Economics Questions Thread

[Seamus Wong]

Thanks, this does help 

Great!

[Jmac02]

Dear fellow 3/4 Economics students,
I'm struggling to find effective ways to study for Economics, as I primarily come from a science-based background. Although I'm averaging roughly 80's for my first two SAC's, I believe I'm putting in more than enough work to achieve scores of 85+, however, I don't really have a specific technique to study. If anyone could tell the ways they study for an Eco SAC, that would be great. Thanks

[NomotivationF]

Dear fellow 3/4 Economics students,
I'm struggling to find effective ways to study for Economics, as I primarily come from a science-based background. Although I'm averaging roughly 80's for my first two SAC's, I believe I'm putting in more than enough work to achieve scores of 85+, however, I don't really have a specific technique to study. If anyone could tell the ways they study for an Eco SAC, that would be great. Thanks

Hey Jmac, I've found in terms of Eco the key to scoring well is to actually understand the concepts that you are learning and applying them to different scenarios. I don't know if you are, but I think wrote learning answers in Eco bounds you for failure as questions can be extremely variable. Basically, understand and consolidate ur concepts and make sure you talk to the teacher about things you don't understand. If you can understand the concepts fo each of the dot point you should realistically be able to score quite well on sacs and eventually the exam.

[Jmac02]

Hey Jmac, I've found in terms of Eco the key to scoring well is to actually understand the concepts that you are learning and applying them to different scenarios. I don't know if you are, but I think wrote learning answers in Eco bounds you for failure as questions can be extremely variable. Basically, understand and consolidate ur concepts and make sure you talk to the teacher about things you don't understand. If you can understand the concepts fo each of the dot point you should realistically be able to score quite well on sacs and eventually the exam.

Thank you very much NomotivationF, I will take this advice on for my next SAC on Thursday. Wish me luck!

[Jmac02]

Hi everyone again,
As my SAC is just days away. I've got two questions about the topic. Firstly, is the reason for the balance of payments equaling out because countries like Australia who run a CAD means they're spending on foreign goods and services or buying loans to fund this. This means countries whom they buy off, run a CAS meaning they have money to spend. As Australia has spent their money to finance expansion (most likely) countries like China who have a CAS, see Australia as an appropriate place to invest in because of the high economic activity, and hence the CAFA increases. As well, why are higher interest rates perceived as a good thing (in terms of the exchange rate)? Thanks, any help is appreciated.

[Seamus Wong]

Hi everyone again,
As my SAC is just days away. I've got two questions about the topic. Firstly, is the reason for the balance of payments equaling out because countries like Australia who run a CAD means they're spending on foreign goods and services or buying loans [Not buying loans, we Take out loans or Issue Government Bonds] to fund this Yes, you are right. We spend a lot on foreign goods and pay a lot in interest payments to foreign countries on our foreign debt (which arises due to the savings-investment gap) and thus we have to seek finance from abroad to fund the CAD. This means countries whom they buy off, run a CAS meaning they have money to spend Yes, this is correct. As Australia has spent their money to finance expansion (most likely) countries like China who have a CAS, see Australia as an appropriate place to invest in because of the high economic activitycorrect, and hence the CAFA increases The CAFA doesn't increase; the CAFA SURPLUS increases . As well, why are higher interest rates perceived as a good thing (in terms of the exchange rate) They aren't necessarily a good thing. Higher interest rates could usually be argued to be unfavourable since they encourage capital inflows, causing an appreciation of the dollar and hence reducing the attractiveness of our exports and increasing the attractiveness of foreign imports, which slows the growth in economic activity domestically. However, one could argue that an appreciation of the Australian dollar potentially makes Supply-side conditions more favourable for domestic firms who source the majority of their inputs from abroad, and thus the appreciation of the AUD can help expand our productive capacity.? Thanks, any help is appreciated.

Good job, you seem like you have a relatively good understanding of how the Balance of payments works.
Keep asking questions though. The more you ask, the more prepared you'll be for the SAC.

[Jmac02]

Good job, you seem like you have a relatively good understanding of how the Balance of payments works.
Keep asking questions though. The more you ask, the more prepared you'll be for the SAC.

Thank you so much for your help, Seamus. I will definitely do so.

[Jmac02]

Hey everyone again,
Is this an appropriate explanation for the effects of the exchange rate on Australia's CAD?
A depreciation of the AUD is likely to decrease CAD. This is because as imports are more expensive for domestic consumers and exports are relatively more attractive to investors overseas (because they can purchase more). There is likely to be greater spending on exports relative to imports, resulting in a BOGS surplus, leading to a decrease in the CAD.
However, a depreciation of the AUD is also likely to increase CAD. This is because a depreciation is likely to stimulate net primary income debits (we are selling domestic assets to overseas) because exports are relatively more attractive to purchase. This increases the net capital inflow and foreign liabilities, causing an increase in the payment of dividends, rent and profits abroad, thus increasing CAD.

Thanks.

[Jmac02]

Another quick thing, I asked a similar question before but why do higher interest rates attract investment from overseas?

Thanks.

[NomotivationF]

Another quick thing, I asked a similar question before but why do higher interest rates attract investment from overseas?

Thanks.

Higher relative interest rates attract overseas investment due to the fact investors will obtain a higher rate of return if they invest in Australia, compared to other countries. Make sure to say relative interest rates otherwise the answer may not make complete sense.

[NomotivationF]

Hey everyone again,
Is this an appropriate explanation for the effects of the exchange rate on Australia's CAD?
A depreciation of the AUD is likely to decrease CAD. This is because as imports are more expensive for domestic consumers and exports are relatively more attractive to investors overseas (because they can purchase more). There is likely to be greater spending on exports relative to imports, resulting in a BOGS surplus, leading to a decrease in the CAD.
However, a depreciation of the AUD is also likely to increase CAD. This is because a depreciation is likely to stimulate net primary income debits (we are selling domestic assets to overseas) because exports are relatively more attractive to purchase. This increases the net capital inflow and foreign liabilities, causing an increase in the payment of dividends, rent and profits abroad, thus increasing CAD.

Thanks.

Hey Jmac, your answer is good, but here's how I would improve it;

A depreciation of the AUD is likely to decrease CAD. If there is a depreciation in the AUD, foreign goods and services (imports) are relatively more expensive for domestic consumers compared to Australian made goods and services; and Australian made goods and services are relatively cheaper to foreign investors (exports). As a result, there is a decrease in imports and an increase in export, increasing net exports (X-M). As there is more spending on exports relative to imports, there will be an increase in credits relative to debits in the balance on merchandise trade section of the current account, which improves the CAD.

However, a depreciation of the AUD is also likely to increase CAD. This is because a depreciation is likely to stimulate net primary income debits (we are selling domestic assets to overseas) because exports are relatively more attractive to purchase. This increases the net capital inflow and foreign liabilities, causing an increase in the payment of dividends, rent and profits abroad, thus increasing CAD.

I don't think your second statement is correct. The demand side factor is a stronger argument, however if your teacher has taught you the second statement, go for it.

[Jmac02]

Thanks so much again, highly appreciate your help.

[LenaChime]

Quick Question - How does a depreciation in the AUD result in a fall in the TOT? Is it because, we are receiving less foreign currency for our exports or need to use more or our currency to buy imports?

Any help is greatly appreciated   

[Seamus Wong]

Quick Question - How does a depreciation in the AUD result in a fall in the TOT? Is it because, we are receiving less foreign currency for our exports or need to use more or our currency to buy imports?

Any help is greatly appreciated   

We don't receive the foreign currency, we receive Australian Dollars. But yes, we do need to use more of our currency to purchase those imports - provided that we continue to actually purchase those imports at the relatively higher price level (in terms of our currency).

A depreciation of the Australian dollar means that exports are relatively cheaper in terms of foreign currency, increasing demand for our exports - thus increasing the export price index. Likewise, Australian imports become relatively more expensive in terms of our currency, reducing our demand for imports - thus reducing our import price index.
Since TOT is calculated as ((export price index)/(import price index) * 100), we should see a rise in the TOT.
... i think....

BUT

I'm pretty sure they would ask the question the other way around - i.e. how does a fall in the TOT lead to a depreciation of the AUD?. ( I say this because my notes don't say anything about the Exchange rate influencing the TOT, but rather the TOT influencing the Exchange rate )

- You would answer by saying that if the TOT is falling, it reflects export prices falling faster or rising slower than import prices, which in itself reflects a decreased level of demand for the AUD relative to supply - causing a depreciation of the AUD.

If I'm wrong please let me know cos I kinda forgot about all of it right after my sac

[NomotivationF]

We don't receive the foreign currency, we receive Australian Dollars. But yes, we do need to use more of our currency to purchase those imports - provided that we continue to actually purchase those imports at the relatively higher price level (in terms of our currency).

A depreciation of the Australian dollar means that exports are relatively cheaper in terms of foreign currency, increasing demand for our exports - thus increasing the export price index. Likewise, Australian imports become relatively more expensive in terms of our currency, reducing our demand for imports - thus reducing our import price index.
Since TOT is calculated as ((export price index)/(import price index) * 100), we should see a rise in the TOT.
... i think....

BUT

I'm pretty sure they would ask the question the other way around - i.e. how does a fall in the TOT lead to a depreciation of the AUD?. ( I say this because my notes don't say anything about the Exchange rate influencing the TOT, but rather the TOT influencing the Exchange rate )

You are completely right in saying (in terms of the study design at least) a change in exchange rates does not influence the TOT, although it does have an impact on net exports.

A change in TOT is only due to changes in global prices of imports and exports,

- You would answer by saying that if the TOT is falling, it reflects export prices falling faster or rising slower than import prices, which in itself reflects a decreased level of demand for the AUD relative to supply - causing a depreciation of the AUD.

This is more along the lines of what answers should look like regarding TOT.