Topic 2

Question 1

Whats the balance of payments

Answer 1

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

Question 2

What are the two accounts that make up the BOP and whats the main differentiator

Answer 2

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

Question 3

What are the components of the CA

Answer 3

Balance of Goods and Services(BOGS)
Net Primary Income(NPY)
Net Secondary Income(NSY)

Question 4

What is BOGS

Answer 4

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

Question 5

What is NPY

Answer 5

which are the earning on factors of production(income, rent, profit, interest)

Question 6

What is NSY

Answer 6

which are returns NOT from the factors of production (payouts on insurance claims, workers remittances and gifts)

Question 7

What is in the KA

Answer 7

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.

Question 8

What are the components of the FA

Answer 8

Direct Investment
Portfolio Investment
Financial derivatives

Question 9

What is Direct investment

Answer 9

a large investment that bestows ownership rights to a company, 10% or more

Question 10

What is Portfolio Investment

Answer 10

purchase of shares, land or securities that don’t grant ownership rights <10%

Question 11

Main differentiator between direct and portfolio

Answer 11

<10%=portfolio
>10%=direct

Question 12

Whats a financial derivative

Answer 12

a financial instrument that ‘derives’ its values from somewhere

Question 13

Links between the categories

Answer 13

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

Question 14

Trends in CAD

Answer 14

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

Question 15

Trends in BOGS

Answer 15

The BOGS is usually in deficit(2010/11, 2016/17 and 2017/18 surpluses were achieved due to strong mining exports)

Question 16

Trends in NPY

Answer 16

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

Question 17

Trends in KAFA

Answer 17

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

Question 18

Reasons for CAD

Answer 18

Aus low household saving rate(structural)
Aus Trade deficit(cyclical if appreciation/depreciation)(structural due to narrow export base)

Question 19

Whats international competitiveness

Answer 19

Degree of price and quality competitiveness of a nation’s export and import substitutions in relation to foreign-produced goods and services

Question 20

Measure of Aus international competitiveness

Answer 20

Two statistical measures of Australia’s competitiveness are:
The value of the AUD concerning the TWI
Real unit labour costs

Question 21

Whats terms of trade and formula

Answer 21

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

Question 22

whats an exchange rate

Answer 22

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

Question 23

Whats bilateral rates

Answer 23

Bilateral rates is the value of a unit of domestic currency relative to another currency, usually that of a major trading partner

Question 24

Define TWI

Answer 24

the measurement of a domestic currency relative to a basket of currencies of Australian trading partners, weighted depend

Question 25

Factor affecting the demand for AUD

Answer 25

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

Question 26

factors affecting the supply of the AUD

Answer 26

the opposite lol

financial flows
level of interest rates relative to others
investment opportunities
speculation
domestic demand for imports
level of domestic income
inflation

Question 27

Resons for an an appreciation in the AUD

Answer 27

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

Question 28

reasons for depreciation of AUD

Answer 28

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

Question 29

positive effects of appreciations

Answer 29

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

Question 30

neg. effects of appreciation

Answer 30

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

Question 31

Whats a fixed exchange rate

Answer 31

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.

Question 32

limitations of fixed echange rate

Answer 32

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.

Question 33

whats floating exchange rate

Answer 33

A system wherein the exchange rate is determined by the free movement of market forces and non-government intervention

Question 34

managed exchange rate

Answer 34

Similar to fixed exchange rates, but are allowed to stay within a daily target band
allows for more frequent intervention from the central bank

Question 35

pos. effects of depreciation

Answer 35

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

Question 36

neg. effects of depreciation

Answer 36

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

Question 37

jcurve theory

Answer 37

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