here it is: 2001 Specimen paper Q27
Q: Discuss possible government responses to changes in the global economy that have affected Australias trade and financial flows.
With increased intergration with the global economy resulting in tremendous growth in Australias trade and financial flows, the exchange of goods, services and finances are an important aspect of Australias economy. Being a small country dependant on trade, changes in the global business cycle can have large impacts on Australias domestic economy and it is important that the government responds to minimise the damaging impacts of these fluctuations. Possible government policies to achieve this are fiscal, monetary and microeconomic reform.
The Current Account is a key indicator of Australias performance against the rest of the world. The major components of a Current Account are exports, imports, net services and the net income generated by assets. These are a current record of transactions through which trends and impacts can be analysed.
For example recently there has been a major economic downturn beginning with the Wall Street collapse of 2000. Although Australia being an importer of technology wasnt directly adversely affected by the burst of the technological bubble, it sparked a downturn in the global economy. As a result Australian exports where no longer in demand and export growth slowed (contributing -3% to economic growth in 2001-02). This was reflected in the Goods balance where imports outstripped exports resulting in a Goods deficit where previously it was a surplus. Other global factors with September 11, war on Iraq and SARS compounded this loss of global consumer confidence especially in the service export of tourism. Global interest rates where low in an attempt to kick-start the global economy. This encourages domestic firms to borrow from overseas resulting in an increase in Australias already large foreign debt (no idea how much), which in turn increases servicing costs of net income. These factors combined have led to a huge blowout in the CAD of 5.7% (2002-03), which is beyond a sustainable range.
The major impacts of these changes are a decrease or constraint on economic growth and increasing levels of debt. In response the government stimulates the economy through expansionary fiscal and monetary policy, as well as repays public debt through a fiscal surplus. In the long term, the government can use microeconomic reforms to improve productivity as well as raise the levels of national savings.
Fiscal policy is the use of an annual budget to affect the level of economic activity in an economy. A deficit budget where government expenditure exceeds government revenue represents an injection into the economy, raising the level of aggregate demand (C+I+(G-T)+(X-M)). This encourages greater output, expanding the productive capacity of the economy and has a multiplied effect on the level of national income. Greater domestic demand however, will also increase demand for imports leading to a worsening in the Current Account Balance. Also a deficit must be financed and if this is done by borrowing overseas, the government increases the level of foreign debt and subsequent net incomes. Alternatively, the government could have a budget deficit where revenue exceeds expenditure and the surplus from the budget can pay off public debt, yet this will contract the economy instead of encouraging growth.
Monetary policy functions in a similar manner through the manipulation of interest rates. A low interest rate facilitates the expansion of an economy because it encourages borrowing for consumption and investment. For example a low interest rate lessens the mortgage repayments giving the average household more disposable income with which to consume. The lower interest rate however, may encourages spending beyond our means whereas a higher interest rate would raise the levels of national savings.
As can be seen in the two macroeconomic policies, economic growth and national savings are conflicting economic goals. Thus the government uses a policy mix to approach these goals. For example in face of the recent global recession, the government has had a expansionary stance on monetary policy, with a consistent cash rate of 4.75% to stimulate the economy and maintain within the growth target of 3-4%. During this time, the government balanced excess growth with budget surpluses, which were also used to repay public debt. In 2001-02 to 2002-03, this fiscal policy has been loosened to provide additional mild stimulus to the economy.
In the long run, microeconomic reforms must be used to improve the allocative efficiency of the economy. By achieving this, the greater potential in the resources being used can be realised for greater levels of national income. Greater efficiency will make our products more competitive in the global markets improving the Goods balance and in turn reducing foreign debt and debt servicing costs. Reforms that have aided this are the floating of the Australian dollar to a more realistic price; the trade and industry policy to lower trade barriers and increase competitiveness; the national competition policy to encourage efficiency in Public Trading Enterprises; compulsary superannuation to raise the levels of national savings. All these are structural changes aimed at increasing the technical, allocative and dynamic efficiency of the Australian economy allowing it to compete on a global scale. The costs of microeconomic policy are short term such as structural unemployment from inefficient industries after protection is lowered, or investors caught out by the depreciation of the Australian Dollar when it was first floated.
Thus while the government uses macroeconomic policies to smooth the cyclical impacts of fluctuations in the global economy, these policies are difficult to effectively implement due to a conflict in economic objections. Thus it is used in conjunction with microeconomic reforms, such that in the long run, Australia can benefit from global intergration without being impacted too heavily on by changes in the global economy.
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I absolutely hate this topic. I really don't like the way i've handled the question. I mean ive just talked about the global business cycle without anything about the composition or direction of australia's flows. Yet i have no idea how to fit it in. Plus im not even sure if the first bit on CAD is even relevant to the question. What does everyoneone else think and how would yous have answered the Q?
Q: Discuss possible government responses to changes in the global economy that have affected Australias trade and financial flows.
With increased intergration with the global economy resulting in tremendous growth in Australias trade and financial flows, the exchange of goods, services and finances are an important aspect of Australias economy. Being a small country dependant on trade, changes in the global business cycle can have large impacts on Australias domestic economy and it is important that the government responds to minimise the damaging impacts of these fluctuations. Possible government policies to achieve this are fiscal, monetary and microeconomic reform.
The Current Account is a key indicator of Australias performance against the rest of the world. The major components of a Current Account are exports, imports, net services and the net income generated by assets. These are a current record of transactions through which trends and impacts can be analysed.
For example recently there has been a major economic downturn beginning with the Wall Street collapse of 2000. Although Australia being an importer of technology wasnt directly adversely affected by the burst of the technological bubble, it sparked a downturn in the global economy. As a result Australian exports where no longer in demand and export growth slowed (contributing -3% to economic growth in 2001-02). This was reflected in the Goods balance where imports outstripped exports resulting in a Goods deficit where previously it was a surplus. Other global factors with September 11, war on Iraq and SARS compounded this loss of global consumer confidence especially in the service export of tourism. Global interest rates where low in an attempt to kick-start the global economy. This encourages domestic firms to borrow from overseas resulting in an increase in Australias already large foreign debt (no idea how much), which in turn increases servicing costs of net income. These factors combined have led to a huge blowout in the CAD of 5.7% (2002-03), which is beyond a sustainable range.
The major impacts of these changes are a decrease or constraint on economic growth and increasing levels of debt. In response the government stimulates the economy through expansionary fiscal and monetary policy, as well as repays public debt through a fiscal surplus. In the long term, the government can use microeconomic reforms to improve productivity as well as raise the levels of national savings.
Fiscal policy is the use of an annual budget to affect the level of economic activity in an economy. A deficit budget where government expenditure exceeds government revenue represents an injection into the economy, raising the level of aggregate demand (C+I+(G-T)+(X-M)). This encourages greater output, expanding the productive capacity of the economy and has a multiplied effect on the level of national income. Greater domestic demand however, will also increase demand for imports leading to a worsening in the Current Account Balance. Also a deficit must be financed and if this is done by borrowing overseas, the government increases the level of foreign debt and subsequent net incomes. Alternatively, the government could have a budget deficit where revenue exceeds expenditure and the surplus from the budget can pay off public debt, yet this will contract the economy instead of encouraging growth.
Monetary policy functions in a similar manner through the manipulation of interest rates. A low interest rate facilitates the expansion of an economy because it encourages borrowing for consumption and investment. For example a low interest rate lessens the mortgage repayments giving the average household more disposable income with which to consume. The lower interest rate however, may encourages spending beyond our means whereas a higher interest rate would raise the levels of national savings.
As can be seen in the two macroeconomic policies, economic growth and national savings are conflicting economic goals. Thus the government uses a policy mix to approach these goals. For example in face of the recent global recession, the government has had a expansionary stance on monetary policy, with a consistent cash rate of 4.75% to stimulate the economy and maintain within the growth target of 3-4%. During this time, the government balanced excess growth with budget surpluses, which were also used to repay public debt. In 2001-02 to 2002-03, this fiscal policy has been loosened to provide additional mild stimulus to the economy.
In the long run, microeconomic reforms must be used to improve the allocative efficiency of the economy. By achieving this, the greater potential in the resources being used can be realised for greater levels of national income. Greater efficiency will make our products more competitive in the global markets improving the Goods balance and in turn reducing foreign debt and debt servicing costs. Reforms that have aided this are the floating of the Australian dollar to a more realistic price; the trade and industry policy to lower trade barriers and increase competitiveness; the national competition policy to encourage efficiency in Public Trading Enterprises; compulsary superannuation to raise the levels of national savings. All these are structural changes aimed at increasing the technical, allocative and dynamic efficiency of the Australian economy allowing it to compete on a global scale. The costs of microeconomic policy are short term such as structural unemployment from inefficient industries after protection is lowered, or investors caught out by the depreciation of the Australian Dollar when it was first floated.
Thus while the government uses macroeconomic policies to smooth the cyclical impacts of fluctuations in the global economy, these policies are difficult to effectively implement due to a conflict in economic objections. Thus it is used in conjunction with microeconomic reforms, such that in the long run, Australia can benefit from global intergration without being impacted too heavily on by changes in the global economy.
-------------------------------------------------------------------------
I absolutely hate this topic. I really don't like the way i've handled the question. I mean ive just talked about the global business cycle without anything about the composition or direction of australia's flows. Yet i have no idea how to fit it in. Plus im not even sure if the first bit on CAD is even relevant to the question. What does everyoneone else think and how would yous have answered the Q?
