FFER and BOP

Question 1

how does FFER benefit/help BOP

Answer 1

provides automatic adjustment in the BOP through changing price of exports/imports
reduces savings in the CAB

Question 2

what will happen if the trade balance falls

Answer 2

1. because supply of AUD is in excess
2. depreciation occurs
3. will increase import price in domestic currency
4. decrease export price in foreign currency
5. attracts demand for exports

Question 3

briefly discuss the J Curve Effect

Answer 3

auto adjustment only occurs if demand elastic. if inelastic lower price may initially lead to lower export receipts, decreasing short term TB
= j curve effect (short term)

Question 4

discuss using mining boom as an example (with ER stats) how APPRECIATION shields the economy from POSTIVE external shock

Answer 4

1. MB increased growth in china, boosting com prices, increasing AUD and ToT
2. USD0.5 2001 —-> US1 in 2011
3. increased investment + national income would usually cause inflation
4. high AUD decreased import price and increase export price, weakening non mining sectors and reducing inflation

Question 5

discuss using end of mining boom as an example (with ER stats) how DEPRECIATION shields the economy from NEGATIVE external shock

Answer 5

1. End of boom 2012: 33% depreciation US1.05 -> US0.7)
2. decreased export price increased Aus competitiveness
3. expansions rebalanced economy

Question 6

what is the disadvantage of FFER on exporters

Answer 6

unsure of the selling price of their goods and how much they will recieve when they sell abroad (always changing)

Question 7

what is the disadvantage of FFER on importers

Answer 7

unsure of how much import goods will be

Question 8

what is the solution to FFER uncertainity

Answer 8

foreign ER Hedging

• able to buy currencies in future markets at set price
• future payments or receipts can be priced in your currency knowing value wont change