This practice task mirrors Task 2 in the course assessment outline: an extended-response question on the balance of payments and the terms of trade. As in the real task, you choose one of the two questions and write a sustained, structured response. Recommended time: 40 minutes for one question (20 marks).
Choose ONE question
Question A. Analyse the structure of Australia's balance of payments and explain how a persistent current account deficit is linked to the savings–investment gap. In your answer, refer to the double-entry recording system and the relationship between the current account and the capital and financial account. (20 marks)
Question B. Explain the concept of the terms of trade and analyse the effects of a sustained rise in Australia's terms of trade on national income, the exchange rate and the current account. (20 marks)
Your response
Circle the question chosen: A / B
Plan (verb, paragraph points, diagram):
Response:
Marking guide (teacher)
Question A — indicative content
- Structure: BOP = current account (trade balance + net primary income + net secondary income) plus the capital and financial account.
- Double-entry: every transaction recorded twice, so the accounts sum to zero overall; a current account deficit is matched by a capital and financial account surplus.
- Savings–investment gap: a CAD reflects domestic investment exceeding domestic saving; the shortfall is funded by net capital inflow (foreign borrowing/equity).
- Analysis: links the identity (S − I = CAB) to the financing flows; explains why a CAD is not inherently "bad" if it funds productive investment; may reference net income outflows servicing past borrowing.
- Diagram: a BOP structure tree or the S–I/CAB relationship, referenced in the prose.
Question B — indicative content
- Concept: terms of trade = (export price index ÷ import price index) × 100; a rise = export prices rising relative to import prices.
- National income: a higher ToT raises export revenue for a given volume, lifting incomes, company profits and tax revenue (the income effect).
- Exchange rate: higher commodity prices/ToT raise demand for $A, tending to appreciate the currency.
- Current account: higher export values improve the trade balance, though an appreciation and rising imports may partly offset; analysis should weigh these.
- Diagram: the ToT index over time, or an exchange-rate D/S appreciation, referenced in the prose.