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Economics Units 3 & 4
for the
Douglas Cave
Real World Tony De Luca
Ron Hanmer
4th Edition
Economics for the Real World Units 3 & 4 Text © 2018 Douglas Cave, Tony De Luca, Ron Hanmer
4th Edition Design and illustrations © 2018 Cengage Learning Australia Pty Limited
Douglas Cave
Tony De Luca Copyright Notice
Ron Hanmer This Work is copyright. No part of this Work may be reproduced, stored in a

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Economics 2019 v1.1 General Senior Syllabus © Queensland Curriculum & Australia.
Assessment Authority

This syllabus forms part of a new senior assessment and tertiary entrance Cengage Learning Australia
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1 2 3 4 5 6 7 22 21 20 19 18
 iii

Contents
About this series vi
Introduction vii

UNIT 3 INTERNATIONAL ECONOMICS 1

1 International trade 2
1.1 e open economy and the external sector 3
1.2 e international economic problem 6
1.3 Advantages and disadvantages of international trade 13
1.4 Why international trade is important to Australia 16
1.5 Australia’s trade 17
1.6 Trade theories 21
1.7 Challenges in trade 29
Review of Chapter 1 30

2 Globalisation 36
2.1 e nature of globalisation and interdependence 37
2.2 e extent of globalisation 38
2.3 Multinationals and supply chain integration 43
2.4 Factors contributing to globalisation 45
2.5 Forces driving globalisation 51
Review of Chapter 2 58

3 Exchange rates 63
3.1 How are international payments made? 64
3.2 What is an exchange rate? 66
3.3 Types of exchange rates 70
3.4 How Australia’s exchange rate is determined 76
3.5 Forward-exchange facilities 79
3.6 e terms of trade 80
3.7 Government policy and exchange rate movements 83
Review of Chapter 3 85

4 e balance of payments 92
4.1 What is the balance of payments? 93
4.2 Balance of payments and the economy 100
4.3 Foreign debt 106
4.4 Foreign investment 111
Review of Chapter 4 115
9780170407014 Contents
iv

5 Trade policy 121

5.1 Free trade, investment and protection 122
5.2 Methods of protection 125
5.3 e effective rate of protection 131
5.4 Costs and bene ts of protection 133
5.5 Trade policy 138
5.6 Trade agreements 140
Review of Chapter 5 145

UNIT 4 CONTEMPORARY MACROECONOMICS 151

6 Aggregate expenditure model 152
6.1 e circular ow of income model 153
6.2 Economic growth 158
6.3 Aggregate demand and supply theory 162
6.4 Global effects on macroeconomic issues 173
Review of Chapter 6 176

7 Macroeconomic objectives 184

7.1 Managing the economy 185
7.2 Economic objectives 186
7.3 e economic/business cycle 205
7.4 Economic indicators 208
7.5 e role of government in managing the economy 229
Review of Chapter 7 232

8 Economic management: scal policy 239

8.1 e nature of scal policy 240
8.2 Government income and expenditure 241
8.3 Fiscal policy 250
8.4 Budget outcomes 256
8.5 e effectiveness of scal policy 265
Review of Chapter 8 273

Contents 9780170407014
 v

9 Economic management: monetary policy 277

9.1 Introduction to monetary policy 278
9.2 e objectives of monetary policy 281
9.3 e implementation of monetary policy 284
9.4 e impacts of changes in interest rates 288
9.5 e current monetary policy stance 294
9.6 e effectiveness of monetary policy responses 297
Review of Chapter 9 304

10 Economic management: microeconomic policies 311

10.1 Introduction to microeconomic policies 312
10.2 e relationship between microeconomic reform and domestic macroeconomic
objectives 321
10.3 e signi cance of microeconomic policy to Australia’s economic growth and
development 324
Review of Chapter 10 340

Glossary 348
Index 356

9780170407014 Contents
vi

About this series

is new edition of has NelsonNet
been fully updated for the QCAA Economics General
Economics for the Real World

Senior Syllabus implemented at Units 1 & 2 in 2019

and Units 3 & 4 in 2020. It comprehensively covers the
syllabus and unit objectives using the inquiry
approach valued in the syllabus, with integration of the
underpinning factors throughout.
Student book
• e content
re ects changing
Economics Units 3 & 4
for the

Australian and
Real World Douglas Cave
Tony De Luca
Ron Hanmer

global economies, 4th Edition

NelsonNet is your protected portal to the premium

withcurrentdata, digital resources for Nelson textbooks located at
statistics and www.nelsonnet.com.au. Once your registration is
real-world complete, you will have access to comprehensive digital
applications. resources that supplement and complement each
• Updated chapter, including:
‘Economics in • answers to selected student book review questions
action’ sections
NELSON

• useful weblinks.
A

provide realistic
Cengage
Compan

economics scenarios and allow students to learn Icons in your NelsonNetBook will link you to these
y

through inquiry. resources.

• Clear de nitions of key concepts are provided Teachers will have access to these resources, plus
throughout each chapter and included in a syllabus mapping and teaching plan documents, and a
complete glossary. PDF version of the student book.
• Updated reviews at the end of each chapter and NelsonNetBook
a wealth of questions throughout ensure a steady e NelsonNetBook is your customisable, interactive
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Contact your Education Consultant for information about access codes and conditions.

About this series 9780170407014

 vii

Introduction

Assessment in Units 3 & 4

Assessment in Units 3 and 4 will be similar to the types of assessment conducted in Units 1
and 2. During the course of the year, you will have to complete four different assessment tasks,
each of which is worth 25 per cent towards your overall result for Year 12. ree of the assessment
instruments (1, 2 and 3) will be set and marked by your teachers in your school. e fourth will be an
external examination that will be the same for all students in Economics across the state.
e tasks and requirements are stated in the Economics 2019 General Senior Syllabus
developed by the Queensland Curriculum and Assessment Authority (QCAA), which can be
located on the QCAA website. QCAA Economics
All assessment instruments will be used to assess at least three of the five objectives stated in syllabus
the syllabus.
e ve objectives of the syllabus are:
1 comprehension of economic concepts, principle and models
2 selection of data and economic information from sources
3 analysis of economic issues
4 evaluation of economic outcomes
5 creation of responses that communicate economic meaning.
For a more in-depth explanation of what is required for each objective to be attained, refer to pages
4 and 5 of the Economics Syllabus.
Each assessment task is linked to a topic of study, one for each of the four topics as shown in
Figure 1.
FIGURE 1 Summative assessment for Units 3 & 4

Topic Assessment type Conditions Weighting

1: The global Examination – • 2 hours plus 15 minutes 25%

economy (Unit 3) Combination response planning time
2: International Investigation – • 4 weeks, including 25%
economic issues Research report 10 hours of class time
(Unit 3) • Length: 1500–2000 words
1: Macroeconomic Examination – Extended • 2 hours plus 15 minutes 25%
objectives and theory response to stimulus planning time
(Unit 4) • Length: 800–1000 words
2: Economic External assessment: • 2 hours plus 15 minutes 25%
management Examination – planning time
(Unit 4) Combination response

Instrument-speci c marking guides

Each of the assessment tasks will be accompanied by an instrument-speci c marking
guide (ISMG). e marking guide will indicate the standards a student’s work must demonstrate

9780170407014 Introduction
viii

to gain the marks. e highest marks a student can achieve is 25 per cent for each assessment
instrument. Marks will be spread across the objectives of the syllabus that the summative
assessment is measuring.
As an example, the rst assessment instrument in Figure 1 will be based on the following
break-up of tasks.

FIGURE 2 Summary of the ISMG

Criterion Objectives Marks

Part A – Comprehending 1 10
Part B – Analysing 3 8
Part C – Evaluating 4 7
Total 25

For each of the marks to be awarded for each criterion, there will then be a de ned set of
standards stated on the assessment instruments that shows what you need to achieve to be
allocated the relevant mark. e following example shows this for the criterion ‘Comprehending’
in the rst assessment instrument.
Assessment objective 1: Comprehend economic concepts, principles and models of exchange
rates, international trade patterns and trade theories

FIGURE 3 Example of an instrument-speci c marking guide

The student work has the following characteristics: Marks

• accurate and detailed identification of the essential features of exchange rates, 9–10
international trade patterns and trade theories
• perceptive application of economic concepts, principles and models to exchange rates,
international trade patterns and trade theories
• precise use of economic terminology.
• effective identification of the essential features of exchange rates, international trade 7–8
patterns and trade theories
• effective application of economic concepts, principles and models to exchange rates,
trade patterns and trade theories
• effective use of economic terminology.
• adequate identification of the features of exchange rates, international trade patterns 5–6
and trade theories
• adequate application of economic concepts, principles and models to exchange rates,
international trade patterns and trade theories
• adequate use of economic terminology.
• partial identification of the features of exchange rates, international trade patterns and 3–4
international trade theories
• partial application of economic concepts, principles and/or models to exchange rates,
international trade patterns and trade theories
• narrow use of economic terminology.
• identification of aspects of exchange rates, international trade patterns and/or trade theories 1–2
• identification of aspects of economic concepts, principles or models
• inconsistent or unclear use of economic terminology.
• does not satisfy any of the descriptors above. 0

Similar tables will be used for every objective in all assessment instruments for your summative
assessment results. You may consult the QCAA Economics 2019 Syllabus for these.

Introduction 9780170407014
 ix

Assessment instruments
We will now have a brief look at each of the assessment instruments that you will be required to
complete in Year 12.
Examination – Combination response
e Examination – Combination response will be 2 hours in time plus 15 minutes planning time.
In this assessment instrument for ‘Unit 3, Topic 1: e global economy’, you will nd a mixture
of ve multiple-choice questions, and between ve to eight short response items that assess your
ability to comprehend (Objective one).
e short response questions may include questions that ask you to explain, measure,
calculate, label and name diagrams and graphs. Sentences, paragraphs, diagrams and graphs may
be required in response to such questions. You may encounter some stimulus material, but these
are not essential. ese will be between 50 and 100 words in length.
You will also be required to analyse (Objective 3) and evaluate (Objective 4). ere will be one
extended response to unseen stimulus of between 400 and 500 words. You will be presented with a
minimum of four different stimulus materials, none of which should exceed 100 words.
Investigation – Research report
e research report will be based on ‘Unit 3, Topic 2: International economic issues’. In this
task, all ve objectives will be assessed – comprehension (Objective 1), selecting information
(Objective 2), analysis (Objective 3), evaluation (Objective 4) and creating a response
(Objective 5). You will be given four weeks to complete this task, including some class time, and
your report will need to be between 1500 and 2000 words in length.
For the issue you are required to research, you should use a variety of primary and secondary
sources such as government and other economics-related websites, media opinions, and
commentaries from experts in the elds of economics and other related disciplines.
Examination – Extended response to stimulus
is examination relates to ‘Unit 4, Topic 1: Macroeconomic objectives and theory’. All ve
objectives will be assessed in this two hour examination (plus 15 minutes planning time), which
requires a response of between 800 and 1000 words.
You will be presented with primary and secondary sources, four to six of which you may have
seen prior to the assessment and two to three of which are unseen. Your teacher will be looking for
you to show your ability to demonstrate your skills of analysis and evaluation in constructing an
analytical essay in response to the given task.
Examination – Combination response
is is the common external exam that all Economics students will be required to sit and is set by
the QCAA. It will be on ‘Unit 4 Topic 2: Economic management’ and will be two hours in length,
plus 15 minutes planning time.
Like the previous Examination – Combination response, it will contain multiple-choice
questions, short response items and an extended response item. e examination will assess
Objectives 1, 3 and 4 only.

9780170407014 Introduction
 UNIT 3

International

economics

notreM moT/segamI ytteG

 ajilA/segamI ytteG
1 International trade

is chapter examines trade and the circular ow of income, patterns

and direction of Australia’s trade and trade theories.

Focus questions and inquiries

• How does trade occur in an open economy? To provide a basis for answering such questions and
• Why do nations trade, and how do they bene t
carrying out such inquiries, this chapter will examine
from trade?
the following:
• imports, exports and the external sector in the
• How important is trade to Australia’s economy?
circular ow of income model
• Does trade impact on Australia’s economic policy?
• advantages and disadvantages of international trade
• Are trade theories still relevant in today’s
• trade and its impact on economic policy
globalised economy?
• composition and direction of Australia’s trade

• trade theories and their relevance in today’s economies

• trends in trade.

2 Economics for the Real World | Units 3 & 4 9780170407014

 3

Imagine for a moment a world in which each country operates as a closed economy; that is,

each country relies totally on its own resources to satisfy the wants of its citizens. ere is no

problem in such a world if every country has an equal allocation of resources and an equal
number of citizens.

But what happens when we introduce the element of inequality into our imaginary

world? Assume that some countries have fewer people and more resources, and that other

countries have vast supplies of some resources and no supply of others. It should be evident

that, under these circumstances, if each nation continued to operate as a closed economy,

living standards would differ greatly from nation to nation and opportunities for economic
development would be severely curtailed.

How does the real world compare with this imaginary world? We do not have to look very

far to notice that we live in a world of appreciable differences. When early humans ventured

beyond their immediate environment, they discovered new resources and, as civilisation

spread across the Earth’s surface, humans recognised the need for trade. People saw that

trade provided the means by which a greater number of wants could be satis ed. We are all
familiar with the practice of swapping recipes, digital les and other items among friends.

is is a version of the primitive barter system, the simplest form of trade, which even today

still accounts for a substantial volume of internal trade in less-developed regions of the world.

KEY IDEA
Changes in the prosperity of a country’s external sector can have signi cant effects on
its domestic economy.

In today’s global economy, international trade is a far more complex process, but the basic

reason for its existence is the same. No country is so well endowed with resources that it does

not have to rely on other countries for the supply of some commodities. For instance, Australia
has ample supplies of coal and iron ore, while Japan does not. As a result, Japan trades with

Australia to obtain these minerals for its productive processes. Australia, on the other hand,

does not produce rubber, cocoa or computer chips and must rely on other nations to provide

these commodities. Interdependence of this kind is a characteristic of all nations in the world

today. erefore, we can say that all contemporary nations operate as open economies.

1.1 The open economy and the external sector

CONCEPTS
Circular ow of income model: a model External (foreign) sector: that sector
of the economy, based on income ows of the circular ow of income model that
from one sector of the economy to another identi es economic in uences external to
in a circular motion, which explains levels the domestic economy
of national income and output, and how
changes in these occur Internal balance: a state of the economy
in which there is full employment and
Exchange rate: the value of the currency acceptable levels of in ation
of a nation expressed in terms of the
currency of another nation Open economy: any nation that trades
with other nations
9780170407014 Chapter 1 | International trade
4

One way of illustrating how our domestic economy is linked to the rest of the world is through
a circular ow of income model (or ‘circular ow model’) incorporating the external
( foreign) sector.
A circular ow of income model for an open economy incorporates income ows
generated by the external sector. ese include leakages from the economy due to expenditure
on imported commodities by residents, domestic businesses and governments. Injections
into the circular ow are due to income received by residents for commodities exported to
other nations.
Figure 1.1 shows how the external sector ts into a typical circular ow of income model. You
will recall that, if we let M stand for expenditure by residents on imports and X stand for income
received by residents from exports, then the equation for total income in the economy becomes:
Y=C+S+T+M
or
O=C+I+G+X
where:
Y = total income
C = consumption expenditure
S = savings
T = taxation
M = expenditure on imports
O = the value of the total output of production
I = investment expenditure
G = government expenditure
X = expenditure on exports.
Equilibrium is said to be achieved in the economy when:
Ip + G + X = Sp + T + M
where:
Ip = planned investment
Sp = planned saving.
From the above equation, it can be seen that it is possible to have inequality between Ip and Sp,
between G and T and also between X and M, and still have overall equilibrium in the economy
as long as the various inequalities compensate for one another to give overall equality. If the
level of imports is greater than exports (M > X), then the level of economic activity (O and Y ) will
contract. In Australia, there has been an increasing gap between X and M, which has contributed
to an increased external debt – investments, largely from overseas, are being used more than
national savings. To narrow the difference between X and M, the circular ow of income model
demonstrates that I should decrease or S increase or T increase or G decrease. In 2017 and 2018,
the Australian Government delivered budget de cits (G increased more than T) and there has
been a sustained campaign to encourage an increase in national savings.
International economics is an important area of economics. In studying this eld we get a
chance to integrate macro- and microeconomic concepts and models to create a framework within
which we can apply theory to very real-world situations. Concerns such as increasing external
debt, foreign ownership and international competition in industry are affected by pressures such
as volatile exchange rates, decreasing commodity prices and tariffs. Economists have to make
some difficult decisions to achieve their objective of external viability while maintaining internal
balance, such as low levels of in ation and unemployment.

Economics for the Real World | Units 3 & 4 9780170407014

 5

Income (Y)

HOUSEHOLD PRODUCTION

SECTOR SECTOR

Consumers Businesses

Consumer expenditure on goods and services (C)

FINANCIAL SECTOR

S) Investment

I
Savings (
expenditure ( )
segakaeL

snoitcejnI
GOVERNMENT SECTOR

T) Government

G)
Income taxes (
expenditure (

EXTERNAL (FOREIGN)

SECTOR

Imports (M) Exports (X)

FIGURE 1.1 The circular flow of income model

QUESTIONS
1 Why are import payments a leakage from the circular ow-of-information model
and export income an injection into it?
2 Why is Australia described as a small, open economy?
3 How does trade assist economic growth?
9780170407014 Chapter 1 | International trade
6

ECONOMICS DATA
Use the Internet to nd the current rates of growth of Australia’s imports and exports.
1 In the past ve years, has there been a consistent trend in the growth of exports
and imports, or are there uctuations?
2 Suggest reasons why the growth rates are changing.

1.2 The international economic problem

CONCEPTS
Capital: the factor of production comprising Pro t motive: the seeking of pro t, the
the stock of human-made resources used to basic stimulus for economic activity in
create further goods and services a free-enterprise economy
Economic problem: the problem of Relative scarcity: limited supply
deciding or choosing how to satisfy of a resource
unlimited wants with limited resources
Standard of living: a measure of
Factor endowment: the supply of the lifestyle standards based on material and
factors of production (land, labour, capital quantitative indicators, such as possessions,
and enterprise) that exists in a country income, education and health standards,
and housing standards
Gross domestic product (GDP): the total value
of final goods and services produced within Widening gap: increasing economic
an economy in a speci ed period of time difference between poor nations and
Human capital: the knowledge, experience
economically advanced nations
and skills of individuals, in which nations must
invest if they are to advance

It should now be evident that there is a similarity between the economic problem confronting
an individual and the problem that faces all nations. Relative scarcity is the common
element at both levels. Individuals allocate their limited income to maximise the satisfaction
of unlimited wants. In the same way, nations distribute their scarce resources according to

national objectives. Each nation seeks to supplement its own resources through international

trade to compensate for the signi cant differences in factor endowment among nations of

the world.

1.2.1 Unequal distribution of natural resources

Nations are not endowed with the same quantity and quality of natural resources. Geographical

features such as climate and topography largely determine a nation’s agricultural and pastoral
capabilities. For example, a country with high temperatures, low rainfall and a denuded

landscape is extremely limited in its capacity to produce agricultural products and it is

unlikely that such a country could support a thriving pastoral industry. Australia is fortunate

in that, even though only a very small proportion of our continent is considered arable, it has

been sufficient to meet most of the needs of our population.

Economics for the Real World | Units 3 & 4 9780170407014

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