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Exchange Rates and Foreign Investment Task 3 Flashcards

1
Q

Define exchange rates

A

the price of one country’s currency in terms of another country’s currency

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2
Q

How to convert to different currencies?

A

1 AUD = 0.65USD
1/0.65 = 1.53 AUD

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3
Q

calc percentae change in figures

A

Change/ OG x 100

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4
Q

What is the FOREX market?

A
  • foreign exchange market
  • determines the price of a currency which brings together buyers and sellers of foreign currencies
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5
Q

What is TWI?

A
  • Trade Weighted Index
  • a common measure of AUD
  • measures the movement of the AUD against a basket of currencies weighted according to their importance of trade with Australia
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6
Q

What is appreciation?

A

the price of one country’s currency increases against another country’s currency

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7
Q

What is depreciation?

A

the price of one countrys currrency decreases against another country’s currency

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8
Q

What is the price of a currency subject to?

A

changes tp the demand and supply of a currency

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9
Q

What is Demand determined by?

A

(buyers of currency)
- determined by all credit transactions (Transaction which involve money entering the domestic economy)

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10
Q

What is supply determined by?

A

(sellers of currency)
- determined by all debit transaction (Transactions which involve money flowing out of domestic economy)

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11
Q

What happens to demand when there is an appreciation of a currency?

A
  • increase in demand (↑CR)
    due to
  • increase exports
  • income income received
  • increase capital inflow(FI)
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12
Q

What happens to supply when there is an appreciation of a currency?

A
  • decrease in supply (↓DR)
    due to
  • decrease imports
  • decrease income paid
  • decrease capital outflow(AIA)
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13
Q

What happens to demand when there is a depreciation of a currency?

A
  • decrease in demand (↓CR)
    due to
  • decrease exports
  • decrease income received
  • decrease captial inflow (FI)
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14
Q

What happens to supply when there is a depreciation of a currency?

A
  • increase in supply (↑DR)
    due to
  • increase imports
  • increase income paid
  • increase capital outflow (AIA)
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15
Q

What are the 8 factors affecting ER?

A
  • domestic growth
  • world growth
  • world commodity prices
  • ToT
  • external shocks
  • interest rate differential
  • relative inflation rates
  • level of domestic savings
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16
Q

What happens to ER when Domestic Growth decreases

A
  • decreases output
  • decreases income
  • decreases import spending
  • decrease in supply
  • ER appreciates
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17
Q

What happens to ER when world Growth decreases

A
  • fall in growth from trading partners
  • decrease income and spending
  • decrease demand for exports
  • FI decreases as countries have less funds to invest
  • ER depreciates
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18
Q

What happens to ER when there’s a fall in commodity prices

A
  • export revenue decreases
  • demand for AUD decreases
  • ER depreciates
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19
Q

What happens to ER when there is unfavourable TOT

A
  • export prices fall relative to import prices
  • export revenue falls relative to import payments
  • more money going out, increases supply
  • ER depreciates
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20
Q

What happens to ER when there is relatively high inflation?

A
  • fall in international competitiveness
  • decrease demand for exports = decrease demand = DEP
  • increase demand for imports = increase supply = DEP
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21
Q

What happens to ER when theres a fall in interest rate differentials

A

SHORT TERM:
- aus IR lower than major trading partners -> decrease in FI due to lower rate of return -> decrease in D for aud -> dep
- AIA increases as Australia investors attracted to higher rates of return offered outside of AUS-> increase M spending -> increase in S -> dep

LONGTERM:
- causes FI decreases -> decrease PI debit -> decrease in S for AUD-> app
- AIA increases ->PI CR increase -> increase In D for aud -> app

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22
Q

What happens to ER when lvl of domestic savings increase

A
  • more domestic funds for investment
  • decrease D for FI ->decrease D for aud
  • depreciate
  • increase in domestic funds for I -> increase in AIA -> increase S -> dep
23
Q

What is risk sentiment?

A

how much risk investors are willing to take on in their investments
- If ER appreciates (as more FI comes in) = risk sentiment improves

24
Q

What are the effects of a depreciation on international competitiveness and X+M?

A

-international competitiveness increases
- exports and revenue increase
- imports decrease as more expensive
- foreign currencies can buy more AUD with one unit of their currency
- exports more IC than export destinations

25
Q

What are the effects of a depreciation on trade balance and CAB

A
  • increade D for X -> G/S CR will increase
  • decrease D for M ->G/S DR will decrease
  • TB increases -> BOGS increases -> CAB inreases
26
Q

What are the effects of a depreciation
on Foreign Investment flows

A
  • FI increase as exports are cheaper
  • AIA decreases as investing overseas is expensive
27
Q

What are the effects of a depreciation on Domestic producers of EXPORTS:

A
  • increase in D for exports will increase production
  • increase in export revenue and profit
  • increases employment in export sector
28
Q

What are domestic Producers of import replacement goods?

A

domestic prods of imported goods competing with overseas companies importing the same ood

29
Q

What are the effects of a depreciation
on Domestic Producers of import replacement goods?

A
  • imports more expensive therefore domestic production will increase
  • increase revenue and profit
30
Q

What are the effects of a depreciation
on domestic consumers?

A
  • Depreciation increases cost of imported goods therefore consumer wellbeing falls
  • decreases consumer purchasing power
  • ## will choose cheaper domestic alternative
31
Q

What are the effects of a depreciation
on unemployment?

A
  • increased employment in export sector eg mining industry
  • as increase in D for exported expand the business and increases D for workers
  • decrease in structural UE

-economy expands due to increased export revenue
- increase in AD and employment increases
- decrease in cyclical UE

32
Q

What are the effects of a depreciation
on Growth?

A
  • increase in econ growth as output and spending increase
33
Q

What are the effects of a depreciation
on inflation?

A
  • increased in AD causes inflationary pressure through an increase in demand - pull inflation
  • cost of import capital increases -> increases cost of production - cost push inflation
34
Q

What are the 5 winners and 5 losers of a depreciation

A

WINNERS:
- exporters
- domestic tourist industry
- workers gaining jobs in export industry
- economic growth might increase
- CAD should improve

LOSERS:
- consumers who buy imports
- resident who holiday abroad
- firms who buy imported raw materials
- those on fixed incomes/wages who see inflation rise faster
- foreign exports/ tourist industry

35
Q

What are 2 reasons for an increase in commodity prices?

A
  • increase in export revenue
  • increase in FI as mining industries expand due to large demand for exports = more overseas investment to fund mining
36
Q

Definition of foreign investment?

A

overseas resident owning australia financial assets

37
Q

What are foreign liabilities?

A

stock of australian financial assets owned by overseas investors either from buying Australian assets or lending of money to australia

38
Q

Definition of Australian investment abroad?

A

australian resident owning foreign financial assets

39
Q

What are foreign assets?

A

stock of foreign financial assets owned by Australia investors either from buying foreign assets or lending money abroad

40
Q

What are foreign equity securities?

A

financial assets which result in ownership of an asset eg buying shares

41
Q

What are foreign debt securities?

A

financial assets in the form of borrowing (loans) and does not result in ownership of an asset

42
Q

What is direct investment?

A
  • results in 10% or more ownership of an financial asset
  • equity securities
43
Q

What is portfolio investment?

A
  • results in less than 10% ownership of a financial asset
  • equity securities or debt securities
44
Q

What is Govt borrowing and lending

A

debt securities

45
Q

What is reserve assets

A

buying and selling of foreign currencies

46
Q

What is the difference between Australia’s levels of Foreign Investment and Australian Investment Abroad?

A

FE + FD = FL
- - -
AEA + ADA = FA
= = =
NFE + NFD = NFL

47
Q

Other terms for net foreign liabilites?

A
  • Balance of financial acc
  • net capital inflow
  • Net International Investment Position (NIIP)
48
Q

Describe the Trends in Australia’s Foreign Investment (ten years)

A
  • Net Foreign Liabilities, while remaining positive indicating FL>FA, is decreasing as Investment flows in Aus fall relative to investment flows coming out
  • Net foreign Equity has fallen to negative % of GDP since 2013.
  • indicating that Australian ownership of Foreign assets is greater than buying of aus assets by foreign residents (AEA>FE)
49
Q

Explain the Trends in Australia’s Foreign Investment (ten years)

A
  • increase in dom savings as aus experiences a SI gap since 2019, where by the supply of funds increases, therefore aus has more money to invest overseas
  • aus govt is buying foreign assets in order to boost aus public savings as future funds to address to address aus ageing population
50
Q

How does Foreign investment impact financial account and current account?

A
  • FI recorded in financial acct as credit entry
  • AIA recorded in financial acct as debit entry
  • current acct records the service payments in the form of income from the investment
  • FI will result in primary income debit
  • AIA will result in primary income credit
  • ↑FI -> ↑Primary Y DR -> ↓Net Y ->↓CAB
  • ↑AIA -> ↑Primary Y CR ->↑Net Y ->↑CAB
51
Q

What are the 6 benefits of foreign investment (AD)

A
  • Increase in AD as investment represents spending by firms
  • This increase in AD leads to increased economic growth and boosts domestic employment (reduces cyclical UE)
  • Increases aggregate income, output and spending.
  • Leads to economic development including infrastructure
  • Creates new industries and employment opportunities
  • Raises living standards
52
Q

What are the 6 benefits of foreign investment (AS)

A
  • Increase in AS as investment leads to an increase in the availability of capital resources
  • increases the productive capacity of the economy.
  • Aids long term sustainable growth
  • Increases productivity and efficiency in the economy which reduces cost inflation pressure.
  • Improves quality of goods and services.
  • Transfer of managerial skills and new technologies (equity)
53
Q

What are the 6 costs of Foreign Investment?

A
  • Negatively impacts current account through primary income debits.
  • Increase in FI causes an appreciation of the AUD which can reduce international competitiveness
  • Depreciates the AUD in the long-term – increase income payments (increase S in AUD)
  • Can lead to debt trap where more money is borrowed to sustain debt
  • Foreign ownership of aus assets (from FE) leads to increase in domestic structural UE due to shift in labour to where it is cheaper overseas/new tech
  • May lead to increased demand inflation as spending in the economy increases

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