Download Section B - Business

etawa Sundowner
2010
Steven Kemp
School of Economics & Finance
Curtin University
Chief Marker TEE Economics 2009
TEE 2009
• The overall mean of 53 was lower than the preferred
mean of 60, however the reliability measure was high
and the correlation of each of the three sections to the
total paper were high.
• The paper was more difficult than the paper in 2008
(56).
• Section A’s mean was 14.5 out of 25 (58%), compared
to 16.4 in 2008.
• In Section B, the mean mark of 14.7/30 is significantly
lower than in 2008 (16.6)).
• In Section C, the mean was 23.5/45, higher than the
result obtained for 2008 (22.8).
TEE 2009
• The reliability of the written and the overall
paper were both 0.83, which is consistent with
the previous year (0.85 in 2008).
• The correlations of individual sections of the
paper to the total were all very high and
consistent with the previous year (Section A
0.80, Section B 0.92 and Section C 0.94)
TEE 2009
• The exam highlighted certain areas of the
syllabus that are not well understood:
– The current account deficit and foreign debt
– Foreign investment and foreign debt
– The effect of economic policy on the exchange
rate
– The effect of changes in the exchange rate on the
balance of payments
Section A
• The multiple choice section of the paper, while more
difficult, performed well.
• The reliability of the multiple-choice section was higher
compared to 2008 (0.8 in 2009, 0.7 in 2008).
• There were slightly fewer easier questions than in 2008
and there were twice as many relatively difficult
questions.
• There were six questions with less than 40 per cent of
candidates answering correctly - items 6, 9, 11, 14, 17
and 21 (Qs 6, 11 and 21 had particularly low means).
Section A
6.Multi-factor productivity growth measures
(a) combined growth in labour productivity
and capital productivity.
(b) the average growth in labour and capital
productivity.
(c) the rate of technological progress.
(d) growth in living standards.
4% answered correctly
Multifactor Productivity
• Multifactor productivity represents that part of the
growth in output that cannot be explained by growth
in labour and capital inputs. Examples of MFP growth
include improved production techniques, better
management practices, and organisational change.
(ABS)
• Whereas labor productivity measures the output per
unit of labor input, MFP looks at a combination of
production inputs: labor, materials, and capital.
• The multifactor productivity measure is often
preferred because it’s a measure of technological
change
Section A
9. According to the circular flow model, if the
economy is in equilibrium while the government
budget is in deficit and the trade balance is in
surplus, then
(a) investment is equal to savings.
(b) investment is less than savings.
(c) investment is greater than savings.
(d) investment could be greater than or equal to
savings.
35% answered correctly
Section A
11. Which of the following is most likely to
result in an increase in the value of
Australia's exports?
(a) expansionary monetary policy
(b) an economic downturn among Australia’s
major trading partners
(c) an increase in foreign investment into
Australia
(d) a boom in economic activity in Australia
14% answered correctly
Section A
14. Which of the following would cause a
depreciation of the Australian dollar?
(a) a decrease in spending on imported goods
(b) a reduction in the domestic inflation rate
(c) an increase in Australian domestic interest
rates
(d) a decrease in the government's budget
deficit
35% answered correctly
Section A
17. Which of the following statements is correct?
(a) A country will have a current account surplus if
it imports more than it exports.
(b) A country will have a capital and financial
current account deficit if it imports more than it
exports.
(c) A country that has a current account surplus
will lend savings to the rest of the world.
(d) A current account deficit is an indication that a
country has an excessively high level of imports.
34% answered correctly
Section A
21. Which of the following government policies
is most likely to be effective in the short
term in increasing aggregate spending in
Australia during a recession?
(a) an increase in infrastructure spending
(b) a $900 bonus payment to households
(c) a reduction in the GST rate
(d) a reduction in personal income tax rates
9% answered correctly
Section B
26 (a) (i) Define gross domestic product.
Most students could not provide a correct
definition of GDP: the total market value of all
final goods and services produced in a country
in a given year.
Not: the final value of all goods & services
Section B
26 (c) Explain how the change in gross domestic
product during the latter part of 2008 changed
the expected Australian Government budget
balance for 2008–09.
Students needed to state that the budget balance
had shifted from a planned surplus to a large deficit.
Good answers would discuss both the effect of
automatic stabilisers on fiscal policy as well as the
use of discretionary measures such as the stimulus
package to boost economic activity.
Section B
Question 27
This question had the lowest mean in Section
B. Students find the topic dealing with the
current account deficit and foreign debt
relatively difficult and do not understand the
link between the two.
Section B
27 (b) What are the implications of the current
account figures shown in the table for Australia's
net foreign debt? (3 marks)
A current account deficit needs to be financed by
an increase in foreign liabilities which can consist
of either foreign debt or foreign equity. Most
students incorrectly stated that an increase in the
CAD will result in an increase in foreign debt – but
this is not necessarily true.
Section B
27. (c) Since 2005–06, Australia's exports of mineral
and energy commodities have increased
significantly. Explain why there has been no
improvement in the current account balance as a
result.
• Increased imports (investment & consumption)
• Increased net income deficit
• Appreciation of the $A
Section B
8
7
6
5
4
The highest value for the
cash rate shown in the
graph was 7.25%. Many
students gave the answer
of 7.2% which was
marked incorrect.
3
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Jan-06
2
Apr-06
Cash Rate (%)
28 (a) (i) What was the
highest level the cash
rate reached during
2008? (1 mark)
Section B
28 (b) Describe three ways in which the interest rate
changes during 2006 and 2007 were likely to impact
on consumption and investment spending in
Australia.
• Most students were able to achieve 2 marks by
recognising that a rise in interest rates would reduce
consumption and investment spending because of an
increase in the cost of borrowing. The third mark was
awarded for referring to the other channels of the
monetary transmission mechanism such as the effect
of interest rates on asset prices and wealth or the
effect of a rise in interest rates on the exchange rate.
The channels of monetary policy
Section C
• This section was relatively less difficult than
previous years. There was a good blend of topical
and theoretical questions giving students plenty
of scope to demonstrate their economic
knowledge.
• Question 32 stood out as the easiest question
with a mean that was 1 mark higher. Students
who did not answer this question were
disadvantaged.
• The most popular questions were the
sectionalised questions - Qs 31, 32 and 33.
Section C
29. The global economy is beginning to pull out of a
recession unprecedented in the post-World War II
era. World economic growth is now projected to be
about 2.5 per cent in 2010, owing mainly to public
intervention.
Discuss how the changing economic conditions
outlined in the above extract will impact on the
Australian economy.
•
This was the least popular question and had
the lowest mean.
Section C
30. Discuss five measures that the Australian
Government can take to increase the rate of
economic growth in the Australian economy.
•
Many students focussed entirely on demand
side measures such as expansionary fiscal and
monetary policy, failing to discuss any supply
side measures. The best answers provided a
balanced discussion of both demand side and
supply side policies.
Section C
31. (a) Outline the benefits of having high levels of
foreign investment into Australia. (6 marks)
(b) Discuss the effects that a reduction in the level of
foreign investment into Australia would have on
Australia's balance of payments and living standards.
(9 marks)
Part (a) was well answered
Part (b) . . . A dog’s breakfast
Foreign Investment/Foreign Debt
• Most foreign investment into Australia is in the
form of foreign debt. Many students don’t
understand this. Most students tend to argue
that foreign investment is good for the
economy while foreign debt is bad. They fail to
see that foreign investment in the form of
borrowing adds to Australia’s foreign debt.
They tend to see foreign investment as equity
investment but this only accounts for between
10-15%
Foreign Investment & Balance of
Payments
Foreign Investment/Foreign Debt
• Did you know . . .
• A large proportion of Australia’s foreign debt
is due within a very short period.
• In 2008, 37 per cent of loans were due within
90 days and 48 per cent were due within a
year.
Section C
32.
(a) Outline the major macroeconomic objectives of
government.
6 marks
(b) Using examples, explain how these macroeconomic
objectives may sometimes complement one
another, while at other times they may conflict with
one another. 9 marks
Very popular & the only question in section C
recording a satisfactory average (57%)
Section C
Q. 32
Major macro objectives
• Economic growth
• Full employment
• Price stability
Note: external balance is not an objective
• In 2004, Glenn Stevens restated the RBA’s view as
thus: ‘… the current account is not, and should
not, be an objective of monetary policy’
Section C
33.
(a) Discuss the ways in which fiscal policy can be used to
manage the Australian business cycle. In your answer,
provide examples from recent government budgets. 6
marks
(b) Evaluate the effectiveness of using fiscal policy to
manage the Australian business cycle. 9 marks
Very topical & popular
Part (a) well answered
Part (b) surprisingly poor, very few actually ‘evaluated’
Unit 3A
Australia & the Global
Economy
Unit 3A
• Global Markets
– International competitiveness
– Multinational businesses
– Globalisation
• Extent
• Determinants
• Effects
• Arguments for & against
Unit 3A
• Other New Stuff
– Sources of comparative advantage
– Gains from trade using D & S
– Role of WTO & trade agreements
– The current account, foreign liabilities,
foreign debt & foreign investment
Free Trade & Protection
ACCI welcomes textiles and car tariff reductions
The Australian Chamber of Commerce and Industry (ACCI), has
welcomed the import tariff reductions which commence today.
Tariffs applying to passenger motor vehicles and parts
components will be cut from 10% to 5%. Overall tariffs applying
to Textiles, clothing and footwear (TCF) goods will also be cut,
with tariffs for clothing reduced from 17.5% to 10%, and tariffs
for textiles and footwear reduced from 10% to 5%. These tariff
cuts are good news for Australian businesses and consumers,
and will help to stimulate domestic demand.
Lower tariffs mean lower input prices for Australian businesses
and of course lower prices for consumers. It is estimated that a
reduction in Australia’s automotive tariffs from 10% to 5%
could provide net benefits to the economy of around $500
million a year. (January 04, 2010)
Free Trade & Protection
Australia signs historic regional Free Trade
Agreement 27 February 2009
The ASEAN-Australia-New Zealand Free Trade Agreement
(AANZFTA) is the largest FTA Australia has ever signed and will
reduce or eliminate tariffs across a region that is home to 600
million people and has an annual GDP of A$3.2
trillion. Australia’s two-way trade with the ASEAN region is
worth $80 billion a year. The agreement will deliver new
opportunities across the board for Australian exporters. With this
level of trade, which is bigger than our trade with Japan or China
or the United States, this agreement with ASEAN has great
potential to increase job opportunities for Australian
workers. AANZFTA will over time eliminate tariffs on between
90 and 100 per cent of tariff lines, covering 96 per cent of current
Australian exports to the region.
Unit 3B
Macroeconomics & Policy
Unit 3B
• Aggregate demand curve
• Aggregate supply curve
• Use the AD/AS model to explain the business
cycle
• Economic Policy – fiscal, monetary & microreform status quo
•The AD/AS Model
The Two-Way Relationship Between
Output and the Price Level
Aggregate Demand Curve
Price
Level
Real
GDP
Aggregate Supply Curve
Aggregate Demand
• The Aggregate Demand curve shows the
equilibrium level of real GDP (where total
spending = total output) for each price level.
• It is not simply a ‘total spending’ curve
• The AD curve is not to be confused with the
microeconomic demand curve
The AD Curve
• The AD curve slopes downward for 3 reasons:
• Wealth effect
• Interest rate effect
• International trade effect
Aggregate Demand
1. Wealth effect
–
An increase in the price level will decrease the real value
of household wealth & reduce consumption.
2. Interest rate effect
–
An increase in the price level raises interest rates
(increases D for money) which decreases investment (&
C).
3. International trade effect
–
An increase in the price level causes imports to become
relatively cheaper & exports to be more expensive, thus
decreasing net exports.
Aggregate Supply
•
•
The aggregate supply curve shows the effect of
changes in total output or real GDP on the price
level (via changes in unit costs)
As total output increases
– greater amounts of inputs may be needed to
produce a unit of output
– price of inputs will rise
• The AS curve should not to be confused with the
micro supply curve
The Aggregate Supply Curve
Price Level
AS
130
100
B
Starting at point A, an
increase in output
raises unit costs.
Firms raise prices,
and the overall price
level rises.
A
1000
1200
Real GDP ($ billions)
2010 Exam Paper
• Section A Multiple Choice
– 24 questions (24 marks)
• Section B Data Interpretation
– 3 compulsory questions x 12 marks (36 marks)
• Section C Extended Writing
– 2 questions x 20 marks (40 marks)
Sample Section B
Question 1
a.Identify two periods when the
economy was in a recession.
(2 marks)
b.Describe what happened to
the unemployment rate in
2009. (2 marks)
c. Provide 2 reasons for the
change in unemployment
during 2009. (2 marks)
d.How should economic policy
respond to this change in
unemployment? (6 marks)
Sample Section B
QUESTION 2
a. What type of inflation was
occurring in Australia during 2008?
(1 mark)
b. State two costs of high inflation.
(2 marks)
c. What type of policy would the
Reserve Bank use during 2008?
(1 mark)
d. Provide two reasons for the fall in
inflation during 2009. (2 marks)
e. What do you predict the Reserve
Bank will do in 2010? Provide
reasons for your answer. (6 marks)
Sample Section C
1. Globalisation has become an important force in world
economics. Write an essay on the meaning of globalisation, the
factors contributing to its emergence as an economic force and
its impact on the Australian economy. (20 marks)
2. The World Trade Organisation (WTO) referred to the concept of
comparative advantage as ‘arguably the single most powerful
insight in economics’.
a. Explain the principle of comparative advantage and its
sources. How does it differ from absolute advantage? Explain
why the WTO believes it is such a powerful concept. (8 marks)
b. Demonstrate, with appropriate models, how a country can
gain from both exports and imports. (12 marks)
Sample Section C
3. The world economy experienced a deep recession in 2009.
a. Explain the characteristics of a recession. (4 marks)
b. Discuss the factors that can cause a recession. (8 marks)
c. Use the AD/AS model to illustrate how a recession can
occur, distinguishing between supply factors and demand
factors. (8 marks)
4. Expansionary fiscal and monetary policy was used in 2009 to
counter the global recession. Explain what expansionary fiscal
and monetary mean and how they work to stimulate the
economy – illustrate your answer with an appropriate
macroeconomic model. Is monetary or fiscal policy likely to be
more effective during a recession? Provide reasons. (20 marks)
Australia’s Gross Foreign Debt
Composition
of Foreign
Debt –
Institutional
Sector
Composition
of Net
Foreign
Investment
Free Trade & Protection
• Car tariffs must be cut in ASEAN trade deal
The Hon Warren Truss MP Shadow Minister for Trade
• The signing of a free trade agreement between Australia, New
Zealand and the ASEAN group of countries this week must
include massive tariff reductions to allow our car
manufacturers a decent shot at exporting vehicles to
Indonesia and Malaysia. At present, Indonesia slugs tariffs of
up to 180 percent on Australian cars, while Malaysia’s tariffs
are even higher at up to 300 percent. Australia already
exports more than $200 million worth of vehicles to ASEAN
countries, but virtually nothing goes to Malaysia or Indonesia
because of the tariff walls erected by those countries. A
region-wide FTA like this offers many opportunities for
Australia’s exporters and the economies of all of the countries
involved.