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List of Essays Essay 1-1-1—“Discuss the advantages and disadvantages that globalisation has had on an economy other than Australia, and propose policy changes to address some of these disadvantages” ...........2 Essay 1-2-1—“Evaluate the impacts that international organisations, international government forums, trading blocs and free trade agreements have had on globalisation”...................................4 Essay 1-3-1—“Discuss the impacts that globalisation has had on the Australian economy” .................8 Essay 2-1-1—“Discuss the positives and negatives of an appreciating exchange rate to Australia” ....11 Essay 2-2-1—“Discuss the impacts that changes in Australia’s trade policy has had on the Australian economy” ........................................................................................................................................13 Essay 2-2-2—“Describe the implications for Australia of protectionist policies of other countries and trading blocs” ..................................................................................................................................15 Essay 2-2-3—“Evaluate the impacts of Australia’s multilateral and bilateral free trade agreements” .17 Essay 2-3-1—“Outline the trends in the value, composition and direction of Australia’s trade and financial flows” ...............................................................................................................................19 Essay 3-1-1—“Examine the ” ...............22 Essay 3-1-2—“Evaluate the effectiveness of ” ...........................................................................................................................24 Essay 3-2-1—“Analyse the impacts of inflation on the economy” .......................................................26 Essay 3-2-2—“Discuss some policy responses and their effects in dealing with price stability” .........28 Essay 3-3-1—“Examine the effects of a high CAD on the Australian economy” ................................30 Essay 3-3-2—“Examine the causes of Australia’s high CAD” .............................................................32 Essay 3-3-3—“Evaluate the effectiveness of government policies to achieve external stability in the Australian economy”.......................................................................................................................34 Essay 3-4-1—“Describe a government policy intended to improve environmentally sustainable development in Australia and evaluate its effects on the economy”...............................................36 Essay 3-5-1—“Examine the causes of unemployment and evaluate the strategies to reduce unemployment” ...............................................................................................................................39 Essay 3-6-1—“Discuss the policy options available to the Australian Government to promote greater equality in income and wealth” .......................................................................................................41 Essay 4-1-1—“Evaluate the effectiveness of macroeconomic policy on Australia’s goals of internal and external stability” .....................................................................................................................44 Essay 4-2-1—“Discuss the role of fiscal policy and assess its effectiveness in achieving the Australian Government’s current economic objectives” ..................................................................................46 Essay 4-2-2—“Evaluate the advantages and disadvantages of different ways of financing a budget deficit” .............................................................................................................................................48 Essay 4-3-1—“Assess the effectiveness of monetary policy in achieving internal stability” ...............52 Essay 4-4-1—“Analyse the costs and benefits of microeconomic reform” ..........................................55 Essay 4-5-1—“Discuss the effects that changes in Australia’s labour market policy has had on the Australian economy”.......................................................................................................................57

Topic 1—The ! Global Economy 1-1. Case Study Essay 1-1-1—“Discuss the advantages and disadvantages that globalisation has had on an economy other than Australia, and propose policy changes to address some of these disadvantages” While the process of globalisation has increased income and quality of life in China, globalisation is also associated with problems of income distribution and ecologically sustainable development. Therefore, while China has benefited from globalisation, changes in economic policies will be necessary to minimise the negative impacts arising from globalisation. One of the most evident benefits that globalisation has brought to China is the improvement in its quality of life and economic growth. China became a member of the WTO in 2001, which allowed China to benefit from its comparative advantage of labour-intensive manufacturing and to develop its exports in an increasingly globalised market for goods and services. Meanwhile, in 1980, China established five The Multiplier Effect AS!=!Y!=!E!=! Special Economic Zones that offer taxation incentives and looser government regulations. This policy encouraged the inflow of foreign direct investment and consequently, FDI in China increased from none in 1980 to $US 42b in 1998 and $US 105.7b by 2010. Combined with domestic investment, China’s investment, which account for 45% of GDP, increased by an average of 10% p.a. since 2000. The rapid increases in investment and exports, both of which are !ΔY Income autonomous components of aggregate demand, increased China’s aggregate demand from to, which contributed a more significance increase in GDP from to under the multiplier effect. Consequently, since 1980, China’s real economic growth averaged 10.0% p.a., which increased per capita GDP from $US 278 to $US 7519 between 1980 and 2011. With increasing real incomes, China’s spending on education and health also increased significantly. Consequently, China’s adult literacy rate increased from 79% to 96% between 1980 and 2011, whereas life expectancy increased from 65 to 72. The increases in GDP, education and health have significantly increased quality of life in China and consequently, between 1970 and 2011, China’s Human Development Index increased steadily by an average of 2% per year from 0.349 to 0.718!. In these ways, it is evident that globalisation has brought significant benefits in terms of income and quality of life to the Chinese economy. Despite these advantages, globalisation has also created income distribution problems in China, as export-oriented provinces benefit the most from China’s involvement in globalisation. Therefore, while GDP per capita (PPP) in Shanghai and Guangzhou were $24,374 and $27,919 respectively in 2008, (which are comparable to developed countries including New Zealand), GDP per capita (PPP) in the four most impoverished provinces—Qinghai, Tibet, Ningxia and Guizhou—averaged only $4,471 in 2008, which is comparable to least developed economies including the Republic of the Congo. In addition, while 15% of the population in the impoverished provinces lives under the international poverty line of $US 1.25 PPP per day, China has 11% of world’s billionaires, which is

second only to the United States (that has 33% of world’s billionaires). As the disparity between highand low-income earners increased, China’s Lorenz curve deviated further away from the line of perfect equality from Lorenz curve 1 to Lorenz curve 2. This gives China a Gini-coefficient of 0.469, which has increased considerably from its 1985 level of 0.310. One major cause of income inequality in China is that the Chinese government relies heavily on proportional taxes, especially the value-added tax that accounts for 42.3% of total taxation revenue, to finance its spending. In contrast, income tax revenue only accounts for 7% of all taxation revenues, which cannot adequately redistribute the benefits of globalisation to the entire economy. Therefore, China should reform its income tax system so that provinces not endowed with the opportunity to engage effectively in the process of globalisation can also profit from the process of globalisation. Another problem that globalisation has created for China is environmentally sustainable development. As China’s income and wealth increased under the effects of globalisation, Chinese consumers are more able to afford the private costs of goods and services whose consumption and production cause environmental degradation. In addition, owing to China’s loose environmental regulations, China is able to produce and export goods that are banned in countries with stronger environmental regulations. These factors increased the impacts of negative externalities since the 1990’s. Between 1991 and 2008, for instance, the number of passenger motor vehicles in China increased from 1.6 per 1000 of population to 28, which increased the demand for and consumption of petrol, a key complementary good of cars. Meanwhile, electricity consumption in China also grew by an average of 13% p.a. since 1990. With increased consumption of fossil fuels such as coal, China’s carbon dioxide and sulphur dioxide emissions in 2007 both increased by 2.5 times of their respective 1991 levels. This imposed a significant cost onto the Chinese economy, including increases in government spending on health. To address these environmental problems, The Social Cost Curve the Chinese government should introduce a substantial pollution tax that decreases the supply of environmentally unfriendly goods and services from to, leading to an increase in the prices for these products from to. ! In this way, the social cost can be internalised into the private cost, which contracts market quantity fromto, thus leading to a more socially optimal outcome. In addition, more effective “command-based” policies such as stronger environment legislations should also be D implemented—which should be easier for an economy in which QS QE Quantity the government still has immense influence—so that environment quality might improve. From the above analyses, it is evident that globalisation has helped China to increase its income levels and quality of living. However, as the increases in income are not evenly distributed across the economy, income inequality arose as a major problem. In addition, increased income also increased the social cost of environmental problems. For these reasons, while China enjoys the benefits of globalisation, microeconomic reforms such as taxation reform and environment protection policies must be implemented to minimise the negative effects associated with globalisation.!

1-2. Trade, Financial Flows and Foreign Investment Essay 1-2-1—“Evaluate the impacts that international organisations, international government forums, trading blocs and free trade agreements have had on globalisation” Globalisation refers to the process of trade liberalisation leading to greater international economic integration. This process has been positively encouraged by international organisations such as the World Trade Organisation, trading blocs including the European Union and free trade agreements such as the Australia-US Free Trade Agreement. However, government forums such as the G7 and the G-20 are ineffective at coordinating responses to global problems such as the 2008 GFC. Therefore, the international institutions and mechanisms have varying impacts on globalisation. International organisations such as the WTO and its predecessor, the General Agreement on Trade and Tariff, have encouraged trade creation and have therefore positively encouraged globalisation. Before 1995, members of the Cairns Group—a group of 19 efficient agriculture producers—were disadvantaged by the European Union and the United States that protected their unproductive agricultural sectors with tariffs and quotas. As this prevented Effects of Cutting members of the Cairns Group from benefiting from their comparative advantage in agricultural produces, inefficiency was created. To encourage trade liberalisation in the agricultural sector, the Agreement on Agriculture was negotiated at GATT’s 1995 Uruguay Round, which required developed and developing economies to reduce their agricultural tariffs by 36% and 24% respectively over six years. In the European Union, for instance, assistance to agricultural producers reduced from 10b € in 1992 to QD1 1.2b € in 2006 1. As protection is reduced, the market prices for agricultural produces in the EU, the US etc. reduced from to, which extended import quantity from to. ! This has contributed to a significant increase in trade, so that the value of global fruit and vegetable trade increased from US$ 28b in 1980 to US$ 71b by 20002 . These clearly indicate that international organisations can effectively facilitate the removal of trade barriers such as tariffs and quotas, thereby encouraging trade. Consequently, international organisations have encouraged the process of globalisation. In addition, the establishment of multilateral trading blocs, in particular the European Union and the North American trading bloc,! have ! encouraged closer regional economic integration as well as the growth in global trade. For instance, since the adaptation of the Euro in the European Union Monetary Union in 2002, intra-EU trade grew by 8.3% p.a.3 Similarly, after the formation of the North American trading bloc in 1994, trade between the Canada, the US and Mexico tripled from $US 297b to $US 1t between 1993 and 20074. While EU-sceptics criticise that trading blocs can only lead to trade diversion instead of trade creation, improvements in resource allocation in a free trading bloc should maximise efficiency, increase output and therefore create more trade, even with economies 1 http://ec.europa.eu/agriculture/capexplained/record/index_en.htm 2 http://www.google.com.au/url?sa=t&source=web&cd=1&ved=0CBsQFjAA&url=http%3A%2F%2Fsiteresources.worldbank.org%2FINTGAT%2FResources %2FGATChapter13.pdf&ei=RfldTp68MYzTiAKrn7WzBQ&usg=AFQjCNEHOGoBy_q3j3gQJ_4k4EH-vitkvw

3 Table 4A in http://www.google.com.au/url?sa=t&source=web&cd=1&sqi=2&ved=0CCIQFjAA&url=http%3A%2F%2Fepp.eurostat.ec.europa.eu%2Fcache%2FITY_OFFPUB%2FKSGI-10-001%2FEN%2FKS-GI-10-001-EN.PDF&ei=eD5oTs63IO34mAX1scCzDA&usg=AFQjCNE68ryIbhAyXk4drE4tP4UqScQBsA

4 http://useconomy.about.com/od/tradepolicy/p/NAFTA_Advantage.htm

outside the trading bloc. This is proven by the growth of EU’s external trade of 9.3% p.a.5 since 2002 that exceeded the growth in intra-EU trade. Similarly, the North American free trading bloc led to a 9% p.a. 6 increase in US’s trade with non-NAFTA members. Therefore, it is evident that trading blocs do not create trade diversion but contributes to the growth in global trade. Hence, trading blocs contribute positively to the process of globalisation. Free trade agreements have also played a positive role on globalisation, as they encourage different economies to Comparative Advantage specialise in areas in which they have absolute or comparative Agricultural goods advantage. Australia has one of the most efficient agricultural sectors amongst developed economies, whereas the United States has a competitive IT service industry. Therefore, as the diagram on the right indicates, Australia and the US each have USA an area of comparative advantage. To promote specialisation, the Australian-United States Free Trade Agreement (AUSFTA) AUS was signed in 2004 to liberalise trade between the two signatories. Immediately after the implementation of the IT services Agreement, 75% of the tariffs imposed by the United Stated on Australian agricultural exports were removed7 . This allowed Australia’s lamb and diary exports to increase by 20% by 35% respectively in the first year of the agreement. The AUSFTA also immediately removed 97% of tariffs on the other goods and services, which led to a 24% growth in US’s export of computer and information services to Australia in 2006. Overall, the AUSFTA was responsible for a 12% p.a. increase in two-way trade between Australia and the US, which reversed the downward trend between 2001 and 20058 . In these ways, the AUSFTA has encouraged specialisation, which has positively promoted the process of globalisation. However, there are international mechanisms that are less effective at contributing positively to globalisation. Even though international government forums should encourage closer policy coordination and thereby minimise the negative effects of globalisation, forums such as the G7 and the G-20 are not always effective at facilitating global efforts in response to problems in the global economy. For instance, at the 2008 Washington Summit, the G7 economies agreed to a synchronised expansionary fiscal stimulus response to the GFC in attempt to restore confidence in the world economy. Despite this, GWP still contracted by 0.5% in 2009, and the G7 economies underwent a recession of 3.7%. In addition, in the 2009 London Summit, the G-20 leaders agreed a coordinated US$ 1t package to assist developing economies whose export industry has been damaged by the contraction in demand in developed economies. However, developing economies’ GDP growth rates still halved from its post-2000 average of 6.2% p.a. to 2.7%, with some developing groupings such as the Commonwealth of Independent States experiencing a recession of 6.4%. It therefore becomes evident that international government forums have limited ability to coordinate effective responses to problems that arise in the global economy. Consequently, international government forums cannot effectively play a positive role on globalisation. From the above analysis, it is clear that international organisations such as the WTO, trading blocs such as the EU and the North American trading bloc and free trade agreements have positively

5 Table 2C in http://www.google.com.au/url?sa=t&source=web&cd=1&sqi=2&ved=0CCIQFjAA&url=http%3A%2F%2Fepp.eurostat.ec.europa.eu%2Fcache%2FITY_OFFPUB%2FKSGI-10-001%2FEN%2FKS-GI-10-001-EN.PDF&ei=eD5oTs63IO34mAX1scCzDA&usg=AFQjCNE68ryIbhAyXk4drE4tP4UqScQBsA

6 http://www.heritage.org/research/reports/2001/08/the-effects-of-nafta-on-exports-jobs 7 Geography in Focus 2 8 http://www.dfat.gov.au/publications/stats-pubs/downloads/Aus_US_trade_recent_trends.pdf

encouraged globalisation. Nevertheless, bodies such as the G7 and G-20 cannot adequately address the negative impacts of globalisation and are therefore ineffective at playing a positive role in globalisation. Hence, the different organisations have different levels of effectiveness at promoting globalisation.

!Bonus Paragraph—IMF The International Monetary Fund was established in 1944 by the Bretton Woods Agreement with the primary objective of ensuring stability in the global financial system in an increasingly globalised economy. As global capital flows increased from between 2% to 6% of GWP in the 1980’s to 15% of GWP by the 2000’s, there is now closer financial and economic integration between different economies. Even though this helps to achieve allocative efficiency between economies, increased financial integration renders each economy more susceptible to fluctuations in the international business cycle, especially for economies that are already fragile. To alleviate such negative effects associated with globalisation, the IMF organises loans to economies experiencing cyclical deteriorations in their balance of payments that are likely to be corrected over the short-term, which helps to restore confidence and growth sooner than otherwise possible. For instance, after the 1997 Asian Financial Crisis, the IMF provided $35 billion of assistance to South Korea, Indonesia and Thailand. This allowed the South East Asian newly industrialised economies (NIE’s) to avoid default and to continue to service their foreign debt, which might have been rendered impossible by the valuation effect caused by the depreciation of their currencies (especially the Thai Baht, which lost 26% of its value within one year of its float in 1997). This maintained ...