Worked Solutions
Topic 2: Australia's Place in the Global Economy — Worked Solutions (HSC Economics)
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Worked examples for HSC Economics Topic 2: Australia's Place in the Global Economy. Each shows where the marks are awarded, the key idea, and the full solution explained by your choice of tutor — Stella, Ella or Cassie.
How to use these
Try each question first, then check your working against the model answer. Use the tutor tabs to read the response in the style that suits you: Stella is direct and challenging, Ella is warm and explains the why, and Cassie is concise and analytical. For balance of payments questions, watch the signs — a current account deficit is financed by a matching capital and financial account surplus.
Example 1 — Balance of payments arithmetic
Question
In a given year an economy records the following (all in $ billion): exports of goods and services $480, imports of goods and services $510, net primary income –$45, and net secondary income +$3. Calculate the balance on current account, and state what this implies for the capital and financial account.
Solution
The current account is the balance on goods and services (BOGS) plus net primary income plus net secondary income.
First the BOGS:
$$\text{BOGS} = X - M = 480 - 510 = -30$$
Now add the income balances:
$$\text{CAB} = \text{BOGS} + \text{NPY} + \text{NSY} = (-30) + (-45) + 3 = -72$$
So the current account balance is a deficit of \$72 billion.
Because the balance of payments must sum to zero (net of errors), a current account deficit of \$72b must be financed by a capital and financial account surplus of \$72b — a net inflow of foreign funds.
Let's build the current account up from its parts, because that's how the marks are awarded. The current account has three components: the balance on goods and services, net primary income, and net secondary income.
Start with goods and services — what we sell abroad minus what we buy:
$$\text{BOGS} = X - M = 480 - 510 = -30 \text{ billion}$$
We're importing more than we export, so this is negative. Now we add the income flows. Net primary income (–\$45b) covers things like interest and dividends paid overseas, and net secondary income (+\$3b) is transfers like foreign aid:
$$\text{CAB} = -30 + (-45) + 3 = -72 \text{ billion}$$
So the current account is in deficit by \$72 billion.
Here's the why for the last part: the balance of payments always balances. Money leaving on the current account has to be matched by money coming in elsewhere. So a \$72b current account deficit must be offset by a \$72b surplus on the capital and financial account — foreigners are net lenders to, or investors in, this economy.
CAB = BOGS + NPY + NSY.
- BOGS = $X - M = 480 - 510 = -30$
- NPY = $-45$
- NSY = $+3$
- CAB = $-30 - 45 + 3 = -72$
$$\text{CAB} = -\$72\text{ billion (deficit)}$$
BoP sums to zero → capital and financial account = +\$72 billion surplus (net capital inflow finances the CAD).
Where the marks go
- 1 mark: Correctly calculates the balance on goods and services ($X - M = -30$)
- 1 mark: Correctly calculates the current account balance (–$72b deficit) by adding the income components
- 1 mark: States that the capital and financial account is in surplus by $72b (financing the deficit)
Key idea
Current account = BOGS + net primary income + net secondary income; the capital and financial account is the mirror image, so a CAD is financed by a matching surplus.
Example 2 — Free trade versus protection
Question
Discuss the effects on the domestic economy of removing a tariff on an imported good.
Solution
A tariff is a tax on imports that raises their price, protecting domestic producers. Removing it does the reverse.
Lower prices, higher consumption: the import price falls, so consumers pay less and buy more. Consumer surplus rises — a clear welfare gain.
Domestic producers contract: without protection, less-efficient domestic firms lose market share. Output and employment in that industry fall, causing structural unemployment in the short term.
Resource reallocation: capital and labour shift toward industries where the economy has a comparative advantage, raising efficiency and long-run productivity. This is the source of the long-term gains.
Government revenue falls: the tariff was a revenue source, so removing it reduces government receipts.
On balance: removing the tariff improves efficiency and consumer welfare over the long run, but imposes short-term adjustment costs (unemployment, lost output) on the protected industry — which is why governments often pair liberalisation with structural adjustment assistance.
First, what is a tariff doing? It's a tax on an imported good that pushes its price up, shielding local producers from cheaper overseas competition. So when we remove it, we reverse all of those effects — and there are winners and losers, which is why this is a "discuss".
For consumers, the news is good: the price of the import falls, so they can buy it more cheaply and consume more. That's a rise in consumer surplus and a direct gain to living standards.
For domestic producers in that industry, it's harder. They were relying on the tariff to stay competitive; without it, the cheaper imports take market share. Production and jobs in that industry fall, creating structural unemployment as workers need to find new roles.
But here's the longer-term why it's usually worth it: those workers and that capital don't vanish — they move toward industries where the economy is genuinely more efficient (its comparative advantage). That reallocation raises overall productivity and growth over time.
One more effect: the tariff used to raise revenue for the government, so removing it reduces that revenue. Weighing it all up, removing the tariff lifts consumer welfare and long-run efficiency, but the short-run adjustment costs fall on the protected industry — which is why support like retraining often accompanies it.
Tariff = tax on imports → raises import price, protects domestic producers. Removal reverses this.
Effects of removal:
- Import price falls → consumers buy more, consumer surplus rises
- Domestic producers lose share → output and employment fall (structural unemployment, short run)
- Resources reallocate to comparative-advantage industries → higher efficiency/productivity (long run)
- Government tariff revenue falls
Net:
- Long-run gain: efficiency + consumer welfare
- Short-run cost: adjustment/unemployment in protected industry
- Often paired with structural adjustment assistance
Where the marks go
- 1 mark: Identifies a tariff as a tax on imports that raises their price/protects domestic producers
- 2 marks: Discusses benefits of removal (lower prices, higher consumer surplus, resource reallocation/efficiency gains)
- 2 marks: Discusses costs of removal (contraction of domestic industry, structural unemployment, lost tariff revenue)
Key idea
Removing a tariff lowers prices and improves long-run efficiency through resource reallocation, but imposes short-run adjustment costs on the previously protected industry.