Australia's Trade & Financial Flows: Concepts Flashcards

1
Q

Why did the mining boom happen?

A

The industrialisation of China and India led to a dramatic increase in demand for commodities (in particular coal and iron for the construction of cities and infrastructure)

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2
Q

Why did mining production only increase 10 years after the start of the mining boom?

A

It takes time to increase the size of mines or build new ones - so the mining investment boom had to happen before production could be increased

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3
Q

Why does Australia import a lot of intermediate, consumer and capital goods?

A

Australia specialises in resources, services and agriculture - so most of these manufactured goods need to be imported from overseas

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4
Q

Why has China become the main destination for Australian exports?

A

China’s industrialisation means it requires a lot of resources to build infrastructure, make its products, and generate electricity

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5
Q

Why is China the biggest source of Australia’s imports?

A

China specialises in low-cost manufactured goods, which Australia does not have a comparative advantage in

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6
Q

Why does Australia usually have a savings-investment gap?

A

Australia has a relatively small population (so low national savings) and specialises in industries like mining that require large amounts of investment

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7
Q

What has happened to Australia’s savings investment gap?

A

It has temporarily disappeared due to the improvement in Australia’s trade balance (following the spike in commodity prices)

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8
Q

What are 4 reasons Australia has recently changed from being a net recipient of foreign investment to a net provider?

A
  1. End of the mining boom (firms need less funds)
  2. Improvement in the trade balance (Australia is receiving more funds from trade, so no need to borrow those funds)
  3. Growth of superannuation savings over time
  4. Increase in domestic savings during the pandemic
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9
Q

What does it mean if a country’s net foreign liabilities is positive?

A

The value of foreign investment into the country is greater than the value of the country’s foreign investment into other countries

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10
Q

How could a country’s net financial flows this year be negative but net foreign liabilities be positive?

A

Financial flows only measure what happened this year, whereas net foreign liabilities shows the accumulation of flows from all previous years.

So this country may have lent more than it borrowed this year, but it may have lots of unpaid debt that it borrowed in previous years still

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11
Q

Why did Australia’s net foreign debt increase in the 90s and 2000s?

A
  1. Financial deregulation: In the late 1980s, the government removed laws that restricted firms’ ability to borrow from overseas
  2. The mining investment boom: firms needed more funds for expansion in the 2000s
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12
Q

Why has net foreign debt fallen in recent years?

A

Business investment has fallen since the mining boom (reducing borrowing from overseas), (though government foreign debt has increased because they have had a budget deficit every year since the GFC until 2023).

Mining profits have also increased with the ToT spike, helping to fill the S-I gap

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13
Q

Why has the depreciation of the Australian dollar affected Australia’s net foreign equity?

A

When the value of the Australian dollar falls, the value of an asset owned overseas (e.g. a share in Volkswagen) will be worth more in AUD than before. So the total value of assets owned overseas by Australians looks like it has increased, causing net foreign equity to improve

Meanwhile, the value of assets in Australia owned by foreigners is always measured in AUD, so it is unaffected when the exchange rate changes

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14
Q

How does a change in the exchange rate affect the value of a country’s net foreign debt (and why is this less of an issue for Australia’s net foreign debt)?

A

Let’s say a firm borrowed €100 from France and converts it into AUD. Then the AUD depreciates. This will make it more expensive to repay that debt in Euros. So a depreciation would worsen the value of a country’s net foreign debt.

But most Australian debt is AUD-denominated (meaning we borrowed in AUD, not in the foreign currency), so exchange rate changes don’t affect Australia’s net foreign debt very much

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