Exchange Rates

Question 1

What is an exchange rate?

Answer 1

The value of the currency of a nation expressed in terms of the currency of another nation

Question 2

What is cost structure?

Answer 2

The overall framework within a country that contributes to the final price of a commodity produced by that country

Question 3

What is currency depreciation?

Answer 3

A decrease in the value of a currency relative to other currencies under a floating exchange regime

Question 4

Example of currency depreciation imports?

Answer 4

A depreciation of the Australian dollar increases the price of imported commodities and consequently, makes them less attractive to Australian consumers

Question 5

What is currency devaluation?

Answer 5

The result of a deliberate decision by the RBA and Australian Government to lower the Australian dollar

Question 6

What is currency appreciation?

Answer 6

An increase in the value of a currency relative to other currencies under a floating exchange regime

Question 7

Example of currency appreciation to imports?

Answer 7

An appreciation of the Australia dollar decreases the price of imported commodities, making them more attractive to Australian consumers

Question 8

Example of currency appreciation to exports?

Answer 8

An appreciation of the Australian dollar makes Australian exports more expensive for foreign buyers, potentially reducing their attractiveness and demand in international markers

Question 9

Example of currency depreciation to exports?

Answer 9

A depreciation of the Australian dollar makes Australian exports cheaper for foreign buyers, potentially increasing their attractiveness and demand in international markets

Question 10

What is currency revaluation?

Answer 10

Currency revaluation is the official increase in the value of a country’s currency relative to other currencies, often implemented by a government or central bank

Question 11

What is the foreign exchange (FOREX) market?

Answer 11

A market where international currencies are bought and sold

Question 12

What is the trade weighted index (TWI)

Answer 12

TWI is a measure of the level of the value of the Australian dollar against a basket of foreign currencies of major trading partners
These currencies are weighted according to their significance to Australian trade flows

Question 13

What is a fixed exchange rate?

Answer 13

The value of the currency is determined by the government fixing it to the value of another currency at a certain level and guaranteeing to maintain that level

Question 14

What are the advantages of a fixed exchange rate?

Answer 14

The stability and predictability of the exchange rate encourages growth of international trade and enables easier long-term planning for industries

Question 15

What are the disadvantages of a fixed exchange rate?

Answer 15

• a stock of international reserves and gold is required to maintain artificially high or low value
• its open to speculation
• changes tend to occur in larger steps so they have larger impacts on the economy

Question 16

Effects of depreciation? (5)

Answer 16

• Australian exports become less expensive to overseas buyers
• there is growth in income and employment in export-orientated industries
• Australian imports become more expensive and this could lead to a decline in imports and growth of import-substitution industries or increased inflation
• there is an increased level of external debt that is measured in overseas currencies
• the RBA may increase interest rates to slow down the depreciation of the dollar, and this may have an impact on domestic consumption and investment

Question 17

Effect of appreciation?

Answer 17

• Australian exports become more expensive to foreign buyers, and so income and employment in export industries may decline
• Australian imports become cheaper, and increased demand for imports may lead to an increase in the current account deficit
• there are decreased level of external debt, where debt is measured in overseas currencies
• the government may be more able to repay interest or external debt and so reduce the income component on the current account deficit
• inflation may decrease as domestic prices on imports decline

Question 18

What is a floating exchange rate?

Answer 18

The value of a currency is determined by the forces of supply and demand in the foreign exchange market

Question 19

Factors effecting demand of the Australian dollar?

Answer 19

• exports goods and services
• incomes received
• capital flow
• speculation

Question 20

Factors affecting the supply of Australian dollar?

Answer 20

• import goods and services
• incomes payable
• capital outflow
• speculation

Question 21

What are the advantages of a floating exchange rate?

Answer 21

• the balance of payments is always in equilibrium
• money supply is not affected by international exchanges, so domestic policy can operate independently of overseas exchange rate pressures
• it is not necessary for the RBA to hold large amounts of foreign reserves to maintain the artificial exchange levels at a fixed rate

Question 22

What are the disadvantages of a floating exchange rate?

Answer 22

• the volatility of exchange rates can create uncertainty for exporters and importers
• the level of external debt can change when debt is largely measured in overseas currency

Question 23

What are the terms of trade?

Answer 23

A statistical concept that highlights the relationship between export prices and import prices

Question 24

What is the terms of trade index?

Answer 24

A statistical measurement used by economists to produce an index number used to monitor price fluctuations

Question 25

How is terms of trade calculated?

Answer 25

Export / import

Question 26

What is the export price index?

Answer 26

A statistical measurement used by economists to produce an index number used to monitor fluctuations in export prices

Question 27

What is the import price index?

Answer 27

A statistical measurement used by economists to produce an index number used to monitor fluctuations in import prices

Question 28

What is balance of trade / trade balance?

Answer 28

• the difference between the value of a country’s exports and imports for a given period
• exports > imports = surplus balance of trade
• exports < imports = deficit balance of trade

Question 29

Extend of terms of trade?

Answer 29

Terms of trade is an indicator of a country’s economic health and trading efficiency, especially around the balance of payments issue
It tells you how many units of exports it takes to buy a unit of imports and allows you to identify if a nation is accumulating capital

Question 30

The terms of trade increases because:

Answer 30

• export prices rise and the increase is higher than import prices
• exports prices rise but import price fall or remain unchanged
• export prices fall but at a lower rate than the fall of import prices
• export prices are unchanged while import prices fall

Question 31

Terms of trade decrease because:

Answer 31

• export prices rise, but the increase is smaller than the increase in import prices.
• export prices rise, while import prices rise at a higher rate.
• export prices fall at a higher rate than the fall in import prices.
• export prices remain unchanged, while import prices rise.

Question 32

Terms of trade measurments?

Answer 32

terms of trade > 100% = accumulating capital and favorable trading conditions
terms of trade < 100% = spending capital and unfavorable trading conditions

Question 33

What will impact terms of trade?

Answer 33

Exchange rates and the price of commodities which will determine the volume of commodities