TOPIC 2

2013

Candidates showed strength in these areas:

understanding exchange rates explaining both positive and negative effects of movements in the exchange rate on

economic activity using stimulus to link currency movements to significant economic events in Australia

such as the mining boom and the GFC

Candidates need to improve in these areas:

answering the question rather than writing about a key concept such as exchange rates

explaining links between movements in exchange rates and economic performance

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Candidates showed strength in these areas:

outlining both domestic and global protection policies and considerations of their economic effects

using relevant economic diagrams to support arguments

Candidates need to improve in these areas:

using accurate data and relevant examples to support arguments supporting responses with more contemporary references to the Australian economy

2012

Question 25

Sample answer/Answers could include: • Differing global growth rates • Exchange rate changes (TWI) • International business cycle • • Impacts on components of BoP • Sources of imports and exports • Changes in prices of imports/exports • Changes in quantities imported/exported of merchandise trade and services • Foreign capital to finance domestic investment/FDI • Interest rate differentials • International competitiveness • Impact of GFC or EU crisis on Australia’s CAD • Structural and cyclical components of BoP • Debt servicing component • Savings ratio

Question 25

Most candidates provided a clear definition of the Balance of Payments, demonstrated a sound understanding of the components of the Balance of Payments and also defined the process of globalisation.

In better responses, candidates integrated their knowledge of Australia’s Balance of Payments with recent changes in the global economy. These candidates substantiated their analysis with economic data. They demonstrated comprehensive understanding of the impact on the Balance of Payments of changes in the international business cycle, terms of trade, appreciation of the Australian dollar as well as the developments in the role of emerging economies.

The specific effects of changes in the global economy were accurately explained in better responses. The relationship between Current Account effects and Capital and Financial Account effects were clearly explained. The significance and relevance of these effects for the Australian economy were comprehensively analysed. Information provided in the stimulus was used to enhance better responses.

In weaker responses, candidates, tended to simply rewrite information from the stimulus. These candidates described the structure of the Balance of Payments with little attempt to relate changes in the global economy to Balance of Payments outcomes.

In many weaker responses, candidates lacked understanding of the concepts ‘terms of trade’ and ‘international competitiveness’. They frequently confused the Current Account Deficit with the Budget Deficit. These candidates often failed to grasp that the question required more than details of the Balance of Payments.

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Question 26

Sample answer/Answers could include: • Global growth rates • Development of emerging economies and their increasing demand for minerals and agricultural commodities • Trade liberalisation • Terms of trade • Technological development – internet • Rise/fall of service industries, tourism, education • Appreciation of $A • Two speed/patchwork economy • Mining boom • Decline in manufacturing • Structural unemployment • Productivity changes • Protection and barriers to trade • Effects on government revenues and budget outcome

Question 26

In better responses, candidates wrote comprehensively on the relationship between the changes in the global economy and its impact on the structure of industry in the Australian economy.

In better responses, candidates also integrated economic theory with both the stimulus material and their own data, and considered the four main sectors of the Australian economy, agriculture, mining, manufacturing and services in some detail. In addition, better responses were well structured and sustained; they often included key definitions and correctly explained diagrams. These candidates made clear links in a specific manner rather than in a generalised way.

In weaker responses, candidates tended to be more descriptive and general in nature. They focused on describing the impact of some changes in the global economy, but with minimal linkage to their effects on the structure of industry in the Australian economy. These responses typically included some poorly drawn diagrams (tariffs; subsidies, exchange rates, etc) that were not linked correctly to the question.

In weaker responses, candidates commonly made limited use of statistics, either from the stimulus or their own knowledge. They also provided limited examples that directly linked the impact of changes in the global economy on the structure of the Australian economy. In many instances, candidates simply chose to rewrite or copy out parts of the stimulus without demonstrating any clear understanding of the relationships involved.

2011

Question 28

Answers could include:

• Relative levels of interest rates in the domestic and global economy • Global commodity prices • Levels of trade and investment • Inflation rates • Current account balances • Terms of trade • Currency speculation • Exchange rate intervention by the RBA • Appreciations • Depreciations • Trade weight index • Competitiveness of Australian industry

Question 28In better responses, candidates clearly distinguished between the domestic and global factors that affect Australia's exchange rate. Additionally, these candidates often integrated these factors and examined both the short-term and long-term effects on the exchange rate. These responses often made reference to global factors such as the commodities boom, movements in the international business cycle and the impacts of the GFC, and gave a comprehensive explanation of how these factors influenced the value of the Australian dollar. They also applied these factors to events that have been occurring in the global and Australian economies, and provided accurate economic information relating to these events.

Better responses correctly explained the way in which Australia's exchange rate is influenced by changes to the levels of Australia's exports and imports, and the attractiveness of Australia as an investment destination, including interest rate differentials between Australia and the rest of the world and the RBA's ability to manage the exchange rate. These candidates enhanced the quality of their responses by including correctly labelled and fully explained demand and supply diagrams of the Australian dollar, which showed the effect of these changes on the exchange rate. Weaker responses tended to be more descriptive and general in nature. They provided a range of global and domestic factors that affect Australia’s exchange rate. These responses made little or no use of data, or to references to current events in the global and domestic economies. They referred mainly to the effect of changing trade and investment flows on the Australian dollar as global factors, and the effect of interest rate changes and inflation in Australia as domestic factors. These responses often included diagrams of how changes to demand and supply influence the value of the Australian dollar, but the accompanying explanations of these diagrams were generally poor or non-existent.

Weaker responses also outlined the effects of changes in the exchange rate on the Australian economy. These responses described the effects of depreciation and appreciation, thus limiting these candidates’ ability to access marks.

2010

Question 28In better responses, candidates addressed the short-term and long-term impacts of both domestic and international protectionist policies on a range of variables in the Australian economy, including efficiency, productivity, economic growth, inflation, international competitiveness, standard of living, unemployment and structural change. These candidates also drew out implications for the Australian government of protectionist policies. These included reductions to protection implemented by the Australian government in recent years to counter the negative effects of high levels of protection until the 1980s. In better responses, candidates also showed understanding of how international protection policies such as the EU’s CAP have led to changes in the composition and direction of Australia’s trade flows and the pursuit of bilateral and multilateral trade agreements for Australia.

In better responses, candidates also integrated economic theory with economic information and data, including frequent reference to specific Australian industries. Candidates briefly outlined or described the types and reasons for protection by way of introduction but focused on the effects of protection on the Australian economy. Responses were well structured, included key definitions and candidates made clear links in a specific, rather than generalised way.

In weaker responses, candidates tended to be more descriptive and general in nature. They focused on describing the types and reasons for protection rather than the effects of protection. These responses typically included diagrams for tariffs, subsidies and quotas and provided detailed descriptions of those diagrams, with little reference to the question. Some weaker responses included diagrams that were incorrect.

In weaker responses, candidates commonly made little or no reference to data and specific examples in the Australian economy. Many of these responses did not refer to international protection or Australia’s involvement with bilateral and multinational trade agreements.