2. Australia's place in the global economy Flashcards
International Trade Flows (definition)
Flows of goods and services across different countries
International Trade Flows (types)
Debt, Foreign exchange (FDI), derivatives trading across borders. = International finance and investment
Investment (types)
Portfolio / Direct / Others (loans, deposits) / Derivatives
Portfolio Investment
purchase of shares, bonds & securities, etc.
Direct investment
When foreigners establish a subsidiary or buy a controlling interest in a local firm.
International trade contains…
Trade in more than 1 currency / Risks (exchange rates, changes in commodity prices, IR or government policy) / MNCs dominated / Affected by changes in the economic cycle
Foreign investment in Australia
Other countries established subsidiaries or bought controlling interests in manufacturing, agriculture, mining and services.
Foreign investment refers to…
foreign liabilities owed by Australian residents to non-residents.
Debt and equity borrowing trends
Australians are net borrowers
Australian Balance of Payments components
Current Account / Capital and financial account / Errors and omissions.
BOP Formula
CA +k + net errors & omissions = 0
Current Account Components
Balance on Trade (X-M) + Net Primary Income account + Net Secondary Income Account
Net primary income account
receipts and payments of employee compensation paid to non-resident workers and investment income
Net secondary income account
income from a property, dividend income from stocks, or royalties from intellectual property.
Current account shows…
all transactions involving money received(income, credits) and money spent(expenditure, debits) for exports and imports and the net primary and secondary income accounts.
Capital and financial account record…
foreign financial and investment transactions including borrowing, lending, sales and purchases of assets.
Capital Account
Records all credits and debits of the acquisition or disposal of non-financial assets.
Financial Account
Credits and debits of transactions associated with investments
Trends in current account
Australia has a CAD - Net primary account = main reason
Trends in k
usually small deficits. Usually in surplus
Exchange Rates
Rate at which a unit of currency is exchanged for a given amt. of foreign currency. Measure of relative value of purchasing power.
Relative exchange rates can be…
determined by D&S (floating exchange rate) or Govt. (fixed exchange rate) and are usually measured through bilateral or cross rates.
TWI (Trade weighted index) is used to…
represent one’s currency in terms of another.
Factors affecting demand for AUD
Demand for AUD is a derived demand based on demand for our X and domestic assets by foreigners.
Current account influences demand for M&X in… (examples)
Difference in inflation rates between AUS & others = Decreased demand for X / ToT (price of exports relative to imports) - rise in world economy = +D / International and domestic growth = +D for M = +S
Supply is derived from demand for…
Imports and purchase of foreign assets
Capital and financial account impacts demand for M&X in…
Differences in domestic & international IR. if higher in AUS = +D. if lower = -S for aud / Expectations about future changes
Factors affecting supply of the AUD
Supply is derived from demand for M and purchase of foreign assets
Fixed exchange rates
Central bank fixes exchange rates daily to another currency
Advantage of fixed ex. rates
Advantage: Certainty for importers and exporters ; monetary policy can be conducted to whichever currency fixed XR is pegged against.
Disadvantage of fixed exchange rates
Disadvantage: Speculation increase / central bank must hold more foreign reserve / XR does not respond to external shock (eg. GFC) Dis > Adv.
How does RBA intervene w XR market
- XR might differ from long term equilibrium
- Smooth volatility if too much speculation
- Use foreign reserves to minimise excessive highs and lows
Sterilised intervention
when buying AUD (taking currency out of the economy) RBA offsets this by buying or selling govt. securities through exchange settlement accounts
Positive Economic effects of exchange rate depreciation
Positive - enhancing international competitiveness ; higher capital inflow, due to assets becoming cheaper.
Unsterilised intervention
RBA does not do sterilised intervention, leading to changes in IR.
Negative Economic effects of exchange rate depreciation
Negative - increase in import prices lowering in export prices. Short run = decrease in export income ; can lead to ↑ capital outflow as it reduces cost of foreign assets ; could lead to ↑ unemployment in exporting industries ; large appreciation will force RBA to intervene and reduce AUD by reducing r.
Economic effects of exchange rate appreciation
Negative - In the long run appreciation will reduce competitiveness of exports ; greater capital outflow ; Increased unemployment in exporting business ; large appreciation will force RBA to reduce AUD by reducing r.
J-Curve
effect of depreciation on a country’s trade balance - a depreciation = increase in export sales, having an expansionary effect on Aussie Economy.
Structural Change example
In appreciation, Australia struggled to compete w China, India & ASEAN on exports such as education, tourism & ETMs. Since 2013, the AUD has depreciated by 26%. As a result, resources moved from mining to non-mining sectors such as construction and residential building.
Australia’s trade policy examples
In 1973, the Whitlam Government announced a 25% reduction in protection to encourage efficiency and lower the prices of imports. Increased specialisation and economies of scale in production would result in a lower cost structure.
