Topic 2 Flashcards
Without Trade for Task 2
Whats the balance of payments
A balance of payments is a record of all the trade and financial transactions between Australia and the rest of the world, based on the double-entry accounting system of debits and credits
What are the two accounts that make up the BOP and whats the main differentiator
The current account(CAD) and the Capital and Financial Account(KAFA) are the two account and are differentiated because the CA consists of irreversible transactions while the KAFA is reversible
What are the components of the CA
Balance of Goods and Services(BOGS)
Net Primary Income(NPY)
Net Secondary Income(NSY)
What is BOGS
The BOGS refers to the sum of goods and services such as tourism, education and transport exported by Australia minus the goods and services imported
NET EXPORTS
What is NPY
which are the earning on factors of production(income, rent, profit, interest)
What is NSY
which are returns NOT from the factors of production (payouts on insurance claims, workers remittances and gifts)
What is in the KA
The KA is made up of non-financial assets like conditional foreign aid for development projects and intellectual property like patents, copyrights, trademarks and franchises.
What are the components of the FA
Direct Investment
Portfolio Investment
Financial derivatives
What is Direct investment
a large investment that bestows ownership rights to a company, 10% or more
What is Portfolio Investment
purchase of shares, land or securities that don’t grant ownership rights <10%
Main differentiator between direct and portfolio
<10%=portfolio
>10%=direct
Whats a financial derivative
a financial instrument that ‘derives’ its values from somewhere
Links between the categories
Current account and KAFA and net emissions should add up to 0
The deficit(debit) on one is equal to the surplus(credit) on the other
Trends in CAD
Australia usually has a deficit in the current account. the size of the CAD is influenced by the value of the BOGS and the size of the NPY deficit
Trends in BOGS
The BOGS is usually in deficit(2010/11, 2016/17 and 2017/18 surpluses were achieved due to strong mining exports)
Trends in NPY
The NPY deficit accounted for the majority of the current account deficit between 2009/10 and 2017/18 and represents the servicing costs of Aus net foreign liabilities
Trends in KAFA
The financial account balance is always in a surplus mainly due to debt and equity borrowings to financial domestic investment and CAD
The capital account is usually in deficit- 09/10 and 17/18
Reasons for CAD
Aus low household saving rate(structural)
Aus Trade deficit(cyclical if appreciation/depreciation)(structural due to narrow export base)
Whats international competitiveness
Degree of price and quality competitiveness of a nation’s export and import substitutions in relation to foreign-produced goods and services
Measure of Aus international competitiveness
Two statistical measures of Australia’s competitiveness are:
The value of the AUD concerning the TWI
Real unit labour costs
Whats terms of trade and formula
The relative prices a country receives for its exports and pays for its imports. Movements in export and import prices are measured using index numbers
export price/import price
whats an exchange rate
The price of one economy’s currency in terms of another economy’s country. In an Australian context, the exchange rate is simply the price of Australian currency in terms of another countries currency
Whats bilateral rates
Bilateral rates is the value of a unit of domestic currency relative to another currency, usually that of a major trading partner
Define TWI
the measurement of a domestic currency relative to a basket of currencies of Australian trading partners, weighted depend
Factor affecting the demand for AUD
financial flows(money in and out of AUS)
level of Aus interest rates relative to other countries(foreign investment)
investment opportunities(foreign investment)
speculation(think there’s gonna be an appreciation then demand increases)
demand for AUS exports
change in commodity prices and ToT
international competitiveness
global economic conditions
factors affecting the supply of the AUD
the opposite lol
financial flows
level of interest rates relative to others
investment opportunities
speculation
domestic demand for imports
level of domestic income
inflation
Resons for an an appreciation in the AUD
Increase in interest rates
Improved investment opportunities
A rise in commodity prices and improvement in Aus ToT
An improvement in Aus international competitiveness
Lower inflation in Aus
Increased demand for Aus exports
Expectations of a currency appreciation
reasons for depreciation of AUD
decrease in interest rates
more investment overseas/less here
fall in commodity prices
aus International competitiveness falling
high inflation
increased demand for imports
expectations of depreciations
positive effects of appreciations
Positive effects
Australians enjoy increased purchasing power- they can purchase more goods with the same quantity of goods
Decreases interest servicing cost of foreign debt, meaning we can buy more foreign currency in AUD(we pay less in AUD for debts)
Valuation effect- same as above but for the nation(j curve theory)
Goes down due to intl competitiveness then increases due to valuation effect
Inflationary pressures decrease as imports become cheaper
neg. effects of appreciation
The increasing value of AUD leads to the increased price of exports
Imports are less expensive worsening CAD
High import spending reducing eco growth rate
Less financial investment internationally
Whats a fixed exchange rate
The exchange rate is fixed by the central bank to another currency, usually USD due to its confidence and its a reserve currency(generally overvalued)
Note instead of saying appreciate and depreciate, for fixed it is revaluation and devaluation.
limitations of fixed echange rate
Central bank has to maintain the value through purchasing and selling the currency, and if they do not have enough foreign currency reserves, trades will collapse. To counteract this exchange controls will be introduced to reduce exports, creating a shortage for production
Slow economic growth if overvalued, with a high interest rate used to attract foreign investors
Impacts confidence, as speculators may purchase domestic currency if they believe it will revalue or selling if they believe it is going to be revalued.
whats floating exchange rate
A system wherein the exchange rate is determined by the free movement of market forces and non-government intervention
managed exchange rate
Similar to fixed exchange rates, but are allowed to stay within a daily target band
allows for more frequent intervention from the central bank
pos. effects of depreciation
In the long run it enhances the competitiveness of exporting and import competing industries by making Australian goods and services relatively cheaper thereby improving the current account balance
Higher levels of capital inflows and foreign investment into Australia as domestic assets become cheaper to purchase, allowing Australia to pursue long term growth
Structural change and greater competitiveness of industries in the long term as exporting firms grow
neg. effects of depreciation
In the short run, depreciations reduces the ToT and reduces export revenue whilst increasing import costs, worsening the trade balance
Higher domestic inflation caused by higher import prices, passed onto consumers
Increasing value of foreign debt repayments if they are repaid in foreign currency, leading to a larget net primary income deficit, but move debts are hedged in AUD
Valuation effect
Could force the RBA to intervene by increasing interest rates to attract foreign capital inflow to appreciate the currency, but in doing so limiting the domestic economic growth
jcurve theory
Trade surplus is when exports are larger than imports, while a trade deficit is when imports are more than exports
The idea that a country with a CAD would benefit in the long run from a currency depreciation
