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Economics > Australias Place in the Global Economy > Flashcards

Australias Place in the Global Economy Flashcards

1
Q

What is the value of Australian trade?

A

2016 value of Australia’s trade:

  • Exports: $312billion.
  • Imports: $349billion
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2
Q

What is the composition of Australias trade?

A
  • Minerals and metals have increased about 20% over the past 20 years due to mining investment boom
  • Decline of rural -4% due to fluctuations in world prices, trade protection policies and no value adding to transformation process.
  • Decline of manufacturing -5% due to high exchange rate and increased competition from China and other Asian economies whom have a comparative advantage
  • Diversifying exports to middle class consumers of Asian countries services hold potential for long term growth with mining exports only contributing to 7% of GDP with many subsidies.
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3
Q

What is the direction of Australia’s trade?

A
  • Eliminated average tariff level about 20% since 1980
  • Changed direction due to EU
  • Shifted focus towards Asian economies who have fast growing sustainable growth, expected to account for 45% of global trade flows by 2020
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4
Q

Why have financial flows increased?

A
  1. International capital markets opened up.
  2. Exchange rates floated.
  3. Tech changes made it easier to shift finance between countries.
  4. Restrictions on movement of capital across nation borders were removed.
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5
Q

What is the value of Australias financial flows?

A

Australia’s net international investment liability position was $173 billion in 1990 but has increased to $955 billion in 2017.

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6
Q

What is the composition of Australia’s financial flows?

A

Change in composition between portfolio and direct investment

  • They require servicing costs, show’s up as a debit to the CA
  • Prior to deregulation most financial flows were direct - preferred by the government
  • Australias investment overseas is 100x the 1980 level as the removal of financial flow restrictions has injected money into Australian businesses through net foreign debt
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7
Q

What is the direction of Australia’s financial flows?

A

Imbalance between investment inflows and outflows

  • Australia has always been a net capital importer - level of foreign investment in Australia higher than Australian investment abroad.
  • Australia needs to borrow from o/s investors to fund CAD from purchasing high levels of imports –> increases debt and leads to negative transactions in CA, expanding CAD
  • Reflects the historically low level of domestic savings - reliant on foreign capital to supplement shortage.
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8
Q

What is in the capital account?

A

Capital transfers

  • Conditional foreign aid
  • Debt forgiveness

Net acquisition
- Sale of intellectual property rights

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9
Q

What are some links between the key balance of payments categories?

A
  • CAF surplus indicates borrowing from overseas or foreigners investing into Australia
  • CAD is a result of the savings and investment gap
  • Financial flows create debits on the primary income through international borrowing and foreign investment.
  • Creates ‘debt trap’ as Australia borrows money to pay servicing costs.

M + Yd + Ko = X + Yc + Ki

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10
Q

What are the cyclical factors of the BOGS?

A
  1. Exchange rate - impacts international competitiveness
  2. Terms of trade
    - Deteriorating terms of trade creates deficits in the CA due toe expenditures on imports greater than income from exports
    - Evident as BOGS is in deficit when M>X
    - Depreciation decreases terms of trade by increasing price of imports
  3. Level of domestic growth - economic growth increases incomes leading to increased volume of imports
  4. Changes in the international business cycle - increased business cycle reflects an increase of imports
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11
Q

What does a high terms of trade mean?

A
  • Higher prices for exports increasing BOGS
  • Increased demand for Australian exports increasing AUD
  • High AUD weakens international competitiveness of Australia’s non-commodity exports
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12
Q

What are the structural factors of the BOGS?

A
  1. Narrow export base - heavily rely on commodities
  2. Lacking international competitiveness in manufacturing
    - Would benefit by diversifying export base towards ETM’s
    - Reliance on China
    - Capacity constraints on exports, particularly minerals due to bottlenecks of transport infrastructure
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13
Q

What are the cyclical factors of the primary income?

A
  1. Exchange rate - valuation effect: movements will alter the AUD value of foreign debt
  2. Interest rates - servicing costs on debt
  3. Domestic business cycle - equity servicing costs
    - Booming economy –> worsened net primary income through profits becoming dividends
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14
Q

What are the structural factors on primary income?

A
  1. Savings and investment gap

2. Mining required a lot of capital investment - Australia has a low savings rate and has to borrow from overseas

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15
Q

What are the consequences of a high CAD?

A
  • Indicates high level of foreign liabilities - lenders are inclined to lend heavily indebted economy but AAA credit rating
  • Leads to high servicing costs –> increases CAD
  • Increased volatility of exchange rate - reduces investor confidence
  • Balance of payments constraint - high CAD reflects high economic growth, economy has to limit growth and sustain longer periods
  • Contractionary economic policy –> lower economic growth reducing CAD
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16
Q

What are the factors affecting demand for the AUD?

A
  1. Size of financial flows into Australia
    a. level of domestic interest rates
    b. availability of investment opportunities domestically
  2. Expectations of a future appreciation
  3. Demand for exports
    a. changes in commodity prices
    b. degree of international competitiveness
    c. changes in global economic conditions
    d. taste and preferences of overseas consumers will affect demand for exports
17
Q

What are the factors affecting supply for the AUD?

A
  1. Size of financial flows out of Australia
    a. level of domestic interest rates
    b. availability of investment opportunities overseas
  2. Expectations of a future depreciation
  3. Demand for imports
    a. level of domestic income
    b. domestic inflation and competitiveness of overseas producers
    c. tastes and preferences of domestic consumers
18
Q

How can the RBA influence the exchange rate?

A
  1. Dirtying the float - RBA uses AUD and foreign currency reserves to import demand or supply by trading
  2. Monetary policy decisions - changes in interest rates will have an impact on exchange rates
19
Q

What are the positive impacts of an appreciation on the economy?

P-urchasing power
I-nterest rates –> NY
V-aluation (debt)
I-nflationary pressures

A
  • Australia’s consumers increase purchasing power
  • Lower interest rates –> reduce net primary deficit
  • Valuation effect: value of foreign debt reduces
  • Inflationary pressures reduce with lower import prices
20
Q

What are the negative impacts of an appreciation on the economy?

F-inancial flows
I-mports
F-oreign income
G-rowth
E-xports
V-aluation (assets)
A
  • Exports become expensive decreasing terms of trade in short term
  • Imports will be less expensive encouraging demand and worsening the CAD
  • Reduced economic growth
  • Lower financial flows as it is more expensive to invest
  • Reduced value of foreign income from foreign investment worsening the net primary income
  • Valuation effect: reduces the value of foreign assets
21
Q

What are the main aims of governments removing protection?

A
  • Force competitiveness of domestic industries
  • Focus on comparative advantage
  • Benefit from globalisation
  • Promote structural change
22
Q

What is the main role of SAFTA (2003)?

A
  • Eliminate tariffs and improve market access for services exporters such as; telecommunications, financial and professional services
  • Provide cooperation across other areas of policy
23
Q

What is the main role of AUSFTA (2005)?

A
  • Significant tariff reductions on agriculture and manufacturing
24
Q

What is the main role of APEC (1989)?

A
  • Facilitate economic growth and prosperity in the region, vision of creating a seamless regional economy
  • Remove barriers of trade and investment
  • Reduce cost of trade and improve access to trade information (average tariff levels decreased 11% over past 20 years)
25
Q

What is the main role of AANZFTA (2009)?

A
  • 12 member countries

- Extensive tariff reductions (aim to remove 30% of tariffs on exports in a 10 year period)

26
Q

What are the short term and long-term implications for firms of reduced protection?

A

Short-term

  • Import-competing industries go out of business
  • Lower tariffs provide lower input costs for firms

Long-term
- Efficient firms restructure operations to compete globally

27
Q

What are the short term and long-term implications for individuals of reduced protection?

A

Short-term

  • Structural unemployment increases as inefficient firms close
  • Consumers gain access to wider variety of goods at lower prices

Long-term
- Job opportunities increase in internationally competitive sectors

28
Q

What are the short term and long-term implications for governments of reduced protection?

A

Short-term

  • Cutting tariffs reduce government revenue
  • May adverse political consequences
  • Government spending on structural adjustment may increase

Long-term
- Sustainable economic growth should raise revenue

29
Q

What are the impacts of international protection levels on Australia?

A
  • Disadvantaged due to global protection on agriculture
  • EU’s common agricultural policy accounts for 20% of farmers income
  • Australias manufacturing industry face little protection
30
Q

What is the future of Australian industries?

A

Mining and energy - peaked during mining investment boom, output and exports will continue to grow

Agriculture - face a mixed outlook

Manufacturing - gradual reductions in older import-competing manufacturers and growing smaller export-oriented manufacturing

Service - likely to continue growing as a proportion of the economy in line with global trends

Economics (4 decks)

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