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• Gains from international trade

  • Increases access to resources, enabling higher production and living standards
  • Increases specialisation, competition and efficiency, and living standards
  • Promotes greater economies of scale production and living standards
  • Boosts GDP, jobs, incomes, and living standards
  • Increases consumer choice and living standards
  • Keeps consumer prices lower, improving living standards
• 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 a country and the rest of the world
• Accounting system of BOP


  Credits are money received by residents, debits are money paid overseas
• BOP always balances because every dollar spent abroad by a country is matched by a dollar earned from abroad
• Components of the current account

  • Net goods
  • Net services
  • Net primary incomes
  • Net secondary incomes
• Current account deficit (CAD)

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


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

  • Capital account
  • 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 a country abroad minus the total value of debits for investments and lending by that country abroad
• Components of the financial account

  • Net direct investment
  • Net portfolio investment
  • Net financial derivatives
  • Net reverse assets
• Net errors and omissions

  Reflect inaccuracies in BOP calculations
• Influences on current account balance

  • Cyclical (demand) influences
  • Structural (supply) influences
• Cyclical (demand) influences


  Short-term aggregate demand factors affecting net exports
• Structural (supply) influences


  Long-term aggregate supply factors affecting costs and competitiveness
• Net international investment position


  Measures a country's net international financial obligations, comprising net foreign liabilities
• Net foreign debt (NFD)

  Represents total borrowing from foreign lenders minus lending to foreign borrowers
• Net foreign equity (NFE)

  Measures net equity obligations from foreign ownership of a country's assets and the country's ownership of foreign assets
• Causes of Australia's high net foreign debt

  • Lack of domestic savings
  • Budget deficits
  • Foreign investment opportunities
  • Lower value of the Australian dollar
• Benefits of foreign debt

  • Finances future expansion, enhancing productive capacity, GDP, and employment opportunities
  • Provides access to cheaper credit, reducing production costs
• Costs of foreign debt

  • Economic hardship: higher taxes, reduced government spending, economic contraction
  • Burden of debt repayment for future generations
  • May lose AAA credit rating, resulting in higher borrowing costs
  • Interest repayments abroad weaken the current account balance
• Terms of trade (TOT)

  Measures the ratio of the average price the world pays for a country's exports against the average price the country pays for imports
• More favourable TOT


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


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


  Export price index/import price index x 100
• Factors affecting Australia's TOT


  • Changes in global conditions of demand
  • Changes in global supply
  • Impact of exchange rate
• A fall in TOT


  Decreases the current account balance, by increasing the current account deficit or decreasing the current account surplus as the value of imports outweighs exports
• A rise in TOT

  Strengthens the current account balance by reducing the current account deficit or increasing the current account surplus
• Impact of TOT on macroeconomic goals

  • Economic growth: rise in TOT increases value of export sales, boosting injections and strengthening aggregate demand. A fall however leads to reduced production, hindering economic growth.
  • Unemployment: fall in TOT=reduced production, leading to decreased demand for labour, increasing cyclical unemployment. A rise = opposite.
  • Inflation: fall in TOT = reduces aggregate demand and pressure on prices, slowing demand inflation. A rise = initially inflation may remain stable due to unused capacity, over time increased demand may slowly push up inflation.
• Impact of TOT on living standards

  • A fall in TOT: reduces national income, decreasing average incomes and purchasing power. Leading to reduced consumption + weaker economic growth. Higher unemployment = increased stress, unhappiness, and social isolation.
  • A rise in the TOT: raises incomes = enhancing material living standards. Lower unemployment = opposite.
• Exchange rate


  Measures the price or value of a country's currency when it is swapped for other currencies
• Trade weighted index (TWI)

  The averaged value of a country's currency compared to a weighted basket of foreign currencies of its trading partners
• Floating exchange rate


  The equilibrium price for a country's currency is decided in the foreign exchange market by currency buyers and currency sellers
• Demand for the Australian dollar


  • Paying for Australian exports
  • Paying primary income to Australians who own overseas assets
  • Money transfers from foreign countries to Australia (secondary income)
  • Foreigners investing directly or through portfolio investment in Australia
  • Foreigners lending money to Australians
• Depreciation


  The Australian dollar buys less foreign currency, caused by decreased demand or increased supply of the Australian dollar
• Appreciation


  The Australian dollar buys more foreign currency, caused by increased demand or decreased supply of the Australian dollar
• Factors affecting the exchange rate

  • Relative interest rate and capital flows
  • Terms of trade (TOT)
  • Currency speculation and credit rating
  • Relative rates of inflation
  • Demand for and supply of exports and imports
• Effects of changes in the exchange rate

  • Demand side effects: Increased price competitiveness for non-price taker exporters, Higher relative price competitiveness for import competing businesses, Overall, net exports increase, boosting aggregate demand and economic growth.
  • Supply side effects: Higher costs for imported inputs and capital goods, Increased production costs, potentially reducing aggregate demand and economic growth. Demand side impact of depreciation generally outweighs the negative supply side impact.
  • Inflation effects: Demand inflation - Lower AUD stimulates export demand, raising aggregate demand and potential demand inflation. Higher AUD reduces demand inflation by decreasing aggregate demand. Cost inflation - Lower AUD increases costs of imported goods, contributing to cost inflation. Higher AUD lowers production costs, reducing cost inflation.
  • Economic growth effects: Lower AUD boosts aggregate demand through increased net exports, accelerating economic growth. Higher AUD slows aggregate demand, reducing economic growth.
  • Employment effects: Lower AUD boosts aggregate demand, increasing production and reducing cyclical unemployment. Higher AUD slows aggregate demand, increasing cyclical unemployment.
  • Living standards effects: Lower AUD can improve living standards by boosting aggregate demand, employment, and incomes. Higher AUD can improve purchasing power but may reduce economic growth and employment, negatively impacting living standards.
  • Current account balance effects: Lower AUD strengthens the balance on goods and services by boosting exports and reducing imports. Higher AUD weakens the balance on goods and services by reducing exports and increasing imports.
• International competitiveness


  • Competitive selling prices
  • Attractive non-price factors such as product quality, quality of consumer service, and innovation