Unit 3 AOS3 Economics - Lesson 1 Int Transaction and Living Standards

All right. Hello, hello everyone and welcome to the first PowerPoint of unit three areas. Day three, Australia and the world economy. During this area study, it's the last one for Unit three, we're going to be talking all about Australia's international transactions, how money flows in and out of Australia, as well as assets and capital transactions that occur. And then also what's been happening amongst like trade liberalization and free trade between countries and the impact that has on, on Australian businesses and how that impacts the other goals that we have throughout the country. So we'll be looking at things like the terms of trade, the exchange rate and a few different other things. So on the first slide this time to try and update things to make it a little bit more useful, it's going to, each time we have a video show you the dot point of key knowledge that we're looking at. So today we're just going to be looking at this first one which is all about the relationship between trade and living standards, including lower prices for consumers, greater choice for consumers and the ability for businesses to achieve economy of scale and access more resources for business and government. Then in future lessons, there's going to be five videos for this topic. We're going to look at the rest of this here, but I won't bore you with that right now because I will bore you with that another day. All right, now we're going to talk about how international transactions for goods and services affect our living standards. So this is all about the money coming into and out of Australia when we buy goods and services or invest in businesses, etc. And so international transactions affect economic growth, unemployment and living standards. And so imports and exports and foreign investment make up about 20% of all of aggregate demand. So imports being a leakage, which if you look at imports in Australia, it's fairly significant. The amount we spend on imports, exports being an injection and foreign investment also being an injection. When foreign businesses invest into local business, etc. This makes up about 20% of all of aggregate demand. The balance of all of these, that's fairly low compared to private consumption spending, which makes up about 70% of aggregate demand. But it's still 1/5 that is significant. So these international transactions affect efficiency, resource allocation and our living standards. So businesses have to be as efficient as possible. The more and more we have trade liberalization because the less tariffs and the more free trade agreements that exist means that businesses within Australia have to compete with businesses all over the world. And what's going to happen if they do not? If they're not able to produce or charge as low prices as the rest of the world, they are going to go out of business and close down. This has been seen most recently in car manufacturing, and it's being seen in an interesting way at the moment about whether or not yesterday. Because today's 22 April, when I'm recording this yesterday, on 21 April, there was a lot of drama in the media about whether or not the government would bail out Virgin Australia during the pandemic, and the government chose not to do it. And part of the reason the government chose not to do it is because at the moment, if they bailed out Virgin Australia, it would be bailing out a company that has a majority ownership overseas and that would be sending millions upon millions of dollars to overseas investors and overseas shareholders. That wouldn't be going to benefit the Australian economy, other than protecting the jobs of those employed by Virgin Australia and some of the taxes that are paid by Virgin Australia that go to the government. But a large portion of that money would go overseas, which is not great for the Australian economy. On that point as well. There have been a lot of arguments at the moment to move away from trade liberalization based on the pandemic. A lot of countries are freaking out about the fact that they're no longer able to just rely on other countries to get by, because a lot of countries are running into shortages in goods and services because they don't produce them in their own country. And that's leading to an argument towards, once this pandemic starts to slow down or is over, a push towards nationalism, which means moving almost all of our production internal so we produce all the goods and services that we need to get by in Australia, within Australia. So if there was ever to be a major global crisis again, we would have enough employment and goods and services in Australia to get by. The argument against that comes from the next point. So when we look at production, when we look at efficiency, it's all about producing what you have competitive advantage in, which is all about. Let's go on. Again, sorry for this little mistake in here. It's all about a condition or circumstance that puts a company in a favorable or superior business position. So most of the time, a country wants to produce what they're good at producing. The reason why we had the mining boom in Australia is because we had so much iron ore, which China desperately wanted, and it meant we could export a ridiculous amount of iron ore to overseas for a period of almost 10 years and put ourselves in a really good economic position in Australia. Australia had the benefit of being the only country in the world that had a positive trade relationship with China. Positive in that meaning that we exported to China more than we imported from China. That meant that we were really focusing on an area we have a competitive advantage in. It's also important to achieve economies of scale, which is a proportionate saving in costs gained by an increased level of production. Hopefully, if you do business or you've done accounting, this comes up a little bit. But when you own a business, you have a certain level of fixed costs and the more and more you produce, the lower and lower those fixed costs become as a proportion of your overall expenses. And so by opening up trade barriers and allowing us to trade all over the world, it means that we can lower our costs basically on a per unit basis and achieve economies of scale. Because you're producing on a mass scale or a large scale in comparison, and can make it cheaper to produce overall, which is very positive for businesses. Profitability. International transactions can also affect the inflation rate and living standards. So if there is a drop in the Australian dollar, there might be demand inflation. So if there's a drop in the value of the Australian dollar or the exchange rate, which has been happening at the moment, it's at the lowest it has been in a long, long time, this could lead to an increase in the cost, an increase in the value of exports that we are exporting to other countries because they're suddenly cheaper for other countries to purchase. If this happens to a large enough degree, this will lead to a massive increase in aggregate demand and demand inflation to occur where prices start increasing. Cost inflation might also rise if there's a drop in the Australian dollar for firms who use imports as a factor of production. So when you purchase goods and services, you've probably seen the majority of things you buy in Australia, especially food, have a sign on the label that says made from local and imported ingredients. That is basically going to be the reason why during the time that we have a low valued Australian dollar, there may be some cost inflation because businesses that use imports as inputs in production are going to increase their prices to protect their profit margin. So any increase in cost for them, they're going to pass on to the consumer through higher prices. So a lower Australian dollar can increase the inflation rate. But we'll get into that in more detail in a future video. It can also affect income distribution and living standards. This is not something you get asked much about in year 12 anymore. It's mainly in year 11 economics. But it's important to talk about because income distribution greatly affects living standards. So rising amounts of exports can mean that business owners in export industries have a greater share of national income compared to other sectors. Also increasing levels of exports can mean basically the point we're making before that if there is higher levels of demand inflation because we're exporting more, it means lows on lower incomes are going to be negatively infected because they have less purchasing power to purchase goods and services and the material and non material living standards will fall because of it. Next up we're going to talk about the different types of international transactions that occur. There's three different types we're going to look at and that is it for the day. So first up we're going to look at financial capital flows. And this is investment coming into or out of Australia. And for the most part it's investment coming into Australia because we have a relatively low savings rate in Australia and we do not invest that much in other countries. It's mostly investment coming in. We really try and promote investment coming into Australia. It's interesting to look at before the pandemic and over the last few years there's been a really big push from the Australian government to have investment coming to Australia from the entertainment industry. So especially in the filming of movies and television shows, the government has given incentives to businesses overseas to invest in Australia by giving them subsidies or tax breaks. And that's why you've seen probably in recent years, a lot of major movies have been filmed in Australia because it's cheap for them to do so. In some cases capital flows also involve buying or selling of shares and and businesses within another country. There's an interesting one, again with the Virgin Australia example from yesterday. Part of the reason the government didn't bail them out is because by doing that, a lot of the benefits of that if they continue to trade in future is the money will end up being taken back overseas to those foreign investors. Next is a little bit simpler, human capital flows. So human capital flows are all about immigration and migration, people coming into and out of a country. So greater levels of trade agreements has increased freedom for people to work in other countries, which is referred to as the movement of human capital. This is really, really important in Australia, especially at the moment, because we have skill shortages in a lot of different industries. And based on the work that we did in full employment, a lot of the unemployed people in Australia do not have the skills required to match up with those jobs that are available. So we need to bring in skilled labour from overseas to help us be as productive as possible. This might decrease based on some of the changes made to 457 visas and citizenship requirements in recent years where they're making it harder for businesses to bring in those skilled migrants. But the way they work at the moment is if the temporary work visas, as they tend to be called now, is that if businesses cannot fulfill a job within Australia from Australian workers, then they can apply for one of these visas to bring in a worker from overseas for a temporary amount of time, but they'll come into Australia, work and then eventually have to return home unless they gain citizenship. So human capital flows is all about the people coming into Australia to work and Australians leaving Australia to work overseas. And lastly is international transactions, which is international transfers, which is all about foreign aid to poorer countries. Originally I had a graph on this slide, but clearly it did not save. But it's pretty simple to draw in just the space underneath here. So in recent years Australia still does give a lot of foreign aid to other countries, but in recent years, if you look at the last 20 or so years, it has been trending downwards a lot as the government has started focusing on no longer being in a budget deficit and returning to surplus. One of the easiest places to cut spending is in foreign aid because it doesn't directly bring the country that much benefit. The general idea behind foreign aid is that if you help countries with foreign aid, eventually they're going to help you out in the future and it may lead to positive trade relationships and benefits in that way. But most of the time foreign aid seen as a one way transaction with nothing expected in return. I don't think any country would give aid to another country purely altruistically where they don't expect anything in return. But the general idea is that we give foreign aid to other countries expecting that when they get back on their feet, it potentially is going to be beneficial to Australia in future. Alright, so that's it for the introduction to international transactions, just about how money and capital flows into and out of Australia. Next we're going to start looking at the balance of payments, which is a more specific look at in the past 12 months, how money is coming into and leaving Australia and how we get our current account deficit and what that means and some things that affect that in the short term and long term. And then after that we'll go into our net foreign debt, terms of trade and exchange rate in future lessons. So once again, thank you for watching. I hope this has been helpful to you. As always. Any questions? At all that you have. Feel free to comment below or send me an email or message and I'll help you out to the best of my ability. I hope you enjoy the rest of your day. Goodbye.