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HSC Economics > Topic 2 > Flashcards

Topic 2 Flashcards

1
Q

When did Australia adopt a floating FX rate?

A

December 1983.

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2
Q

Demand for AUD impacted buy…3

A
  1. Amount of financial flows in from overseas.
  2. Speculation - an expectation of future appreciation/depreciation.
  3. Demand for exports.
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3
Q

Things affecting amount of financial flows in from OS (2)

A
  1. High-interest rates attract OS $$
  2. Share market prospects.
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4
Q

Influences on demand for exports…(4)

A
  1. Global Eco conditions.
  2. Competitiveness of exports
  3. Global Tastes
    1. Commodity Prices
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5
Q

Supply of AUD influenced by…3

A
  1. Level of Financial flows out of Aus (IR rates, investment opps OS)
  2. Speculation of future app/depc
  3. Domestic demand for imports (domestic growth)
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6
Q

Influences on domestic demand for imports…4

A
  1. Domestic income
  2. Competitiveness of domestic firms
  3. Tastes
  4. (relative) Inflation - if high, imports more attractive
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7
Q

Best method of explaining how factors influence D & S…

A

Graphs

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8
Q

TWI…

A

A measure of the value of the AUD against a basket of foreign currencies of major trading partners. These currencies are weighted according to their significance in Australian trade flows.

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9
Q

Limitiation of TWI…

A

Some imports/exports priced in USD (despite not being with USA). Therefore USD/AUD more important than TWI suggests.

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10
Q

How RBA can influence X rates…2

A
  1. DIRECT - Dirtying the float - buying/selling to prevent rapid/adverse changes. Draws on foreign currency/gold holdings.
  2. INDIRECT - Monetary Policy Decisions - Need to stop depreciation - raise IR - increase D for AUD. Uncommon.
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11
Q

Managed flexible rate…

A

RBA pegged value at 9am for the rest of the day.

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12
Q

Benefits of Apprecitaion…4

A
  1. Greater Purchasing power
  2. decrease foreign debt servicing - reduce CAD
  3. Reduce value of foreign debt - valuation
  4. Reduced inflation - imports become cheaper.
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13
Q

Negatives of appreciation…7

A
  1. Exports become more expensive. Decrease in export income and increase in CAD.
  2. Lower domestic production as imports are cheaper.
  3. Greater import spending worsens CAD.
  4. Lower economic growth (High import spending + reduced export income)
  5. Reduced financial inflows (its more expensive to invest here)
  6. Reduce value of OS income from investements. Worsen CAD
  7. Reduce value of OS assests - valutaion.
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14
Q

Benefits of Depreciation…5

A
  1. Cheeper for OS to invest here - boost
  2. Foreign assets increase in value - valuation
  3. Increase foreign income on investments
  4. Lower import spending and more exports = higher growth
  5. Exports are cheaper - sell more
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15
Q

Demand for AUD is a ____ demand

A

Derived

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16
Q

7 Potential factors for app/deppreciation…

A
  1. IR
  2. Investement Opps
  3. Commodity prices
  4. Int. Competitiviness of domestic exports
  5. Inflation
  6. Demand for domestic exports
  7. Expectations of currency movement
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17
Q

Valuation effect…

A

Where currency movement causes immediate changes in AUD value of debts/assets overseas. Eg AUS appreciates - debt in China is now worth less in AUD terms.

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18
Q

Direction of trade in AUS…

A
  • 1950s - Lots of trade w/ UK and EU. In 1973 UK joins trading bloc pushing us out of the market.
  • 1960s-1990s Japan sustains rapid growth and demands mineral and energy inputs. Tapered towards 1990 as Japan slowed.
  • 2000s China booms and becomes 1/3 of our export earnings. $100B export market 2018.
  • 2000s+ Growing Asian economies. India perhaps.
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19
Q

Trends in our imports…

A

Imports mostly match exports. However, while our exports to EU have declined, (30% to 17%) we still import alot from them - mostly advanced manufacturing products. (34% of stuff)

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20
Q

Why has agricultural exports fallen in recent times…2

A
  1. Protectionism OS
  2. Large fluxuations in world prices.
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21
Q

Why has Australia never been into large scale manufacturing?

A

We focused on mining post war when other economies built manufacturing industries. It came back a little in the 1990s but appreciation due to mining squashed it.

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22
Q

What is a concern of our economies structure?

A

Over-reliance on mining.

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23
Q

Trends in financial flows between 1950 and 1970…3

A
  • FX rates were fixed
  • OS capital markets mostly closed.
  • Little financial flows
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24
Q

Trends in financial flows from 70s onwards…3

A
  1. FX rates began to float
  2. restrictions on G F flows loosened\
  3. F flows expand rapidly, aided by new technology.
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25
Q

Direct investement…

A
  • Establish new company or purchase 10% or more of a company.
  • Intend to play a role in the operating of the business
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26
Q

Portfolio investement…

A

Loans, securities, smaller shareholdings. Dont have a management role.

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27
Q

Portfolio investment began less popular, but has now far surpassed FDI in $ terms… Why? 3

A
  • Govts initially prefered FDI because it brought jobs and tech.
  • Prior to dereg, OS loans were uncommon
  • P investement - shorter term and more speculative has since become far more popular.
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28
Q

Why has Australia always been a net capital importer? 2

A
  • Historic low level of savings - therefore we must borrow from OS
  • Increased our investing OS since dereg.
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29
Q

Define Balance of payments…

A

Record of the transactions between Aus and the rest of the world in a given time period. Consists of the current account, and the capital and financial account.

30
Q

BOP, Inflow=

A

Credit

31
Q

BOP, Outflow =

A

Debit

32
Q

BOP is separated into 2 accounts…

A
  1. Current account
  2. Capital and Financial Account
33
Q

Current account…

A

Shows the money flow from all imports and exports of G&S, income flows and nonmarket transfers. (For a period of one year)

34
Q

Transactions in the CA are…

A

Non-reversible

35
Q

4 components of the CA…

A
  1. Goods
  2. Services
  3. Primary income
  4. Secondary income
36
Q

Net goods + Net services

A

Balance of Payments (BOGs)

37
Q

CA, Primary income is…3

A
  • Returns from investements.
  • Eg interest payments, dividends from OS countries, rent from OS land ownership.
  • Flows in and out of Aus
38
Q

CA, Secondary income is…3

A
  • Non-market transfers.
  • When products/financial resources provided without anything in return.
  • Eg, Insurance claims, worker’s remittances, foreign aid, Pensions from OS governments.
39
Q

Capital and Financial account is…

A

Records the borrowing, lending, sales and purchases of assets between Aus and the rest of the world.

40
Q

Transactions of the C&FA are…

A

Reversible

41
Q

2 Components of the Capital account…

A
  1. Conditional Transfers
  2. Net acquisition/disposal of non-produced, nonfinancial assets.
42
Q

Net acquisition/disposal of non-produced, nonfinancial assets…

A

Mainly intellectual property rights. (Patents, copyrights, trademarks, franchises)

43
Q

Conditional Transfers… (Captial account)

A

Mostly conditional foreign aid linked to specific capital projects such as infrastructure and debt forgiveness.

44
Q

Financial account…

A

Shows Aus’s transactions OS financial assets and liabilities.

45
Q

On the financial account, credit represents.

A

Money inflow. Eg Loan from UK coming here.

46
Q

On the financial account, debit represents.

A

Money outflow. Aus investor loaning money to NZ.

47
Q

5 Components on the capital account.

A
  1. Portfolio investment
  2. Direct investment
  3. Financial derivatives
  4. Reserve Assets
  5. Other investments.
48
Q

Financial derivatives…

A

Complex financial assets. Based on the value of other assets. Eg futures contracts, options etc.

49
Q

Reserve assets…

A

Foreign financial assets available and controlled by central authorities for financing and regulating payment imbalances.

50
Q

3 eg of reserve assets

A
  1. Monetary gold
  2. Special drawing rights
    1. reserve positions in IMF and FX
51
Q

Other investment in the CA..? with egs

A

Captures transactions not classified as other categories. Eg Trade credits, currency, deposits, other accounts payable and receivable

52
Q

Current account =

A

Net goods + net services

+
Net primary + secondary income

53
Q

Capital and Financial account =

A

Capital account

+

All 5 components of the FA. ( Direct, porfolio, reserve, derivatives, other)

54
Q

Net errors and emissions meaning…

A

Statistical descrepincies. Balancing item, since under floating FX accounts should sum 0.

55
Q

Strongest link on CA and CAFA

A

NPI

56
Q

F inflows create debits on NPI in 2 ways…

A

Interest payments.

Dividends, profits, rent etc.

57
Q

Cyclic factors definition.

A

Those which vary with economic activity.

58
Q

Structural factors definition.

A

Underlying and persistant influences on BOP.

59
Q

Cylic influences on BOGS 4

A
  1. FX rate (changs competitiviness of X)
  2. TOT
  3. Domestic economic growth (D for M)
  4. Int business cycle (D for our X)
60
Q

Main cyclical component of CAD in Aus…

A

BOGs

61
Q

Main structural component influencing CAD

A

Net Primary income - savings and investement gap

62
Q

2 cyclic influences on NPI

A
  1. FX rate (valuation effect) (diminished by hedging though)
  2. Changes in global and domestic IR
  3. Domestic business cycle performance (high growth high dividends).
63
Q

Structural influences on NPI 4

A
  1. Savings and investement gap
  2. Superannuation
  3. Highly leveraged households
  4. Govt Policies (expansionary fiscal policy)
64
Q

Consequences of a High CAD 4

A
  1. The growth of foreign liabilities - lenders may become reluctant
  2. Increase servicing costs - “Risk premiums”. Makes us reliant on future inflows.
  3. Increased FX volatility / Sudden undermining of OS investor confidence - Changes in market sentiments - AFC 1997
  4. Constraint on future growth / Contractionary fiscal policy. “BOP constraint”. Since growth increases M.
65
Q

Demand for AUD is a _____ demand

A

Derived

66
Q

Reduced Dom protection - 2 short term impacts on Firms

A
  • Import-competing industries go out of business
  • Lower input costs for firms
67
Q

Long-term impacts of reduced domestic protection for firms 1

A
  • Efficient firms restructure and compete on global stage
68
Q

Short/Long term impacts of reduced protection on individuals. 3

A
  • Short :
    • Structural unemployment
    • wider acess to cheaper good
  • Long:
    • Job opps increase due to higher growth in competitive sectors.
69
Q

Short/Long term impacts for Govt of reduced domestic protection. 3

A
  • Short:
    • Reduced tariff revenue
    • Adverse political outcomes
    • increase in structural adjustment spending (job search)
  • Long:
    • Sustainable growth raises income.
70
Q
A

HSC Economics (1 decks)

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