and services that might not be produced in Australia
• International trade benefits


  • Lower prices
  • Greater choice
  • Access to resources
  • Economies of scale
  • Increased competition and efficiency
• Foreign trade flows


  • Financial capital flows
  • Equity transactions
  • Human capital flows
  • International transfers
• Long-term benefits of aid

  Aid in developing countries can lead to increased future economic growth and living standards for both donor and recipients countries
• Disadvantages of international trade

  • Benefits have not been shared equally between nations + individuals
  • Rise in structural unemployment associated with foreign competition leading to local business closures, as less efficient firms struggle to compete
  • Trade and specialisation have increased our global interdependence, but has also made countries more vulnerable to disruptions to international supply chains caused by global shocks
  • Environmental costs: of increased trade associated with increased from transportation of goods, as well as costs from the over exploitation of common access + non-renewable resources
• Balance of Payments (BOP)

  A statistical record of financial transactions between Australia and the rest of the world
• Accounting system of BOP


  • Credits are money earned by residents; debits are money paid overseas
  • Total credits equal total debits
• Current account


  • Net goods: difference between export credit and import debits
  • Net services: differences between service credits and service debits
  • Net primary incomes: difference between income credits and income debits
  • Net secondary incomes: difference between secondary income credits and debits
• Current account deficit (CAD)

  Debits exceed credits over a period
• Current account surplus (CAS)


  Credits exceed debits over a period
• Components of capital and financial account

  • Capital account: records net capital transfers and acquisition/disposal on non-produced non-financial assets
  • Financial account: the total value of credits for investments and lending by Australians abroad, minus total value of debits for investments and lending by Australians abroad
  • Net direct investment: inflows from foreign investment in Aus - Aus investment abroad
  • Net portfolio investment: difference in transactions of foreign and Aus shares, debits, and securities
  • Net financial derivatives: value of financial contracts credits - debits
  • Net reserve assets: RBA and government dealings in foreign currencies, gold, and IMF contributions
• Net errors and omissions

  Reflect inaccuracies in BOP calculations
• Influences on current account balance

  • Cyclical influences: short-term aggregate demands factors
  • Domestic conditions: stronger local spending weakens the current account, weaker spending strengthens
  • Overseas conditions: stronger foreign demand strengthens the current account, weaker demand weakens it
  • Structural influences: long-term aggregate supply factors affecting costs and competitiveness
  • Production costs: rising costs weaken the current account: lowering costs strengthen it
  • National savings gap: high overseas debt from savings investment gap weakens the current the account
• Net international investment position

  Measures Australia's net international financial obligations, comprising net foreign liabilities (NFL)
• Net foreign debt


  Represents totals borrowing from foreign lenders minus lending to foreign borrowers (total value of debt owed to foreigners - total value of debt owed by foreigners to Australians)
• Net foreign equity


  Measures net equity obligations from obligations from foreign ownership of Aus assets and Aus ownership of foreign assets (total value of Aus assets owned by foreigners - total value of foreign assets owned by Australians)
• Reasons for public and private borrowing

  • Public sector borrow: gov borrow overseas to finance budget deficits
  • Private sector borrowing: includes companies and banks, accounting for around 70% of Aus overseas borrowing
• Causes of high net foreign debt and net foreign equity

  • Lack of domestic savings: aus now reliant in borrowing, contributing to high NFD and interest rates
  • Budgets deficits
  • Foreign investment opportunities: ais natural resources attract foreign investment →increased extreme liabilities economic capacity
  • Lower value of the AUD: lower purchases of of ours assets cheaper
• Benefits of high net foreign debt and net foreign equity


  Finance for future expansion + access to cheaper credit
• Costs of high net foreign debt and net foreign equity

  Economic hardships, burden of debt repayment, credit rating risk, weakened current account balance
• Terms of Trade (TOT)


  Measures the ratio of the average price the world pays Australians exports against the average price Australian pays for imports
• Favourable TOT


  Occurs when export prices rise faster or fall slower than import prices
• Unfavourable TOT


  Occurs when export prices slower or fall faster than import prices
• Measurement of TOT


  Export price index/import price index x 100
• Lower export prices relative to import prices


  Decrease AD and economic activity
• Higher export prices relative to import prices

  Increase AD and economic activity
• Factors affecting Australia's TOT


  • Changes in global demand
  • Economic growth rates among trading partners