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Devine Educational Consultancy Services

HSC Economics
Overhead Masters

By Karen Devine

devineconsult@optusnet.com.au
Updated May 2008.

This book is intended for exclusive use in NSW

Secondary Schools.
It is meant to follow the NSW Board of Studies
Syllabus for the 2 Unit HSC Economics Course.
Copying of the articles within this book is
permitted for educational purposes only by the
purchasing institution.

CONTENTS

Pages

1. The Global Economy

4 31

2. Australias Place within the Global Economy

32 - 67

3. Economic Issues

68 - 122

4. Economic Policies and Management

123 - 183

Topic One
The
Global
Economy

The Global Economy exists when national economies

become more closely linked with each other.
Globalisation is a feature of modern markets becoming
more integrated with each other.
Changes in the economy of one nation can significantly
affect another nation.
Some economic commentators are calling it coupling
if one economy is heavily linked to another nation. Eg:
USA and China.
The aggregate (total) value of goods and services in the
global economy is known as Gross World Product.
Transnational
corporations (TNCs)
are businesses which
are established in
many nations.
TNCs often establish
different stages of the
production process in
other countries. Eg:
manufacturing and
packaging.

Global trade in goods and services has grown to nearly

20 times the level of the 1950s.
FINANCIAL FLOWS.
Global financial arrangements have
increased in recent years.
Most nations have deregulated their
financial markets allowing ease of
monetary flows.
Yet, movements of finance around the
world have an effect on:
a) Exchange rates
b) Trade
c) Investment
d) Economic growth
The impact of financial flows on the global market can
be evidenced in the sub-prime mortgage disaster in the
USA in 2007-2008.
INVESTMENT.
Global investment also occurs as a result of the
globalisation process.
Foreign Direct Investment (FDI) involves funds being
directly invested in economic activity in another nation
or in the purchase of foreign businesses.

In Australia the regulation of this sort of investment is

done by the Foreign Investment Review Board (FIRB).
Investment in foreign nations can be direct, speculative
or financial.
The internet has facilitated much of the worlds trade
and investment.
Also, the USA receives a majority of the worlds income
from royalties and licensing fees for the use of computer
technology.
LABOUR.
People as labour units are also affected by globalisation
as they migrate around the world for work.
Yet, people are not as geographically mobile as goods
and services due to:
a) language barriers
b) family and social links
c) immigration restrictions
d) terrorism fears
e) skills barriers
f) educational barriers
g) cultural concerns

In recent years global trade has changed with regards to its:

a) size
b) composition
c) direction
The composition of trade is the mix of goods and services which
nations exchange with each other.
Presently, there is significant world trade in:
a)
b)
c)
d)

Simply Transformed Manufactures (STMs)

Elaborately Transformed Manufactures (ETMs)
Commodities
Services

In the modern world Newly Industrialised Countries (NICs) are

seeing an increase in their share of world trade.
Yet, there are barriers to free trade within the world. These
barriers are in the form of:
a) trading blocs
b) protectionism.
Any change to the pattern and direction of trade can
significantly affect the income and standard of living of a nation
and hence its GDP.
Furthermore, changes to demand for exports can affect the
investment decisions a nation makes.

Economic activity is never constant.

The ups and downs of economic activity
are known as the business cycle.
The causes of fluctuations in the business
cycle are changes in aggregate demand
and supply.
Over time economies will experience:
a) strong economic growth (booms)
b) weak or negative economic growth
(recessions)
c) economic slowdowns (downturns)
d) economic strength (upswings)
Individual economies go through these cycles and due to
globalisation, one nation can influence the economic cycle of
another.
Many factors may have significant impact on the global
business cycle such as:
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)

Trade flows
Investment decisions of nations
Multinational business decisions
Technology
Global interest rates and interest rate differentials
International organisations and their decisions
Government policies
Exchange rates
Structural changes
Regional issues.

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The Forex Market is the foreign

exchange market.
The market is established for the
buying and selling or exchange of
foreign currency.
The value of currency is expressed in
terms of another. Eg: 1 $AUD buys
$0.94 US.
The value of currency is determined by:
a) the demand for the currency by holders of another
currency
b) the supply of the currency by holders of that
currency.
The value of the currency influences the cost of trade,
investment and borrowings of nations.
The participants in the forex market include:
a) traders (people exporting and importing)
b) investors (those buying assets in another nation)
c) speculators (those speculating in the movement of a
currency in order to profit from buying and selling it).

11

Free trade occurs when there are no artificial barriers to

trade imposed by governments.
Free trade implies a free exchange of goods and services
between nations.
The principle of comparative advantage is the basis of a free
trade argument.
Comparative advantage means that countries should
specialise in the production of goods or services in which they
are most efficient at producing. (Most efficient = lowest
opportunity cost.)
Hence, each nation should then trade the good or service in
which it has a comparative advantage.
ADVANTAGES OF FREE
TRADE
Specialisation.
Efficient resource allocation.
Economies of scale.

Promotion of international
competition.
Promotion of innovation.
Increased standards of living.

DISADVANTAGES OF FREE
TRADE
Unemployment rises as
inefficient businesses fail.
New businesses find it difficult
to start up.
Some countries have the ability
to wipe out their foreign
competition by severely
undercutting prices and
DUMPING their goods on
foreign markets.

12

Protection is government action which is taken to give

domestic producers an artificial advantage over foreign
producers.
INFANT INDUSTRY ARGUMENT.
New industries/ businesses find establishment difficult
with increased initial costs and problems.
The protection argument is that these businesses need
extra assistance to aid them in their establishment.
This is perhaps a valid argument, yet some infant
industries have received protection for so long they
have become geriatric.
Protection should last for a short time to act as an
incentive to promote efficiency and organise cost
structures.

13

PREVENTION OF DUMPING.
Dumping occurs when foreign
businesses sell their goods in
another market at below cost
price in order to:
a) dispose of a surplus
b) establish market control
Due to the practice of dumping, local businesses often
fail and unemployment results.
Once the local competition is eliminated the foreign
producer raises prices again.
PROTECTION OF DOMESTIC EMPLOYMENT
By protecting Australia from cheap foreign goods,
domestic jobs are saved.
This argument is incorrect because protected
industries merely misallocate resources; they are taken
from efficient industries and
used to support inefficient
industries.
Misallocation of resources
promotes the unemployment of
efficient resources.

14

DEFENCE.
Some nations argue that
they need to protect
industries which are
related to the defence of
the country.
A nation would not wish to become reliant on other
nations for providing its defence equipment.
Yet, this argument misses the main problem of
inefficient allocation of global resources.
OTHER ARGUMENTS FOR PROTECTION.
Cheap foreign labour: It is
important to protect the nation
against goods which are produced by
cheap foreign labour.
This argument also stresses that
protection will lead to preventing
trade with nations that use
exploitative labour practices as well.
Eg: Child labour.
Protection can exist against nations
which exploit the environment. Embargoes can
prevent the importation of banned environmental
matter. Eg: Ivory