Effects on our Macroeconomy

Question 1

Terms of Trade as an AD Factor and its Impacts on SoL and Economic Goals

Answer 1

Improvements in terms of trade are caused by an increase in export prices, thus leading to an increase in national income.

An improvement in Australia’s terms of trade, such as an increase in export prices relative to import prices, can have positive effects on the country’s goals and living standards. It can lead to increased export revenues, boosting economic growth, investment, and job creation. This, in turn, can contribute to higher incomes, improved government finances, and enhanced living standards for Australians through increased consumption and public services.

But getting us further from the Goal of Full Unemployment and also increase inflation and therefore reduce material standards of living and erode purchasing power.

(More info on Unit 3 AoS3 Slide 135)

Question 2

Exchange Rate as an AD Factor and its Impacts on SoL and Economic Goals

Answer 2

In short:

An appreciation of the AUD = decreased exports increased imports = decrease AD = fall in growth = a drop in living standards

A depreciation of the AUD = increased exports decreased imports = increased AD = increase in growth = an increase in living standards

(Longer version on Slide 137)

Question 3

Impacts of International Competitiveness on SoL and Economic Goals

Answer 3

The level of international competitiveness of Australian exporters directly affects X (and indirectly M) in the AD formula. If we become more internationally competitive, our products become more competitive in price and in quality, encouraging overseas customers to buy them.

Example: An increase in IC = Increase in X and a Decrease in M = Increase in AD = Increase growth and living standards