2018 HSC Economics: Worked Solutions

Worked solutions to the 2018 HSC Economics examination.

Get the paper first. These solutions describe each question rather than reproducing it, so open the official paper alongside. NESA publishes it free in the 2018 Economics exam pack. The answers below are checked against the official marking guidelines. The explanations are our own.

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Section I: multiple choice

Answer key

Q	A	Q	A	Q	A	Q	A
1	C	6	B	11	D	16	D
2	A	7	A	12	C	17	B
3	A	8	C	13	B	18	B
4	D	9	A	14	C	19	C
5	D	10	D	15	B	20	C

The reasoning

1. Objective of decentralised wage determination. C. Labour productivity. Decentralisation links wages to performance at the level of the individual workplace, which strengthens the incentive to raise output per worker. Income equality is a goal of centralised systems, and decentralisation tends to widen the wage distribution rather than narrow it.

2. Funds to build a bridge. A. The World Bank, which lends long term for development infrastructure. The WTO administers trade rules and lends nothing, the IMF provides short-term crisis finance rather than project finance, and the OECD is a research body.

3. Trade with B rises while trade with C falls. A. Country A implemented a free trade agreement with country B. This is trade diversion: preferential access shifts trade towards the partner and away from non-members, even where the non-member is the more efficient producer. Option D fails because cutting tariffs on both would raise trade with both.

4. Reduction in the company tax rate. D. Increased foreign direct investment. A lower company tax rate raises the post-tax return on investment, attracting foreign capital. Profitability rises rather than falls, and the currency would tend to appreciate on the capital inflow, not depreciate.

5. Improving the international competitiveness of exports. D. The central bank needs a depreciation, so both levers must push the currency down: buy foreign currency, which is the same as selling domestic currency and increasing its supply, and decrease the official interest rate, which narrows the interest rate differential and reduces capital inflow. Options mixing directions cancel out.

6. Internet slowing as more households connect. B. Rivalry in consumption. One household's use is now reducing the bandwidth available to others, which is exactly what rivalry means. This also explains why the internet is not a pure public good: it is excludable through subscription and, once congested, rival as well.

7. Significant increase in US interest rates. A. Capital flows towards the higher return, so investors buy US dollars and demand for USD increases. With more Australian dollars supplied in exchange, the AUD depreciates against the USD. Both halves of the row must be right, and only A has them.

8. Country A's Lorenz curve closer to the line of equality. C. Country A currently has the lower Gini and the more equitable distribution, which rules out A and B. Decreasing country A's top marginal tax rate makes its tax system less progressive, increasing inequality and pushing its Lorenz curve away from the line of equality, meaning towards country B's. Option D moves country B the wrong way.

9. Buying a foreign company, then receiving its dividend. A. Two transactions in different accounts. Purchasing the company sends capital out of Australia to acquire a foreign asset, so it is a debit on the financial account. The dividend is a return on that asset flowing back to Australian shareholders, which is primary income, so it is a credit on the current account.

Note the pattern, because it recurs constantly: a financial account outflow today generates current account credits in future years. The same logic in reverse explains Australia's persistent net primary income deficit.

10. What Alex is NOT guaranteed. D. Protection against unfair dismissal. The question asks specifically about the National Employment Standards, and unfair dismissal protection is not one of them. It sits elsewhere in the Fair Work Act and carries its own qualifying conditions, including a minimum employment period and a high income threshold. Annual leave, notice of termination and redundancy pay are all NES entitlements.

11. Expansionary fiscal stance. D. Stance is the change in the Budget outcome. Moving from a $10 billion surplus to a $5 billion deficit is a $15 billion injection, the largest expansionary swing on offer. Option A is a surplus growing, which is contractionary, and option B is a deficit shrinking, also contractionary.

12. Justification for a national industrial relations system. C. Private sector companies employ workers in many states, so a single national system removes the cost and complexity of complying with several different state regimes for one workforce. Option D is a reason state systems could be retained for state public sectors, which is the opposite of the argument.

13. Government regulation. B. Regulations restricting the behaviour of firms can increase efficiency, which is the whole basis of competition policy: preventing collusion, abuse of market power and anti-competitive mergers makes markets work better. Option A is too absolute, option C confuses microeconomic reform with pure deregulation, and option D describes a possible effect of some regulation rather than a general truth.

14. Why returns to enterprise are a smaller share of household income than returns to labour. C. Most workers are employed by firms, so the dominant income source across households is wages, and many family businesses make a loss or only a small profit, so enterprise income is both less common and often small. Option D is close but incomplete, because it explains why wage income is widespread without explaining why enterprise income is small.

15. Shift in the consumption function. B. The diagram showed consumption falling at each level of income, so look for something that reduces consumption independently of income. A rise in interest rates does that, by raising the return to saving and the cost of borrowing. Rising asset prices, falling unemployment and a lower GST would all shift consumption the other way.

16. Terms of trade and TWI both rising. D. Both indicators moved up, so the cause must raise both. Global demand for exports rising relative to demand for imports lifts export prices against import prices, raising the terms of trade, and simultaneously raises demand for the currency, lifting the TWI. Option A has demand rising for both, which leaves the terms of trade ratio ambiguous, and option C moves the terms of trade down.

17. Underlying inflation above headline. B. Underlying inflation strips out volatile items, so if headline sits below underlying, a volatile item must be dragging headline down. An expansion in global oil production lowers petrol prices, which is the single most volatile component of the CPI. The three distractors all push headline above underlying, which is the more familiar direction and the trap.

18. Government spends an extra $1 billion. B.

k = 1 ÷ (1 − MPC) = 1 ÷ (1 − 0.8) = 5
ΔY = $1 billion × 5 = $5 billion

The required increase to reach full employment was exactly $5 billion, so the stimulus closes the output gap precisely. Cyclical unemployment is eliminated and the unemployment rate equals the NAIRU of 5%. Option D fails because inflation only accelerates if the economy is pushed below the NAIRU, and this lands exactly on it.

19. Monetary union between a recessed economy and a booming one. C. The shared currency settles at a value reflecting the average of the two economies. Country B is booming, so on its own its currency would be stronger than the union rate. Inside the union, B's currency is therefore weaker than it would otherwise have been, which makes it cheaper for foreign firms to acquire assets in country B.

This is the classic argument against monetary union between economies at different points in the cycle: a single currency and a single interest rate cannot suit both, so the union is too loose for the boom and too tight for the recession.

20. Identifying the change in trade policy. C.

Government revenue rose from $0 to $400  →  a tariff now exists where none did
Foreign producer revenue rose $0 → $1600 →  imports were previously ZERO

Tariff revenue = tariff × imports
$400 = $2 × imports   →   imports = 200 units

Foreign revenue = world price × imports
$1600 = world price × 200   →   world price = $8

Work from the government revenue first. Revenue rose from nothing, and a quota generates no government revenue at all, so the new policy must be a tariff. Foreign producer revenue also rose from nothing, which means imports had previously been zero, so the old policy was a quota of zero. Everything then reconciles at 200 units and an $8 world price.

Option D fails immediately, because replacing a quota with another quota would leave government revenue unchanged at zero.

Where marks were lost. Question 20 was the hardest in the paper and required working backwards from three revenue figures. Question 10 caught candidates who knew unfair dismissal exists without knowing it sits outside the NES. Question 18 caught candidates who assumed any stimulus is inflationary without checking the size of the output gap.

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Section II: short answer

Question 21 (10 marks): wages and underemployment

(a) Outline ONE cause of recent low wage growth in Australia (2 marks).

Spare capacity in the labour market. Following the global financial crisis, elevated unemployment and underemployment meant more workers competing for each vacancy, which reduced the bargaining power of employees in wage negotiations. Where workers fear job loss and can be readily replaced, they moderate wage claims, so wage growth stays weak even as employment recovers.

One cause with a mechanism. Other answers that earn full marks: declining union membership, the shift of workers out of high-paying mining jobs after the investment boom, weak productivity growth, and increased competition from imports and offshoring.

(b) Explain how a low unemployment rate can co-exist with high underemployment (4 marks).

The two measures count different things. The unemployment rate measures people who are out of work, actively seeking work and available to start, as a proportion of the labour force. Underemployment measures people who are employed but want and are available to work more hours than they currently get.

The critical point is that a person needs only one hour of paid work in the reference week to be counted as employed. Someone working five hours a week who wants thirty-five is fully counted as employed and contributes nothing to the unemployment rate, despite being substantially underutilised.

The two can therefore diverge when the labour market adjusts through hours rather than headcount. Firms facing weaker demand often prefer to cut hours than to retrench, because redundancy is costly and firm-specific skills are lost. Structural change compounds this: growth in casual, part-time and gig work in industries such as retail, hospitality and care means more jobs are created, which lowers unemployment, but many of those jobs offer fewer hours than the worker wants.

This is why the underutilisation rate, which adds unemployment and underemployment together, is the better measure of labour market slack. It also explains the wage puzzle in part (a): a low unemployment rate suggests a tight labour market, but high underemployment means there is a large pool of existing workers available to supply more hours before employers need to bid up wages.

That final link back to wage growth is what lifts this to four marks.

(c) Explain the effects of low wage growth on the Australian economy (4 marks).

Consumption and growth. Wages are the largest source of household income, so weak wage growth means slow growth in real household income. Since consumption is the largest component of aggregate demand, households respond by spending less or by saving less to maintain their standard of living. Weaker consumption reduces aggregate demand and economic growth, and it discourages firms from investing, which reduces aggregate demand further.

Inflation. Wages are also the largest component of production costs, so low wage growth means low growth in unit labour costs and therefore weak cost-push inflationary pressure. This contributed to inflation sitting below the RBA's 2 to 3% target band for much of the period, which in turn constrained monetary policy by pushing the cash rate towards the effective lower bound.

International competitiveness. Low wage growth relative to trading partners lowers relative production costs, improving the price competitiveness of Australian exporters and import-competing firms.

The Budget. Slower growth in wages means slower growth in personal income tax receipts, since income tax is the largest single revenue source. It also reduces bracket creep, which governments rely on to return the Budget to surplus without legislating tax increases.

Distribution. Where wage growth runs below productivity growth, labour's share of national income falls and capital's share rises. Since wealth ownership is more concentrated than wage income, this widens inequality.

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Question 22 (10 marks): microeconomic reform

(a) Define efficiency in this context (1 mark).

Efficiency is producing the greatest possible output from a given quantity of inputs, or equivalently producing a given output using the fewest inputs.

One mark, one sentence. Do not spend three.

(b) Why reform of a single factor market has a greater impact than reform of a single product market (2 marks).

Factor markets supply the inputs, being land, labour, capital and enterprise, that every industry uses. Improving efficiency in a single factor market therefore lowers costs and raises productivity across all the product markets that draw on that factor, so the gain multiplies through the whole economy. Reform of a single product market improves efficiency in that market alone, and the benefit reaches other industries only where the good is used as an input.

Labour market reform is the obvious illustration, since almost every firm employs labour.

(c) Why microeconomic reform is difficult to implement during low economic growth (3 marks).

Microeconomic reform imposes short-term costs to secure long-term benefits. Exposing protected industries to competition forces the least efficient firms to contract or close, which generates structural unemployment among workers whose skills are specific to those industries.

During a period of low economic growth, the economy is not generating enough new jobs to absorb those displaced workers, so they remain unemployed for longer and the adjustment cost is far higher than it would be in an expansion. Structural unemployment also risks becoming long-term unemployment, as skills atrophy and workers detach from the labour force, which raises the NAIRU and makes the damage permanent.

This creates a political constraint. The costs are immediate, concentrated and visible, falling on identifiable workers and regions who organise in response, while the benefits are delayed and spread thinly across consumers who will not mobilise in support. Governments facing an electoral cycle are therefore reluctant to reform precisely when growth is weak. The fiscal position compounds this, because retraining, income support and regional assistance all cost money at a time when revenue is already depressed.

(d) How labour market reforms help achieve full employment and price stability in the long term (4 marks).

Both objectives must be covered, because the guidelines cap a one-sided answer.

Full employment. Enterprise-level bargaining allows wages to reflect conditions in the individual firm, so employers can afford to retain and hire workers whose productivity would not justify a uniform award wage. Reforms improving labour mobility, including the recognition of qualifications across states and the removal of restrictive work practices, allow workers to move from declining to growing industries, reducing structural unemployment. Education and training reduce the skills mismatch directly, moving people from structural unemployment into work.

Price stability. Wages are the largest component of production costs, so the relevant variable is unit labour cost, which is wages relative to productivity. Enterprise bargaining ties wage increases to productivity improvements at the workplace, so real wages can rise without unit labour costs rising, which generates no cost-push pressure. Decentralisation also removes the flow-on wage claims that a centralised system transmitted across unrelated industries.

The two objectives connect through the NAIRU. By reducing structural unemployment and weakening the link between tight labour markets and accelerating wages, labour market reform lowers the NAIRU itself. That means the economy can sustain a lower rate of unemployment without generating inflation, which is why the two objectives, normally in conflict through the short-run Phillips curve, can be advanced together over the long term.

That final paragraph is the answer to the question. Demand-side policy trades one objective against the other, and supply-side reform is what shifts the trade-off.

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Question 23 (10 marks): globalisation

(a) Explain ONE cost and ONE benefit of globalisation (4 marks).

Two marks each, so develop both.

Benefit: higher living standards through specialisation and trade. Globalisation allows economies to specialise according to comparative advantage and trade for the rest, which raises total world output above what the same resources could produce in isolation. Consumers gain access to a wider range of goods at lower prices, and producers reach larger markets, enabling economies of scale. Access to foreign capital, technology and management practice raises productivity in developing economies, which is why globalisation coincided with the fastest sustained reduction in world poverty in history.

Cost: increased volatility and transmission of shocks. Integration means downturns propagate across borders through trade, financial flows and confidence, which is the international business cycle. The 2008 global financial crisis began in the United States housing market and spread worldwide within months through interconnected banking systems. Financial integration is the sharper risk, because capital can leave an economy far faster than trade patterns can adjust, and sudden capital flight can force a currency collapse and a domestic recession in an economy whose fundamentals had not changed.

Alternative costs that also earn full marks: structural unemployment in import-competing industries, rising inequality within economies, environmental degradation, and the loss of policy sovereignty.

(b) Explain how Australia has contributed to the process of globalisation (6 marks).

Six marks, so cover several channels with dates and mechanisms.

Trade liberalisation. Australia reduced tariffs unilaterally from the 1970s, with major reductions in 1973, 1988 and 1991, rather than waiting for reciprocal concessions. Average manufacturing protection fell from very high post-war levels to among the lowest in the OECD, and the motor vehicle and textile, clothing and footwear industries lost their protection entirely. This opened the domestic market to world competition and forced Australian resources towards industries with genuine comparative advantage.

Trade agreements. Australia negotiated bilateral agreements with the United States, Japan, Korea, China, Indonesia and India, and participated in the CPTPP and RCEP, expanding market access in both directions. Australia was also a founding member of the GATT and remains active in the WTO.

Financial deregulation. The float of the Australian dollar in December 1983 was the decisive step, removing government control over the exchange rate and linking Australia directly to global capital markets. The removal of exchange controls and the admission of foreign banks from 1985 opened the domestic financial system, allowing capital to flow freely in and out. Australian financial flows now dwarf trade flows, and Australian banks and superannuation funds are significant participants in global markets.

Investment. Australia liberalised its foreign investment regime, attracting FDI into mining, agriculture, property and infrastructure, while Australian superannuation funds and firms invested heavily offshore. Australia is now both a substantial host and a substantial source of foreign investment.

Labour mobility. Australia runs one of the largest permanent migration programs in the world relative to population, along with substantial temporary skilled migration and a very large international education sector. Labour is the least globalised factor of production worldwide, so Australia's contribution here is disproportionate.

Institutional participation. Australia is an active member of the WTO, IMF, World Bank, OECD, APEC and the G20, and it contributed to the coordinated G20 response to the global financial crisis. It has also joined international environmental agreements including the Kyoto Protocol and the Paris Agreement.

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Question 24 (10 marks): interpreting the data

The table gave CPI rising from 100 to 105, nominal GDP from $1000bn to $1050bn, a labour force of 12 000 000 then 12 120 000, full-time employment falling from 8 000 000 to 7 920 000, part-time rising from 3 400 000 to 3 500 000, net foreign debt rising from $900bn to $1000bn, and net foreign liabilities unchanged at $1050bn.

(a) Calculate the unemployment rate in 2016 (2 marks).

Total employed = full-time + part-time = 8000 + 3400 = 11 400 thousand
Unemployed = labour force − employed = 12 000 − 11 400 = 600 thousand

Unemployment rate = 600 ÷ 12 000 × 100 = 5%

Answer: 5%. "Show all working" means show it, because a correct figure with no working loses the second mark.

(b) Calculate the rate of growth in real GDP from 2016 to 2017 (2 marks).

Real GDP = nominal GDP ÷ CPI × 100
  2016: 1000 ÷ 100 × 100 = $1000 billion
  2017: 1050 ÷ 105 × 100 = $1000 billion

Growth = (1000 − 1000) ÷ 1000 × 100 = 0%

Answer: 0%. Nominal GDP rose 5% and prices rose 5%, so the entire increase was inflation and real output did not change.

(c) Explain the relationship between net foreign debt and net foreign liabilities (2 marks).

Net foreign liabilities is the broader measure. It equals net foreign debt plus net foreign equity, so net foreign debt is a component of net foreign liabilities rather than a separate concept. Net foreign debt is what Australians owe foreigners in loans and borrowings, net of what foreigners owe Australians. Net foreign equity is the value of Australian assets owned by foreigners, net of foreign assets owned by Australians.

The table shows the distinction in action. Net foreign debt rose from $900bn to $1000bn while net foreign liabilities stayed at $1050bn, which means net foreign equity fell from $150bn to $50bn. The composition of Australia's external liabilities shifted towards debt and away from equity, even though the total was unchanged. That matters, because debt carries a contractual servicing obligation regardless of economic conditions, whereas equity returns fall when profits fall.

Using the table's numbers to demonstrate the relationship is what earns the second mark here.

(d) Justify why this economy likely experienced a depreciation between 2016 and 2017 (4 marks).

Justify means build a case from the data. Use as many indicators as you can.

Real growth of zero. Part (b) shows real GDP did not grow. A stagnant economy offers poor returns on investment, so foreign capital inflow weakens, reducing demand for the currency. It also reduces the likelihood of the central bank raising interest rates.

A weakening labour market. Full-time employment fell by 80 000 while part-time rose by only 100 000, so the composition of employment deteriorated even as the labour force grew by 120 000. That points to rising underemployment and spare capacity, reinforcing the weak growth picture and lowering expectations of monetary tightening. A narrowing interest rate differential reduces capital inflow and therefore demand for the currency.

Inflation of 5%. Prices rose from 100 to 105 while output was flat. If this exceeds trading partner inflation, the economy loses international competitiveness: exports become relatively more expensive, reducing foreign demand for the currency, while imports become relatively cheaper, increasing the supply of the currency as residents buy more of them. Both blades push the exchange rate down.

Rising net foreign debt. Net foreign debt grew from $900bn to $1000bn. Servicing that debt requires converting domestic currency into foreign currency, which increases the supply of the domestic currency on the foreign exchange market. Rising external indebtedness can also reduce foreign investor confidence and the country's credit standing, discouraging inflow.

Taken together, every indicator in the table reduces demand for the currency or increases its supply, so a depreciation is the expected outcome.

Note the useful feedback loop worth mentioning if you have time: the depreciation itself raises the domestic-currency value of that foreign debt, worsening the external position that helped cause it.

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Section III: stimulus-based extended response

Question 25: free trade and the government's ability to achieve its economic objectives

The stimulus paired a quotation from Geoffrey Garrett, that "the gains from free trade tend to be dispersed while the losses tend to be concentrated" and that governments "can attempt to compensate the losers", with an ABS graph of employment in construction, manufacturing and total employment.

Thesis. The move towards free trade has raised aggregate output and total employment while making the government's task harder on all three objectives named, because the gains arrive as diffuse consumer benefits the government cannot direct, while the losses arrive as concentrated regional unemployment it must address. The constraint is distributional rather than aggregate.

The plan:

1. Define free trade, and identify Australia's liberalisation: unilateral tariff cuts from the 1970s, the float in 1983, and the network of bilateral and regional agreements. Define the three objectives.
2. Use Garrett immediately. The dispersed-gains, concentrated-losses asymmetry is the analytical spine of the whole essay, so state it early and return to it under each objective.
3. Full employment. Use the graph: manufacturing employment declined steadily while total employment rose, which is the single most important observation available. Free trade did not reduce employment in aggregate, and it changed its composition, moving workers out of protected manufacturing into services, construction and mining. The government's difficulty is that the displaced workers hold industry-specific skills, are regionally concentrated in places such as Elizabeth, Geelong and Broadmeadows, and are geographically immobile, so structural unemployment rises even while total employment grows. Macroeconomic policy cannot fix that, since it is a supply-side problem requiring retraining and regional assistance.
4. Distribution of income. Free trade lowers consumer prices, which is progressive, because low-income households spend a larger share of income on traded goods such as food and clothing. Against that, it widens the wage distribution by exposing low-skilled workers to international competition while raising the return to skills, and displaced workers typically move to lower-paid work. The net effect is greater market income inequality, requiring more redistribution through the tax and transfer system, which is exactly the compensation Garrett describes.
5. External stability. Free trade raises both exports and imports. It improved Australia's competitiveness in industries of genuine comparative advantage and contributed to the current account surpluses from 2019, but it also increased exposure to the international business cycle and to commodity price volatility, and it deepened concentration in a small number of export markets.
6. The compensation problem, which is where the top band is won. Garrett says governments "can attempt" to compensate. Assess whether Australia succeeded. Structural adjustment packages for the motor vehicle, textile and clothing industries provided retraining and regional assistance, but compensation is politically difficult to sustain, hard to target, and rarely restores displaced workers to their previous earnings. The failure of compensation, more than free trade itself, is what generates the political backlash against liberalisation.
7. Judgement. Free trade has not restricted the government's ability to achieve full employment or external stability in aggregate, and on both it has helped. It has genuinely constrained the government's ability to achieve an equitable distribution of income, because the instruments that would compensate the losers are the same instruments that face the hardest political constraints.

Question 26: how far Australia's growth since 1991 is attributable to macroeconomic policy

The stimulus was a graph of the Australian official cash rate against federal government Budget outcomes.

Thesis. Macroeconomic policy deserves substantial credit for the length of Australia's expansion, because it smoothed the cycle and prevented recessions that would otherwise have occurred, but it cannot explain the rate of growth, which was determined by microeconomic reform, the terms of trade, population growth and Chinese demand. Macroeconomic policy explains why growth was uninterrupted; other factors explain why there was growth to interrupt.

The plan:

1. Establish the fact: Australia recorded close to three decades without a technical recession from 1991 to 2020, an outcome unmatched in the developed world.
2. Monetary policy. Use the cash rate line. Inflation targeting from 1993, RBA independence, and counter-cyclical settings. The clearest case is 2008 and 2009, when the cash rate was cut from 7.25% to 3.00% within months. Explain the transmission mechanism.
3. Fiscal policy. Use the Budget outcome line. Surpluses through the 2000s built the capacity that funded the roughly $52 billion stimulus of 2008 and 2009, and the automatic stabilisers operated throughout. Note the sequencing point: the surpluses are what made the stimulus possible.
4. The policy mix. The two instruments were coordinated in 2008 and 2009 rather than working against each other, which is a genuine achievement and worth naming.
5. Now the counter-argument, which is what "to what extent" demands. Microeconomic reform raised productivity and the sustainable rate of growth, and demand-side policy cannot do that. The terms of trade boom driven by Chinese industrialisation raised national income enormously and was entirely exogenous. Population growth through migration contributed a large share of aggregate GDP growth, so growth per capita was considerably weaker than headline growth, a distinction worth making explicitly. Financial deregulation and the float provided an automatic shock absorber. And Australia was lucky in the timing of the mining boom relative to the global financial crisis.
6. The limits of the policy explanation. Growth in GDP per capita was mediocre by historical standards, productivity growth declined through the 2010s, and by 2019 the cash rate was near zero with inflation below target, which suggests macroeconomic policy had exhausted its capacity before the pandemic arrived.
7. Judgement. Attribute the absence of recession largely to macroeconomic policy, and the rate of growth largely to structural and external factors. Sustained expansion is not the same thing as strong growth, and conflating them is the error the question is designed to catch.

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Section IV: extended response

Question 27: evaluate the success of government policies for environmental sustainability in Australia

Evaluate requires a judgement against criteria, so state your criteria and apply them.

Thesis. Australian environmental policy has succeeded where the externality is local, the abatement cost is contained and substitutes are available, and failed where the externality is global and the cost falls on major export industries. The determining factor has been political durability rather than instrument design.

The plan:

1. Define ecologically sustainable development and intergenerational equity, and identify the market failures: negative externalities, free riding, and common access resources.
2. Market-based policies. The Renewable Energy Target drove substantial growth in renewable capacity. The carbon pricing mechanism operated from July 2012 at $23 per tonne and produced measurable electricity sector emissions reductions before repeal in July 2014. Water trading in the Murray-Darling Basin allocates a scarce resource to its highest-value use. Assess: efficient in principle, because abatement occurs where it is cheapest, and undermined in practice by reversal.
3. Regulations and targets. Vehicle emissions standards, building efficiency requirements, land clearing restrictions, container deposit schemes, and the phase-out of ozone-depleting substances. Assess: certain in outcome but less efficient, since the same requirement falls on firms with very different abatement costs.
4. International agreements. Kyoto, ratified in 2007, and Paris in 2015. Assess: they coordinate action and create reputational pressure, but they are not enforceable and targets are self-nominated.
5. The clear successes, and be specific about why they worked. The Montreal Protocol on ozone-depleting substances is the strongest case, because substitutes existed, producers were few, and the science was uncontested. Household solar uptake is among the highest in the world. Water trading improved allocative efficiency. Land clearing rates fell under state regulation. In every case the abatement cost was contained and no major export industry was threatened.
6. The clear failures, and why. Carbon pricing lasted two years. The Minerals Resource Rent Tax was weakened then repealed. Australia's emissions per capita remain among the highest in the developed world. The Murray-Darling Basin Plan has been persistently over-allocated. Each of these threatened a concentrated, organised, politically powerful interest.
7. Why the pattern holds. Political constraints and the electoral cycle. The free rider problem, since Australia produces slightly over 1% of global emissions. Conflicts with growth, employment and external stability, since coal and gas are major export earners. Long time lags against partly irreversible damage. And policy uncertainty, which is itself the deepest cost, because energy investment has a thirty-year horizon and capital will not commit to a framework that may not survive an election.
8. Judgement against the criteria. Partial success. Rank the instruments: market-based policies are the most efficient where they survive, regulation is the most reliable because it is harder to reverse, and international agreements are the weakest because they are unenforceable. The binding constraint on Australian environmental policy has never been economics but political economy.

Question 28: assess the importance of factors determining the size and composition of Australia's current account

Assess means rank the factors, not just list them. That ranking is the essay.

Thesis. The size of Australia's current account balance is determined cyclically by the terms of trade, while its composition is determined structurally by the savings and investment gap, which produces a persistent net primary income deficit. Distinguishing the cyclical from the structural is the key to the question.

Structure first. Set out the accounts: the current account comprises the balance on goods and services, net primary income and net secondary income, and it is financed by the capital and financial account, with the two summing to zero under a float.

Cyclical factors, which determine size.

• The terms of trade, the single most important factor. Export prices for iron ore, coal and LNG drive export values directly. The 2011 peak and the 2021 surge both moved the balance on goods and services sharply, and the surge produced Australia's first current account surplus in 44 years in June 2019.
• The exchange rate, which under a float partially self-corrects: weaker export demand reduces demand for the AUD, and the depreciation restores competitiveness over time, subject to the J-curve and the Marshall-Lerner condition.
• The domestic and international business cycles. Strong domestic growth draws in imports, given Australia's high marginal propensity to import, while growth in trading partners raises export demand.

Structural factors, which determine composition.

• The savings and investment gap, the deepest cause. Australia has historically invested more than it saves, and the gap must be financed by foreign capital.

  CAD ≡ investment − national savings
  

  That capital inflow accumulates as foreign liabilities, whose servicing appears as net primary income debits. This is why net primary income has been the largest component of the current account deficit for decades, and why the deficit is a servicing phenomenon rather than an inability to sell exports. Make this point explicitly, because it is the strongest available.

• The composition of exports, narrow and commodity-weighted, which makes export values volatile.

• The composition of foreign liabilities, weighted towards debt over equity, and the extent to which it is AUD-denominated or hedged, which determines exposure to valuation effects.

• The maturing superannuation system, which has raised national savings substantially and is the most plausible explanation for the structural shift into surplus after 2019. This is the factor most candidates miss.

• Global interest rates, which determine the servicing cost of existing liabilities.

Then assess, which is the actual task.

• Most important for size: the terms of trade, because it moves export values faster and further than anything else.
• Most important for composition: the savings and investment gap, because it explains the persistent net primary income deficit that dominates the account.
• Most underrated: rising national savings through superannuation, which turned a four-decade pattern of deficits into surpluses.
• Least important: net secondary income, which is small and stable.

Close on the policy implication. Because the deficit reflects private saving and investment decisions rather than government failure, the Pitchford thesis argues it is not a policy problem: the borrowers bear the risk and expect a return. The counter-argument is that the composition matters, since debt carries contractual servicing obligations that equity does not, and a highly indebted economy is vulnerable to a sudden reversal in global capital markets.

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What to do with this paper

Do it timed and closed-book first. Mark against NESA's published guidelines before reading any of the above, then classify every lost mark as knowledge, verb, data, timing or diagram.

Question 21(b) is the one to study. Underemployment, the underutilisation rate and the one-hour rule have appeared repeatedly since 2018, including in 2020 Question 12, and most candidates can define unemployment without being able to explain why the rate understates labour market slack.

Related: 2019 worked solutions · 2020 worked solutions · The complete diagram guide · Every formula you need

Questions are described rather than reproduced. The 2018 examination paper and marking guidelines are © NSW Education Standards Authority and are available free from the NESA website. Answers verified against the official marking guidelines; explanations are our own.