international economics (term one ) Flashcards
exchange rate
the value of one currency for the purpose of conversion to another
fixed exchange rate
where a central bank fixes an exchange rate at a particular level
floating exchange rate
where market forces [demand & supply] set the value of the exchange rate
re-valuation
if a fixed exchange rate is increased
de-valuation
if a fixed exchange rate is decreased
appreciation
if a floating exchange rate is increased
depreciation
if a floating exchange rate is decreased
trade weighted index
a weighted average of exchange rates from the nations we trade with
factors affecting demand
export of goods & services [foreign buyers demand AUD to buy Australian exports]
incomes received [Australians earning money from foreign investments (e.g. dividends or interest)]
capital inflow [foreign investors move money to Australia if interest rates increase]
speculation [traders buy AUD if they think it will increase]
factors affecting supply
import of goods & services [Australian buyers supply AUD to buy foreign imports]
incomes payable [foreigners earning money from Australian investments (e.g. dividends or interest)]
capital outflow [foreign investors move money overseas if Australian interest rates decrease]
speculation [traders sell AUD if they think it will decrease]
2 ways a currency appreciates
increase in demand
decrease in supply
2 ways a currency depreciates
decrease in demand
increase in supply
reasons for currency appreciation
high interest rates
competitive exports
positive speculation
less imports
less overseas travelling
Reserve Bank of Australia buys AUD [dirty float]
reasons for currency depreciation
low interest rates
expensive exports
negative speculation
more imports
more overseas travelling
Reserve Bank of Australia prints money
how would the Reserve Bank of Australia revaluate ?
revaluating the exchange rate from equilibrium causes a surplus
the RBA must buy the surplus using forex or gold
revaluation of the AUD
how would the Reserve Bank of Australia devaluate ?
devaluating the exchange rate from equilibrium causes a shortage
the RBA must sell the shortage using AUD
devaluation of the AUD
clean float
the RBA doesn’t intervene
dirty float
the RBA does intervene
advantages of a floating exchange rate
high reserves of forex or gold unnecessary
interest rates used as a domestic monetary policy tool
inclined to return an economy to equilibrium
disadvantages of a floating exchange rate
high uncertainty - volatile & harder to predict
external debt can increase if AUD depreciates
may worsen cost-push inflation
advantages of a fixed exchange rate
increased stability & predictability - reduced uncertainty
devaluation boosts exports - seen as cheap by trading partners
revaluation cheapens imports & foreign debt
disadvantages of a fixed exchange rate
high levels of forex & gold required
changes occur in large steps - significant impacts on the economy
artificially low exchange rates seen as unfair trade advantages - economic disputes, investigations & retaliation
impacts of a depreciating AUD
cheaper exports - increased demand for Australian exports
expensive imports - decreased demand for foreign imports (local substitutes may emerge)
more jobs in export industries
less jobs in import industries
prima facie, increased foreign debt
impacts of an appreciating AUD
expensive exports - decreased demand for Australian exports
cheaper imports - increased demand for foreign imports
less jobs in export industries
more jobs in import industries
prima facie, decreased foreign debt
terms of trade
relationship between the price of exports & the price of imports
terms of trade expression
[(export price index) / (import price index)] x 100
