Effects of currency change Flashcards
When $AUD depreciates against our trading partners
Australian import prices rise
Australian export prices fall
These will affect demand:
- import sales should contract
- export sales should expand
Therefore:
- Australian economic growth, jobs, unemployment and production
- Business investment
- Inflation
Depreciation impact on trade balance
Trade balance: the difference between the value of countries exports and imports
Exports: A depriciated currency will encourage exports (as they become cheaper for overseas buyers)
Imports: A depreciated currency will discourage imports (as they become more expensive)
This can result in a trade balance surplus as exports could exceed imports
Benefits to firms (depreciation)
- Increased international competitiveness as Australian goods and services become cheaper on the world market
- Export prices decrease causing demand for exports to rise
- Increased exports creates more domestic production causing GDP to rise
- Increase in exports stimulates economic growth and investment from overseas investors (injection in CFY)
- Improves profitability of Australian firms that operate overseas
- Purchasing power increases for overseas tourists causing more to visit Australia
Disadvantages for firms (depreciation)
- Risk of higher costs of production from importing components, raw materials or capital technology
- Major commodity imports (petrol) become more expensive for firms
Benefits to households/consumers (depreciation)
- Domestic production causes more employment and income
Disadvantages to households/consumers (depreciation)
- Decreased international purchasing power due to imports becoming more expensive
- For goods that must be imported, higher import prices can lower disposable income and living standards
When $AUD appreciates against our trading partners
Australian import prices fall
Australian export prices rise
These will affect demand:
- import sales should expand
- export sales should contract
Therefore:
- Australian economic growth, jobs, unemployment and production
- Business investment
- Inflation
Appreciation impact on trade balance
Trade balance: the difference between the value of a country’s exports and imports
Exports: An appreciated currency will discourage exports (as they become more expensive for overseas buyers)
Imports: An appreciated currency will encourage imports (as they become cheaper)
This can result in a trade balance deficit as imports could exceed exports
Benefits to firms (appreciation)
- Increased international purchasing power may lower costs of production for importing components, raw materials and capital technology
- Major commodity imports become cheaper for firms
Disadvantages to firms (appreciation)
- Decrease international competitiveness as Australian goods and services become more expensive on world markets
- Export prices increase, causing demand to fall
- Decrease in exports reduces domestic production, causing GDP to fall
- Decrease in exports decreases economic growth and investment from overseas investors, reducing the injection in the CFY
- Decreased purchases from the domestic market as consumers look to buy cheaper imports
- Purchasing power decreases for overseas tourists, causing them to avoid Australia, decreasing income for tourism and universities
Benefits to households/consumers (appreciation)
- Increasing international purchasing power of international goods and services (consumers can buy more)
- Living standards increase as consumers satisfy their wants by buying cheaper goods overseas
- Helpful in times of high inflation as it allows for consumers to purchase more from overseas than domestically and maintain living standards
Disadvantages to households/consumers (appreciation)
- Decrease in domestic production (due to decreased exports) causes higher unemployment and decreased household income and spending
