topic 2 aus place in global eco Flashcards
australia’s place in the global eco
- big country (physical size) but relatively small small, open eco (only small prop global eco terms of GDP)
- as ecos become more integrated, aus’ eco increasingly affected by developments in global eco, accelerating as globalisation continues
- HDI very high lvl eco development QOL
- aus doesnt have much influence on developments in global eco but eco developmenys world very sig impact on aus
trends in AUS’ trade patterns
why aus trades, eco structure
- despite geographic isolation, trade high prop of aus eco activity bc:
- always been overseas markets for AUS’ primary commodities eg. minerals & agri products
- aus’ lvl development –> service exports eg. tourism & edu
- aus need to trade to obtain new tech & goods not produced domestically bc relatively small pop
- export 1/4 our output, import 1/4 of GDP –> aus lil influence of global eco developments but theirs very sig impact on AUS
AUS’ changing direction & composition of trade
+ exports
- China Aus dominant trading partner since 2007, China’s share AUS imports grown last 3 decades since 2016 largest source of imports
- SK, India & ASEAN c’s gradually mroe imp
- key export markets for AUS previosu deades (Japan, UK, Europe) declined (UK join EU) historic colonial ties
- merchandise trade (physical goods but not services)
- TRENDs of aus exports & imports direction differ
- dont sell high prop of output to other adv ecos but buys large amt from them esp Europe & US for capital equipment & consumer goods
- China & ASEAN ecos large sources of imports reflect AUS demand for manuf imports they specialise in producting
EXPORTS
- 1900-50s, mainly export agri (wool, wheat, dairy) & gold to EUR ecos (UK) = close political ties
- after ww2, ^exports resources, manuf g&s
- 1960s exports direction oriented towards Asian ecos experiencing rapid growth (Japan, SK)
- industrialisation & urbanisation of their ecos ^demand for natural resources (coal, iron ore) for construction manuf, power generation
- 1980s ^avg HH incomes those ecos –> ^demand services (edu, travel)
AUS changing direction of trade (UK)
- historic shift in direction of AUS trade after UK joined EU 1973
- UK had been AUS major trading partner prior, hisotric ties when AUS was colony of Britain
- once UK joined EU, required to impose same barriers to trade w/ AUS as other countries, preference to trade from European countries
- AUS lost many trad export markets for agr products in UK
AUS changing direction of trade (Japan)
- aus exporters diff to access european markets, shift to North East Asian & ASEAN c’s for trade opp
- 1960s Japan eco rapid eco grwoth, demand for prod inputes (minerals, energy products) rapidly increasing
- AUS repond opp & Japan largest export market
- Japan’s share AUs’ trade began declining 1990 reflecting Japan’s weak grwoth & AUS increased focus on other markets in region
AUS CHANGIGN direction of trade (China)
- since 2000s exports to China began sustained period rapid grwoth 2007Aus largest trading partner
- China’s increasing dominance in global eco & AUS major commodity supplier
- China is AUS’ dominant export market, larger share of exports than 2 (Japan)+3(ASEAN)+4(EU)+5(SK) largest
the changing composition of AUS’ trade (export base)
- primary industries always main AUS exports, have comparative adv in commodities w/ vast natural resources
- exported high volumes agri products (wheat, wool, beef) & minerals (coal, iron ore, gold, lithium, together ** >2/3** aus export earnings
- less comp in manufacturing
- rely primary exports while importing large quantities of capitla goods & manuf consumer goods
- sig changes in comp of export base exports decreased bc decrease commodity exports and worldwide decline export prices for commodities & weaker global demand
what were factors contributing to decline of agri exports as prop of aus trade over recent decades? (changing comp of AUS trade)
- large fluctuations in world prices
- trade protectionpolicies other countries
suppress export revenue from agriculture - msot agri trade invovles commodity items with little extra value added in processing unlike other world trade eg. ETMs high in added value
- natural disasters caused by more frequent & severe weather patterns reduce output & productivity of agri sector
debate on aus reliance on commodity exports (changing comp of AUS trade)
relying heavily on exports of commodity items
- prospects for high commodity prices positive in medium-LT bc rapid growth China, India, developing ecos
- BUT RISKS OF aus TOO reliant on commodity exports & 1 major export market (China) esp tensions betw C&A gvts
AUS reliance on mienral & energy exports (changing comp of AUS trade)
- risks reliance on glboal demand for coal & gas exports likely fall as demand shifts to energy sources w/ lower carbon emissions
- overreliance on fossil fuel exports AUS harder hit if carbon tariffs adopted around world as gkobal response to climate change
strat for AUS to mitigaterisk of overreliance on fossil fuel exports
- LT alt to diversify exports towatds g&s demanded by growing pop of middle class consumers in Asia
- Albanese FMIA package on emerging critical minerals for renewable energy techs (lithium, for battery production) investment $22.7bn in new export industries (renewable hydrogen, green metals, processing critical minerals)
- services exports hold greatest growth potential medium-LT w/ highly skilled workforce
- recent decades AUS grown export markets for edu & financial services, insurance, tousirm & smaller markets for transport, health, communications services
trends in AUS’ imports as % of total import expenditure (changign comp of AUS trade)
- composition of AUS imports changed moderately
- share of cpaital goods remained largely unchanged at 1/5 of imports
- part finished intermediate g&S imports fallen slightly
-
consumer goods as prop imports increased
changes explaiend by shift away from alrge scale manuf in Aus w/ gradual reduction of tariffs & local content rules
trends in AUS financial flows
- growth financial flows much > ^trade flows as international bus bought AUS assets, invested in AUS bus & AUS companies inreased overseas investments
- international financial flows less imp early 70s fixed ERs & international capital markets remained largely closed
- early 1970s international system of fixed ERs (Bretton Woods system) ended & ERs around world floated & restrictions on mvoemetn capital across national borders removed
- finacnial flows grew rapidly as international cpaital markets opened up, ERs floated, tech changes easier shift finance betw countries
- lvl foreign investment in AUS and investment overseas by Aus doubled past decade,
- also change composition financial flows betw direct & portfolio investment
- imbalance between investment in AUS and AUS investment overseas.
purchase bonds (other loans)/smaller shareholdings in companies, with firms and individuals making
investments not intending to play role running business.
direct investment vs portfolio investment
DIRECT: establish new company/purchase substantial prop of sharesi n existing company (10/+%)
* when bus undertakes, LT investment & investor intends to play role management of bus
PORTFO-LIO: loans, other forms of securities, smaller shareholdings in companies
* bus & ind dont intend play role running bus
financial flows prior deregulation of financial sector in aus (trends in AUS financial flows) & how did this change?
financial flows came in as direct investment
- gvts preferred bc benefits of job creation & tech transfer
- portfolio investment not important bc overseas purchase of shares relatively small & regulated FM overseas loans not common
- remove restrictions on financial flows –> AUS attracting financial flows into eco, injecting moeny into AUS companies through loans & share purchases
following 1980s in AUS trends in finacnial flows
deregulation of financial sector & floating of AUD, restrictions on movement of cpaital across borders removed, tech changes easier to shift finance betw c’s 1980s
- foreign investment inflows grew rapidly sustained past 4 decades
- change composition: rate of ST, speculative portfolio investment growht into AUSsig faster than growth in LT foreign direct investment (also higher)
- financial flows have grown faster rate than growth in trade
- imbalance betw investment in AUS & AUS investment overseas
the imbalance betw investment in AUS and AUS investment overseas (trends in financial flows)
- AUS always net capital importer lvl foreign investment in AUS well above lvl AUS investment abroad
- bc historically low lvl domestic savings
- AUS relied on financial flows from overseas to make up shortfall betw S&I
- BUT flows arent all one-way even though much higher lvl foreign investment in AUS,
- **AUS bus have substantial overseas assets **
- AUS sig ST overseas investments ( loans, shareso n overseas stock markets) bc overseas capital markets more open to international investors & AUS large superfunds increasingly pursued investment opps overseas
AUS’ balance of payments
record of transactions betw AUS nad rest of world during given period, conducted by inds, firms, gvts
BOP figures in:
1. current account
2. capital & finacnial account
- compiled according to international accountign standards, easier to compare BOP w/ other c’s
- msot imp eco indicator of relationship betw AUS & global eco
- shows trade & financial flows in & out AUS eco
- in accounts, credit entries are money inflows considered positive transactions, money outflows debit entreis denoted with minus sign
the current account (BOP)
shows receipts (credits) & payments (debits) for exports & imports of g&s, incoem flows (earned from foreign investments) & non market transfers (payments) over 1 year (national savings - investment)
-
external, non reversible transactions (imports, dividends from overseas shares, remitted wages) not returned later date
items that appear on current account: - net goods + net services (trade balance/BOGS)
- net primary income
- net secondary income (NPI+NSI = ‘net income balance’)
- CA balance in surplus, =0, deficit
net goods in current account (BOP) w/ 3 outcomes
diff betw what AUS receives for exports & pays out for imports
1. CA balance (export receipts = import payments)
2. CA surplus (receitps > payments)
4. CA deficit (payments > receipts)
net services in current account (BOP)
(difference between
what AUS receives for services exports and pays out
for services imports) eg. edu, tourism transport, hc, insurance
- services AUS sells are inflow of money (credits)
- services AUS buy outflow of money shown as debits
- net services surplus =value of AUS’ services exports > value of services imports
balance on g&s (BOGS) in currenct account (BOP)
amt from adding net goods & net services
- DRIVES CHANGES IN SIZE CA bc volatile from quarter to quarter whereas net income balance stable (net income deficit volatile recent yrs tho) [payments overseas-income from overseas]
net primary income in current account (BOP)
AUS residents earnings on investments - income earned as a return from a FOP (pay overseas from working/dividends)
- interest paymetns on overseas borrowings & returns for foreign investments eg. foreign owned companies in AUS/foreign land ownership
- when foreigners invest in AUS, incoem in form of rent, profits, interest, dividends flows overseas
- when Aussies invest overseas, flow of income back to AUS
net secondary income in current acc (BOP0
NON-MARKET transfers (incoem not earned through FOP
- products/financial resources provided w/o specific g/s provided in return
-
small, relatively technical acc with little importance overall BOP
include: - payouts on insurance claims,
- worker’s remittances (eg. foreigners working in AUS and sending money overseas),
- funds taken out AUS in form unconditional aid to developing nations eg. funds given to foreign gvt w/o specified purpose
- residents receive pensions from foreign gvts (credit on net secondary income) included
balance on current account on BOP
addition of BOGS+ net primary income + net secondary income
captial & financial acc (C&FA) in BOP
FINANCIAL assets & liabilities
- (money flows from international borrowing, lending, purchasing assets eg. shares, real estate) over 1 year betw AUS and world
- reversible transactions, (after transactions occur, can be undone in future) eg. borrowings can be paid back, assets bought can be sold again
usually small deficit and small impact BOP
capital account in C&FA in BOP (2 main components)
- capital transfers
- 1 party transfer ownership to another w/o receieving return
- forgive(ness of) debt (borrower no longer pay back)
- conditional grants for cpaital projects (foreign aid to build roads, schools/capital stock eg. AUS donation to build bridge in Japan)
- wealth taken in & out AUS by migrants
- purchase & sale of NON PRODUCED, NON FINANCIAL assets
- intangible assets, rights to use land/water (for mining/fishing)
- mainly intellectual property rights eg. patents, copyrights, trademarks, franchises eg. AUS company buying rights from US company to operate kfc outlet in AUS
financial acc in C&FA (BOP)
shows AUS’ transactions in foreign financial assets & liabilities
categorised by type of investment
- direct investment
- portfolio investment
- financial derivatives
- reserve assets
- other investment
- size of FA can change a lot from 1 time period to next as large money flows underlying the balance on the FA
- credit entries in FA represent net inflows bc ^ foreign investment in AUS/reduction AUS investment overseas
- debt entries = net outflows
- AUS consistently has positive FA balance = during each yr, rise AUS’ liabilities to rest of world higher than ^ liabilities of rest of world to AUS –> draw savings of rest of world to finance deficit on its CA
direct investment in the financial acc (BOP)
foreign financial transactions to fund new investment in AUS/buy 10+% of shares in existing company
* eg. a SK company brings funds to build motorway in Sydney
portfolio investment in financial acc (BOP)
BUY LAND, SHARES (<10%), other marketable securities (securities that can be easily sold eg. bonds) in existing companies
- msot foreign debt recorded
- often largest item on CFA
financial derivatives in the financial acc (BOP)
investments derive value from performance of other assets (IRs/ERs)
increasingly sig recent years
* value of these investments usually derived from performance of specific assets, IRs, exchange rates, indices
* important part of GFMs
reserve assets in financial acc (BOP0
foreign financial assets available to & controlled by central autorities for financing/regulating payment imbalances
- monetary gold (gold held by RBA)
- Special Drawing Rights
- reserve positions in the IMF
- foreign exchange held by RBA
‘other invecstment’ in the financial acc (bop)
residual category captures transactions not meet requirements of other 4 categories (direct inv, portfolio inv, financial deriv, reserve assets)
- trade credits
- loans eg. financial leases
- currency deposits
balance on the capital & financial acc (BOP) determiend by [current account] [capital & financial acc] [BOP]
add categories together, outcome should be approx equal to deficit on current account
CA
net goods + net services (BOGS)+ net primary income + net secondary income
CFA
capital account + direct investment + portfolio investment + other investment + reserve assets + financial derivatives
BOP
current acc + capital & financial acc + net errors & omissions = 0
* net 0s ^ emissions are statistical discrepancies bc under a floating ER system, BOP alaways balances to 0 (deficit of 12 bill on CA offset by surplus of 12 bill o C&FA) added to C&FA to ensure BOP = 0 (can be -)
lineks between key BOP cateogires , equilibrium
CA + CFA = 0, BOP
- CA deficit = CFA surplus ( small categorynet errors & omissions)
- ^ CA deficit –> rise C&FA surplus
-
floating AUD ensure balance BOP. under floating ER, equilibrium:
M - X + Y debits - Y credits (CAD) = K inflow - K outflow (CFA surplus) - strongest link betw CA & CFA on NPI from CA
- LT, CFA surplus –> larger deficit on NPI acc bc foreign financial flow to AUSearn returns for owner, which is debit/outflow on PI acc
- every transaction betw AUS resident & world, BOP record 2 entries (value provided = credit, value receieved = debit)
- credit & debit same amt but credit + and debit - (offsets)
- measurement errors bc diff to record every transaction betw residents & world, sometimes not measured at all
financial inflows can create debits on the primary incoem category of the CA in 2 ways:
- international borrowing / foreign debt
- regular interest repayments (servicing costs) not recorded on CFA, only repayment of the principal (og amt borrowed) recorded on FA
- AUS’ high lvl borrowing from overseas sig contribute to NPI deficit due to servicing costs of foreign debt
- foreign investment / foreign equity
- returns on equity investment
- equity financial inflows from foreign purchase of AUS assets (land, shares, companies)
- foreign owners of AUS land receive rent, owners of shares get dividends, owners of ocmpanies receive profits
- ROI recorded as debits on NPI of CA
over PIT, high lvl CFA surpluses will result in..
widening of CA deficits bc servicing costs from ^ foreign liabilities **(higher foreign debt & foreign equity) **
- extreme –> ‘debt trap’ where eco borrows from overseas to pay interest-servicing costs on its existing foreign debt
how savings & investments affect CFA & CA in BOP differently
AUS historically low savings lvl relative to invcestment demand –> large inflow on FA
- before assumed AUS BOP problems due to lack of international competitiveness (BOGS on CA) –> successive gvts intro microeco reforms in trade, financial & LMs to ^comp & productivity growth
- recently savings & investment gap causing AUS LT external imbalances bc low savings –> need foreign cpaital inflow to fund AUS investment (make CA deficit a CFA problem)
BOP is an important indicator of..
health of eco & ability for AUS to make obligations to rest of world
- reflects key features of eco structure
- highlights imbalances in relation betw AUS and global eco
- BOP figures carefully watched by FMs
- sig influence on bus confidence & foreign investors
some trends since 1980s
what is the main focus of analysing the trends in BOP ? & what is the most accurate comparison of CAD across time & betw c’s?
CA deficit, esp BOGS and net primary income
- 1980s CA deficit first emerged as sig eco concern, as % of GDP avg 1.1% 1970s & 4% 1980s
- sudden increase CA deficit prompted major structural reforms to restore competitiveness of AUS eco
- 1980s –> 2015, CA deficit 3-6% of GDP vg 4.1% 1990s, 4.9% 2000s, 2.5% 2010s
- improvement in CA since 2010s –> less concern for policymakers now
Australia’s CA deficit moves in cycles, reflecting a mix of..
S< domestic & ext influences
- size & movements on BOGS and primary income acc influenced to varying deg by cyclical (vary w/ lvl eco activity eg. changes global demand for commodities, AUS’ TOT, value of ER)
- & structural (underlying/ persistent influences on BOP eg. structure of AUS export base, international competitiveness of AUS exports, lvl national savings) factors
decades before 2010s, CAD record low 2007-8 and since, sustained worsening/improvement, trends since then and why
improvement
mid 2019 CA surplus 1st time since 1975 mainly bc trade surplus (value g&s exports exceed value imports
* improvement CA during COVID recession driven by
- high (resource) commodity prices & ^production iron ore, LNG, coal
- low global IRs
- larger contraction in imports > exports
- sustained by ^surge commodity prices that ended 2023 BUT ST factors, reflected in CAD return (weaker commodity prices & higher debt servigin costs due to ^IRs)
after beginning of boom in _ _ _ in 2003, AUS experienced a doubling/tripling of its terms of trade
global commodity prices, doubling
- besides temporary decline during 2009 global recession, increasing trend in terms of trade continued until 2nd half 2011, peaked at 85% above abg lvl entire 1900s.
- terms of trade reached low pt March 2016 but recovered due to rising prices for key commodity exports
- during inital onset of global recession 2020, despite volatility AUS’ terms of trade onlyl moderate fall
- storng ^ price for iron ore (AUS’ highest value export) –> terms of trade reach highest lvl record 2020-21
terms of trade affects both … & the _ _. hat hapens during rising terms of trade?
BOGS, ER
- higher TOT –> higher export prices for same output –> ^ export revenue & improves BOGS
- BUT ^ demand for AUS exports –> ^ demand AUD –> appreciate ER –> weaken international comp of AUS’ non-commodity exports –> lower lvl of non-commodity exports partially offset benefits of rising TOT
trends in BOGS (RBA explainer) then, analySE IMPACTS of RECENT changes in TOT on CA.
influenced by
- types g&S AUS exports & imports
- prices received/paid for thsoe g&s
- since AUS Comparative adv in resource & agri commodities, large share of exports but volatile prices –> trade balance fluctuate alongside changes commodity prices
- TOT index strong growth over 2 decades
- 2016-24 ^ 63-95.
- commodity prices ^ bc global eco recovered from COVID recession, further after Russia invades Ukraine 2022 (reduce supply commodities & reduced gas supplied, subject eco sanctions)
- improved TOT –> boost surplis BOGS but ^ mining profits (AUS outflow dividend payments)
- change BOGS > change NPI –> improved TOT overall improved CA –> surplus 2019. 2024 began dec bc slowdown China reduce demand for commodities –> reverse some effects & reduced surplus on BOGS in CA
explain potential risks & benefits of large CAD for eco
RISK:
- imports > exports (maybe lack int comp)
- net receiever foreign investment, (national savings < investment)
- series large CADs accumulate NFLs –> ^ servicing costs (interest foreign debt, dividends foreign equity)
- over time ^ foreign debt weaken credit rating, demand ^IR risk lending
- large ext imbalances undermine int confidence in eco –> depreciate AUD & ^volatility
terms of trade & how to measure terms of trade index? (dont need to calculate terms of trade index but understanding terms of trade important to analyse recent trends in AUS BOP)
relative movements in prices of an eco’s imports & exports over PIT
* expressed as a no. known as terms of trade index showing ratio of export price index : import price index
* export price index shows proportional change in lvl export prices vice versa
* prop change relative to a base yr/starting pt - a given index no. of 100
* terms of trade index calculated as export price index divided by import price index x100
lvl domestic eco growth also influences BOGS balance by
by affecting demand for imports
- upturn in domestic bus cycle –> ^bus investment & hgiher disposable income –> higher consumption
- higher lvls bus investment & HH consumption –> higher imports esp since imports which are large prop both capital & consumer spending –> worsen BOGS
waht during the commodities boom contributed to AUS poor BOGS performance in mid to late 2000s?
- high growth in invesment esp in resources sector & HH disposable income lvls despite rising terms of trade
recent years, expenditure on imports has been subdued due to
weaker HH consumption & lower lvls investment in capital
changes in international busincess cycle impact BOGS by affecting the..
demand for AUS exports
* slowdown in global eco growth & weaker growth in AUS’ key regional trading partners reduce growth in demand for AUS exports –> worsen BOGS
a key feauture of AUS’ eco successes in recent decades was….and continuing this success depends on…
more closely integrated to faster growing ecos than many developed countries. depends on strenghtening trade linkages with ecos msot likley drive global eco growth in 2020s (india, china)
BOGS trends 2010s
aka trade balance
- strong surpluses recent yrs since 2016-17 –> strong growth in income from AUS resources & energy exports
- surplus decreased due to elevcated commodity prices, strong activity in travel & tourism sectors, return international students to AUS cities
3 cyclical factors affecting BOGS
- exchange rate
- terms of trade
- rate eco growth in AUS eco & global eco
exchange rate as a cyclical factor affecting BOGS
- movements affect international competitivenessof AUS’ exports & relative price AUS imports (& dom prod goods)
- depreciation decreases foreign currency price of AUS’ exports –> ^ int competitiveness of AUS exports on world markets
- also ^ AUD price of imports & discourages consumers from purchasing imports encourage purchase dom goods, improve BOGS acc
depreciating AUD contribute BOGS improvement since 2016-17
terms of trade
cyclical factor affecting BOGS
- greatest influenceo n AUS BOP recent yrs
- shows relationship betw prices AUS received for exports & prices paid for imports
- if export prices ^ relative to import prices, AUS terms of trade improve
- import prices increasing relative to export prices, terms of trade deteriorate
- improvement = same volume of exports can buy more imports
- unless signfiicant decrease in export volumes compared to import volumes –> improve on BOGS (larger surplus/smaller deficit) & decrease CA deficit
rate of eco growth in AUS nad global eco as cyclical factor affecting BOGS
- dom EG influences BOGS by affecting import demand (upturn BC –> ^bus investment & consumption –> ^ imports (sig prop capital & consumer spending) –> worsen BOGs esp if dom EG > global EG –> slower growth in exports > imports)
- if EG driven by investment in productive capacity that’ll expand exports in future, worsened BOGs reverse MT bc imports of capital goods replaced by exports
- POOR bogs DURING 1ST PHASE GLOBAL MINING BOOM THEN 2010S PROJECTS COMPLETE & mining output expand)
- IBC changes impact BOGS by affecting demand for AUS exports
- slowdown/weaker growth global EG & major (regional) trade partners reduce demand –> wrosen BOGS (depend on AUS dom EG & how impacts imports [China’s growth > AUS’ so BOGS improved])
- eco closely integrated to fast growing emerging ecos must strengthen trade links w/ ecos likely drive global EG 2020s. eg. SE Asia
- 2000s AUS exp largest sustained TOT in its history
- impact of global commodities boom strongest behind changes in CAD for over decade
- commodities AUS largest export, sig impact on TOT & BOGS
- AUS exporters received higher prices for exports, ^ export revenue –> ^ value of AUS exports –> improve BOGS while rise of low cost emerging ecos flooded world markets w/ low cost manuf goods –> reduce import prices –> further ^ AUS TOT
structure of AUS’ export base
2 structural factors affecting AUS’ BOGS (LT deficit)
- NARROW EXPORT BASE,
- heavily weighted towards small no. commodities
- comparative adv in products w/ no large value added component - minerals, agri (which together acc 2/3 AUS export earnings)
- AUS highly exposed to movements in prices & demand in these markets, volatility contirbutes large fluctuatiosn ni BOGS ever yr
- recent decades upturn prices agri exports (but ^smaller than mining sector) reflects ^ global food demand, rising incomes in developing c’s, rising prices agri inputs (oil, fertilisers), war in Ukraine, climate change reducing agri productivity (weather patterns, natural disasters)
- need to reduce dependence on fossil fuel exports as ecos shift away from carbon-intensive fossil fuels (aus exports coal, gas).
- AUS LACKS INTERNATIONAL COMPETITIVENESS (in manuf)
- relies on importing value-added products (consumer & capital goods) & export bulk commodities w/o value-adding –> BOGS deficit bc import payments outstrip export revs
- LT, diversify exports towards high-growth, high value-added sectors of global trade (tech, ETMs aka tech advanced g/s) > simply transformed manuf goods/commodity exports
- FMIA policy Albanese Gvt 2024 manuf solar cells, batteries, clean energy tech
- service exports strong growth opp bc AUS proximity to emerging Asian ecos
- service-based eco
- int comp also affected by infrastructure for transport & info (capacity of ports, road & rail & braodband networks) –> investment alleviate infrastructure capacity constraints & ^export growth
until early 2000s, many though LT downward/upward trend in commodity prices over 1950s onwards would ocntinue to improve/worsen AUS’ external position. However,
downard, worsen
^ global demand for commodities exports far more valuable since beginning 2000s
* although volatility in TOT past decade, TWIndex remained well above LT avgs –> sig improvementsi n AUS TOT & extraordinary growth in export revenues
it took few/several years before commodities boom of 2000s led to a lasting chagne in AUS’ trade accounts, whcih reflected 2 things
- AUS’ need ot import vast amt capital equip to expand its mining capacity –> surge in imports
- time lags betw increases in comodity prices & increased export volumes
-
^ production capacity takes time bc delays in investment deciions & time to construct new mines, railways, shipping facilities
(low capacity at ports, ineff road & rail networks) physically prevent AUS exporter from taking adv of favourable cyclical conditions by ^ export volumes - influx of both gvt & private sector investment in infrastructure gradually eased infrastructure constraints during 2010s and end of decade AUS g&S exports wroth 3x total when mining boom began 2004
(net) primary income account
central role in trends of CA balance
- income AUS residents earn - pay to world from owning FOP & financial ivnestments (dividends/pay interest overseas borrowings)
- difference betw in & outflows of earnings on overseas ivnestments/income earned as return on overseas FOP
- interest payments on overseas borrowings & ROI foreign owned companies/shares/land
- foreigners invest in AUS, income as interest, rent, dividents, profits flow overseas while AUS invest overseas income flows back
- deficit 2-3% of GDP usually
(what does the NPI deficit on the CA reflect abt AUS?
- NPI deficit reflects AUS’ net servicing costs for its foreign liabilities as interest repayments on foreign debt/dividend payments from profits on foreign equity
(primary income acc) relative size of AUS’ interest repayments to overseas affected by 3 main cyclical/strucutral factors
(3 main factors drive servicing costs –> NPI deficit –> CA, 2025 textbook)
cyclical
1. domestic EG
- strong dom EG –> ^company profits –> redistribute to SHs as dividends (outflow) –> ^equity servicing costs –>^NPI deficit
- ~40% AUS public share market foreign owned
- eg. mining sector
- ER
- ER movements change AUD value debt denominated in foreign currencies ‘valuation effect’
- appreciate –> decrease AUD value debt denom foreign currencies –> decrease AUS debt servicing costs in AUD –> reduce value NPI outflows & reduce NPI deficit
- changesi n IRs
- can take out AUS’ overseas loans w/ overseas IRs (when borrowed in foreign currencies)/AUS IR (borrowed in AUD)
- IRs change –> change foreign debt servicing cost
how relativce size of AUS interest repayments to overseas affected by changes in value of exchange rate + argument (not in 2025)
- movements in ER alter AUD value of debt denominated in foreign currencies aka ‘valuation effect’
- appreciation decreases AUD value of debt denominated in foreign currencies –> decreasing value of AUS’ debt service in AUD terms –> reduce value of NPI outflows & improve NPI deficit
- deprecitaion ^ AUD value of debt denominated in foreign currencies –> ^ value of AUS’ interest repayments & worsen NPI deficit
- in practice, argued that valuation effect only small impact on NPI acc (in ST at least) bc large amt AUS’ foreign debt ‘hedged’ (lender & borrower will agree to fix ER over course of loan to reduce risk of large ER fluctuations)
- sig part of AUS’ foreign debt denominated in AUD –> immune from ER movements
valuation effect? (not in 2025)
change in the value of a country’s assets & liabilities due to fluctuations in ERs, asset prices, (FM factors)
- impact changes in market value of foreign investments (such as stocks, bonds, and foreign reserves) on a country’s BOP esp its NPI.
structural factors affecting AUS primary income account (main reason)
- ongoig NPI deficit is - ** savings & investment gap**
- relatiely small eco w/ historicall low lvl national savings but require high lvls capitla investment for EG (AUS major minerals export industry requires high lvls investment in exploration, capital equip for extraction, transport infrastructure from remote locations)
- open eco, firms use foreign sources of finance to fund investment –> AUS funds a lot of investment through overseas borrowing (^ foreigndebt)/sell ownership in AUS bus’ (^ foreign equity) –> ^ AUS foreign liabilities, creates future servicing obligations as interest repayments on debt & dividends on equity
- servicing costs outflows on NPI acc big reaoson why CA remained in deficit until recent yrs even if sustaining trade surpluses
structural factors affecting AUS primary income account (not main reason)
^AUS investment overseas (led by AUS large volume of superfunds) results in inflows of earnings on the investments–> improve NPI balance
- savings & investment gap
- requires high lvls capital investment for EG (export industry)
- open eco –> firms foreign sources finance to fund investment (servicing costs become outflow on NPI acc –> CAD)
- growth in AUS overseas investments from superfunds (returns on overseas equity by AUS investors, low ER)
- low lvls HH & public savings
2 factors that contributed to the trend towards lower primary income deficit in 2010s
- increased returns on overseas equity held by AUS investors
2.a lower exchange rate
HH & public savings (structural factor affecting primay income acc) check 2025
- AUS historically low lvls HH & public savings (HHs 2x debt as prop of HH income than 2 decades ago)
- HH savings ^dramatically COVID ression 2019-20 bc fewer opps to spend but not sustained bc rising IRs and cost of living pressures
- AUS gvts substantially ^borrowings during past decade –> detract overall national savings
2 ways gvt address low domestic savings problem (structural factors affecting NPI acc, low lvls HH & public savings)
implement policies to ^ lvl personal savings
- ^ rate compulsory super,
- removce incentives in tax system encouraging ^ debt & encouraging ^ savings through tax incentives
^ public savings by reducing budget deficits & moving public sector into surplus through fiscal consolidation
* budget deficit = negative public savings
* budget surplus positive contr to lvl nationa lsavings
* key issue 2020s speed of deficit reduction –> LT influence savings/investment gap –> BOP
LSVECI
6 risks associated with sustained high CA deficit
- growth of foreign liabilities
- ^foreign liabilities (financial inflow on CFA as borrowings from overseas (foreign debt)/selling equity eg. property & companies (foreign equity) –>lenders reluctant to lend to /invest in AUS
- ^ servicing costs due to high lvls foreign liabilities
- lead to larger outflows on NPI acc –> worsen CAD
- foreign debt serviced thorugh interest payments that vary according to lvl IRs in AUS & overseas
- profits must be returned on foreign equity investment
- higher lvls foreign debt –> foreign lenders demand ‘risk premium’ on loans (extra amt added to base IR to compensate for ^risks in lending eg. volatile fluctuations, default on debt, –> force up IRs
- ^ volatility for exchange rates
- high CADs can undermine confidence of overseas investors in AUS eco –> reducing demand for AUS’ currency, can depreciate AUD
-
constraint on future eco growth
(LT)
- higher lvls eco growth involve ^ imports & deterioration in CAD
- forced ot limit growht to lvl which CAD sustinable aka BOP constraint
-
more contractionary eco policy
* if necessary to reduce high CAD in ST, gvts must tighter macroeco policies & accelerate implementation of microeco reform
* in ST, tighter fiscal & monetary policies reduce eco grwoth & lower CAD - sudden loss of international investor confidence
- eco crises sometimes triggered by sudden shift in attitude of GMs towards country whose external imbalance appears unsustainable
- investor confidence can change suddenyl & countries with high CADs & foreign debt mroe vulnerable to shifts in investor sentiment
arguments abt consequences of a high CA deficit
different lvl concern abt AUS historic pattern of high deficits on CA & foreign liabilities
- if gvt not borrowing money, any external imbalances are result of normal market transactions in global eco
- others argue CAD & foreign debt can be benefitical bc borrowing from overseas can ^ investment & help eco grow faster
when does IMF consider CAD to be too high
if avgs over 4% in medium-LT/above 6% in ST
althoug AUS’ CAD high compared w/ other countries for decades, concerns abt its potential to disrupt AUS eco inc/decreaezd recent yrs especially since
decreased
- scale & persistence of mining boom clearer last 2 decades
- globalisation era, FMs more willign accept ext imbalances & confident AUS’ natural resource wealth continue strong export growth in future & allow AUS service foreign liabilities
some warn regardless that high CAD may still re emerge as a LT risk for AUS bc
- changes in eco conditions eg. loss of Chinese export markets/rise in global IRs –> return higher CA deficits
- sustained CADs make AUS dependent on financial inflows to fund servicing costs of its high foreign liabilities
- while AUS high CAD hasnt affected growth in recent yrs, due to favourable external conditions that could change in future (GFC lenders willing lend man ecos who later deep eco crises)
- a diversified export base, lower net foreign liabilities could make AUS eco more resilient
define net foreign liabilities, net foreign debt & debt servicing ratio
NFL: AUS’ obligations to rest of world (foreign debt + foreign equity) - rest world’s financial obligatiosn to AUS (stock of debt and equity AUS owers to foreigners - foreigners owe AUS)
net foreign debt: foreign debt + foreign equity all other things equal
DSR: prop export revnue to make repayments on foreign debt, common measure to assess sustainability of foreign debt
explain how continued budget deficits could impact AUS external stability
- ^ foreign debt bc deficits financed partly by selling bonds to foreigners
- servicing cost of interest payments on bonds sold to foreigners –> impact CA & NPI
- impact AUS’ AAA credit rating –> ^cost of servicing foreign loans
- S&I gap mroe diff reduce if gvt continues borrowing –> private sector may need borrow offshore –> crowding out impact ER (when ^gvt spending decreases [reduce supply borrowable funds for investors])/^demand funds ^ IRs
“crowding out”—government borrowing takes up financial resources that would otherwise have been available for productive private investment. slower EG
how decrease AUS’ TWI affect inflation
likely effects of ^TWI on AUS eco
- imports from major trading partners more expensive –> ^prices (inflation)
- **inputs **in PP imported from major trading partners more expensive –> ^prod costs –> ^inflationary pressures
- ^TWI = appreciate AUD\
- (reduce int comp exports, imports cheaper, worsen BOGS, slow EG,
- deter foreign investment (expensive to convert currency to purchase AUS assets), value assets AUS owns overseas fall in AUD terms)
recent movements & outlook for the AUD
- 2000s sustained appreciation –> depreciation since 2011
- low in 2001 (US47c) –> 2003 began strong appreciation (^commodity $)
- response to Ukraine wair 2022 c’s imposed sanctions on Russia (large commodity exporter) –> ^demand AUS commodity exports (coal, iron ore, gas) –> 7.5% appreciate AUD from Jan to March (iron ore prices jumped 30%) –> depreciated
- recent volatility also bc when AUS’ CR > adv ecos, foreign investors (high saving nations eg Japan) likelier invest savings in AUS –> strong AUD last 2 decades
- LT factors: EG, commodity prices, ROI past decade shows affect through impact on GFMs (speculators influenced by ST)
discuss impact of depreciation in AUS on employment & CA
- exports more int competitive –> ^volume exports –> employment in export industries
- ^volume exports improve BOGS & CA
- imports more expensive –> domestic import competing cus more competitive –> ^emp in those industries ^ emp
- depreciat –> ^foreign debt lvls (valuation effect) –> ^NPI debits on CA –> worsen CA
(exports dont cause inflation)
analyse why AUS achieved CA surplus recently (not 2024 tho)
- slowing eco –> less dividiends & profits flow out NPI as debits
- lot of money in super (often invested overseas) –> profits, dividends, interest flow into AUS as NPI credits
- ^ commodity prices (mining problems overseas & covid affect global supply), ^ iron ore to china –> ^BOGs surplus & CAS
- slowed imports bc disrupted supply chains & less demand for imports during lockdown
- demand agri products strong despite global slowdown
exchange rates
price of AUS’ currency in terms of antoehr country’s currecy - price which traders & investors swap AUS currency for another currency
- necessary bc exporting firms wanna be paid in own currency –> importers need mechanism to convert domestic currency into a foreign currency to make payments
- currency conversion occurs in forex market where forces supply & demand/fixed ER, gvt/its representatives determine price of a country’s currency in terms of antoehr
- all trade & financial relations betw countries mediated through exchange of curerncies –> ER movements sig impact on international competitiveness, trade flows, investment decisions, inflation, etc
systems countries can use to determine the exchange rate of their currency
- floating system (clean/dirty float)
- fixed rate system
- flexible peg
- another option for countries w/ similar regional interests is a monetary union w/ major trading partners eg. euro, currency of 19 EU members aka eurozone & 4 non EU countries
floating exchange rate
when value of an eco’s currency is determined by forces of demand & supply in forex markets
AUS floating exchange rate system
Dec 1983 AUS switched from a managed flexible peg to a floating ER system, imp structural change bc opened up the eco to global financial flows
- ER determined by free market forces (not gvt intervention)
- suppy & demand establish equilibrium price for AUD i nterms of anotehr ocuntry’s currency
- equilibrium changes regularly (every minute even) as supply & demand in forex market change
demand for AUD affected by:
- size of financial flows into AUS from foreign investors who wanna invest in AUS & need to convert their currency into AUD
- lvl AUS IRs relative to overseas IRs - relatively higher AUS IRs make AUS mroe attractive location for foreign savings –> ^demand
- availability of investment opps in AUS - more opp for investors overseas to start new bus/buy existing via share market, demand ^
- expectations of future movements of AUD - if expect appreciation, ^ current demand for AUD by speculators
- demand for AUS exports since foreigners who buy AUS’ exports need to convert their currency into AUD to pay AUS exporters
- changes in commodity prices & TOT immediate effect. rise commodity prices & improve TOT –> ^ value of AUS exports. FM respond by ^ value of AUD expecting that value of exports ^ over S-MT.
- demand for AUS exports influenced by degree of international competitiveness of domestic exporters & AUS’ inflation rate relative to overseas countries. if domestic firms **competitive **in world markets & AUS’ inflation rate relatively low, AUS’ exports relatively cheaper & more attractive to foreign buyers
- changes in global eco conditions influence overseas demand for exports. demand for AUS’ commodity exports highly dependent on growth rates of AUS’ trading partners - if world eco upturn, demand & prices for AUS’ exports rise.
- tastes & preferences of overseas consumers affect demand for AUS’ exports.
international competitiveness
measure of abilitty of AUS producers to compete w/ overseas producers in local & world markets
supply of AUD, determined the following factors:
ppl who sish to Sell AUD
- lvl financial flows out of AUS by AUS investors who wanna INVEST OVERSEAS & need to sell AUD to purchase foreign currency
-
lvl of AUS IRs RELATIVE to OVERSEAS IRs influence financial flows out of AUS & supply of AUD. relatively lower AUS IRs make investing savings overseas more attractive –> ^ supply of AUD
2.availability of INVESTMENT OPPS OVERSEAS influence financial flow out of AUS.
- greater opps to start bus’ overseas/purchase shares in overseas companies ^ financial flows out of AUS & ^ supply of AUD
- SPECULATORS in FOREX market who expect value of AUD to DEPRECIATE will sell AUD, ^ supply of $A
- ER affected by Domestic DEMAND FOR IMPORTS since AUS importers who buy from overseas need to sell $A to obtain foreign currencies to make import payments
- demand for imports mainly determined by lvl domestic INCOME (rising). strong EG, EMPloyment –> demand for imports also rising –> ^ supply of $A
- DOMESTIC INFLATION rate & COMPETITIVENESS of IMPORT-COMPETING domestic firms affect import lvls.
- if Aus’ domestic INFLATION rate HIGHER & its import-competitng firms RELATIVELY UNCOMPETITIVE, **imports relatively **cheaper than domestic products & demand for imports ^
- TASTES & PREFERENCES of domestic consumers change over time, ^ preference for g&s from overseas raise supply of $A on forex market
AUS has many exchange rates, which mean
one for each of the currencies of the countries for which forex transactions required –> possible at any time that AUS’ ER appreciating against some currencies & depreciating against others
main factors causing an appreciation of AUD (summary)
- ^ AUS IRs/decrease overseas IRs (relative)
- improved investment opps in AUS/deterioration in foreign investment opps
- rise commodity prices & improvementin AUS TOT
- improvement in AUS international competitiveness
- lower inflation in AUS
- ^ demand for AUS exported g&s
- expectations of a currency appreciation based on forecasts of above factors
high inflation, prices rise, each unit of currency buys fewer. erode PP less attractive to investors, depreciate against currencies
main factors causing depreciation of AUD (Summary)
- decrease in AUS IRs / ^ overseas IRs
- deterioration in investment opps in AUS/improvement in foreign investment opps
- fall in commodity prices & deterioration in AUS terms of trade
- deterioration in AUS international competitiveness
- higher inflation in AUS
- ^ demand for imported g&s
- expectations of currency depreciation basedo n forecasts of abovce factors
why can comparing the value of a dollar against a single currency (bilateral ERs) create a misleading impression of trends in AUD value?
- unique factors affecting both currencies
eg. USD depreciated against most currencies. if examien only USD & AUD, think AUD appreciated itself over 100% its value BUT AUD rising while USD falling creating exaggeration of rise in AUD - it rose by a smaller amt against other currencies
Trade Weighted Index TWI
measure value of AUD agaisnt a basket of foreign currencies of major trading partners weighted according to their significance to AUS’ trade flows (prop of AUS 2 way trade with MTPs not weight)
- value of AUD moving against all currencies compared with a base year
- currencies of c’s more prominent in AUS’ trade higher weighting so they have greater influence on TWI basedo n volumes of trade for previous FY
- each year, RBA amends measurement
- total no. countries included in TWI must cover 90/+% of AUS trade
how RBA’s intervention in forex market & domestic money market can influence AUD value
- directly invervene in forex market by buy & sell foreign currency (dirty float) eg. GFC AUD depreciated 30% so RBA purchased $3.3bn to ^demand & stabilise currency
- intervene INDIRECTLY in DOMESTIC MONEY market by changing cash rate (hence IRs) –> encourage capital inflow to AUS –> ^demand AUD, appreciate. / RBA purchases bonds in the bond market to ^ liqudiity & put downward pressure on IRs & ^ supply of $A
- jawboning/forward guidance (?) RBA governor influences ind & bus influence speculators &direction(hint CR drop, seculators sell AUD anticipating future depreciating –> actual)
adv & disadv of floating ER
ADV
- automatic stabiliser (floats up in boom –> slow export sales & dampen AD, floats down in slowdown –> boost export demand & raise AD) [help protect eco from external booms/busts.
- eg. mining boom ^ demand for AUS resources –> ^commodity prices –> appreciate AUD –> industries didnt directly beenfit from mining boom ^costs & demand for output fall –> re-allocate labour & capital to mining sector –> reduce inflationary pressures & maintain stable employment lvl]
- MP more independent & effective bc no change in moeny supply (inflation, emp, stability w/o adj IRs to maintain fixed ER, not pegged to another currency = no need to maintain foreign currency reserves)
- greater integration itno global capital markets
DISADV
- AUD much more volatile esp speculation –> ^ uncertainty for bus, investors, consumers exporter competitiveness import inflation
limitation of TWI exchange rate measurement
weighting only based on trade volumes regardless of currency in exports & imports are invoiced
- AUS often sells its commodities in USD even when trading w/ another country eg. Japan –> AUD/USD ER far more important than weight it received in TWI calculation
- imp when analysing impact of movements in AUD against USD & TWI on AUS’ trade & financial flows
trends in TWI
- while often sustained trends (appreciation, depreciation), also some yrs where there’s a break in sustained, LT trend
cool fact abt Chinese yuan
Chinese yuan is basic unit of the Chinese
currency, the renminbi.
Its usage is similar to the
way that economists refer
to the British currency as
Sterling and its unit as the
British pound.
2 ways RBA intervention in forex market
although AUS relies primarily on market forces to determine ER, RBA sometimes influences value of currency
* RBA cant change value f AUD in LT but can smooth out swings relating to ST factors by
1. Dirtying the float &
2. monetary policy intervention
RBA dirtying the float when intervening the forex market & what it’s limited by
when RBA feels large ST change in ER (eg. excessive speculation) harmful to domestic eco, intervene in forex market as buyer/seller to stabilise AUD**
* to curb rapid depreciation of currency, RBA buy $A –> upward pressure on ER
* sell $A –> prevent rapid appreciation (recover in value)
* stabilises currency & generates profits contributing to RBA’s dividend payment to the gvt
- limited by size ofi ts foreign currency holdings (its reservces of foreign currency & gold that can be used to fund said purchases)
- sum total of RBA’s foreign currency reserves relatively small, not equal to even 1 day’s total transaction in the currency
- hence RBA has limited power to sustain prolonged interventions, as it may quickly run out of foreign currency to continue influencing the exchange rate.
hwo RBA intervenes in forex market using monetary policy decisions & limitation
- indirect way influencing ER, rarely used
- if RBA curb rapid depreciation, raise IRs –> attract mroe foreign savings, (must be converted into AUD) –> ^ demand for $A and upward pressure on ER
- policy only effective for limited time
- unusual for RBA to change IRs in resposne to currency movements as primary focus is to influence domestic eco esp inflation rate
- BUT ER movements sometimes so large affect stability of eco/lvl inflation
AUS before having floating exchange rate system, what system did it use?
since Dec 1983 AUS had floating ER system but previosu decades operated on range of fixed ER systems
* prior Nov 1976, AUS had fixed ER system which AUD was pegged at diff times to UK pound sterling, USD & TWI
* NOV 1976 - DEC 1983, AUS had a variation of the fixed ER aka managed flexible peg
fixed exchange rates (system) + risk/limit
gvt/RBA officially sets the ER (not left to forces of S&D)
- gvt maintain/intervene in forex market by buying/selling foreign reserves of foreign currency and/or gold in exchange for AUD
- RBA obtained foreign reserves by insisting that all forex holdings be lodged w/ them
- risk of system is that to ^ value of AUD, RBA could exhaust its foreign reserves by continually exchangign them ffor excess supply of AUD –> complete collapse of trade in the currency
- gvt could also change the ER ‘officially’ so it’s closer to real marekt value –> devalue AUD when lowers ER & revalue AUD when^ ER
- limits ability of RBA to influence IRsfor MP
the managed flexible peg (determining ER) (System)
variation of fixed ER
- system operated in AUS Nov 1976 to Dec 1983
- RBA ‘peg’ value of AUD to basket of foreign currencies at 9am daily –> price operate throughout day
- flexible peg system more flexibility than fully fixed rate & allow official rate to drift away from under pure market forces
ERs & the BOP
in AUS open eco, value of ER can change sig in response to eco developments
* perf of BOP very imp influnece on ER
* value of dollar also influence BOP w/ other areas of eco
how floating ER influences BOP (CPA & CA) & what do their effects depend on?
under floating ER, quantity of AUD supplied = quantity of AUD demanded
- net OUTFLOW of funds on CA (SUPPLY of AUD) = net INFLOW of funds on CPA (DEMAND for AUD) …but statistical mistakes through net errors & omissions on BOP]
- if disequilibrium in BOP, temporary & automatically corrected by movement in ER
effects depends on perceptions of FMs too
- if FMs concerned that ^ CA deficit not sustainable, less willing to buy AUS assets –> value of AUD fall further bc capital inflow reduced
- AUD appreciate despite ^ in CA deficit if FMs believe CAD sustainable & confident AUS’ CA problems only ST risk to eco, expecting high commodity prices eventually reduce CAD
- improvement in BOP may not be largest influence on ER in a year
- recent years, most sig influence on ER movements is how FMs react to developments in eco indicators eg. BOP, sometimes diff to predict reactions –> greater instability in forex markets bc market sentiment can quickyl change
how change in CA can influence ER & CFA
- if value of imports ^ & exports unchanged –> deterioration in CA deficit & ^ supply AUD (importers selling more AUD to buy more foreign currency) –> depreciatr currency –> given lvl financial inflows able buy more AUD –> positive balance on CFA ^ in AUD terms to match biger deficit on CA
- any other ^d outflow of funds on CA (eg. payment of services, income payments, current transfers) likely depreciate AUD & ^surplus on CFA
- imporve CA deficit –> appreciate AUD & decrease in surplus on CFA
neg effects of an appreciation (change in ER) to BOP
- increasing value of AUD in terms of other currencies –> AUS exports mroe expensive on world markets, more diff to sell –> decrease export income & deteriorate AUS CAD medium term
- imports less expensive –> encouraging import spending & worsening AUS CAD. domestic production of import substitutes likely fall
- higher import spending & reduced export rev reduce AUS’ eco growth
- foreign investors find more expensive to invest in AUS –> lwoer financial inflows, which may continue if foreign investors expect currency to continue rising
- appreciation reduces value AUD of foreign income earned on AUS’ investments abroad –> deteriorate NPI of CAD
- reduce value of foreign assets in AUD terms ‘valuation effect’
valuation effect
appreciation/depreciation of currency causes immediate change in AUD value of foreign debt that’s borrowed in foreign currencies/foreign assets held by AUSSIES
depreciation ( neg effects of change in ER) on BOP
- AUS consumers suffer reduced purchasing power (can buy fewer imports (overseas **produced goods) w/ same quantity of AUD)
- ^ interest servicing cost on AUS’ foreign debt bc AUS can buy less foreign currency with its domestic currency to pay interest –> ^ income outflow on net income on CA –> ^ CAD
- ^ AUD lvl foreign debt borrowed in foreign currency in AUD ‘valuation effect”
- raise price of overseas assets purchased by AUS investors
- inflationary pressures in AUS ^ (imports more expensive,) ^ pressure on RBA to raise IRs to defends its inflation target
pos effects of an appreciation (change in ER) to BOP
- AUS consumers enjoy ^ purchasing power, can buy more overseas produced goods w/ same quantity of AUD
- DECREASES intererst servicing cost on foreign debt bc aussies can buy mroe foreign currency w/ AUD –> reduce outflow on NPI (component of) CA in future yrs –> reduce AUS’ CAD
- reduce AUD value of foreign debt borrowed in foreign currency ‘valuation effect”
- for aussie investors trying to purchase overseas assets, reduce price of the assets
- inflationary pressures in AUS reduced as imports cheaper –> reduce pressure on RBA to raise IRs to defend its inflation target
pos effects of an depreciation (change in ER) to BOP
- decreases value of AUD in terms of other currencies –> AUS exports cheaper on world markets, easier to sell –> ^ export income & improve AUS’ CAD in medium term. weaker AUD following end of commodities boom largely credited w/ helping AUS eco adjust to reduced income from mining by ^ international competitiveness of other sectors
- imports mroe expensive, discouraging import spending & improving AUS’ CAD. domestic prod of import subs should ^
- lower import spending & greater export revenue (Combo) will ^ AUS’ growth rate unless AUS unable replace its imports w/ domestically produced goods
- ^ $A value of foreign income earned on AUS’ investments abroad –> improve NPI (component of) CA deficit
- foreign investors less expensive to invest in AUS –> greater financial inflows BUT they made dry up if foreign investors expect currency to continue falling
do economists & policy makers favour a higher/lower exchange rate?
mostly favour ER values that reflect true forces of supply & demand
- ‘true’ –> from exchange g,s, finance betw AUS & rest of world but not ER changes due to speculators who buy/sell AUD anticipating change in currency distort ER movements & ^ ER volatility by exaggerating upwards & downwards cycles
one of AUS’ problems dealign with changes in ER
it’s a small eco relying on substantial financial inflows address its external imbalances, –> AUD more vulnerable to speculators than other adv ecos
- excessive speculation & volatile currencies major global eco concern bc large currency movements can destabilise ecos
CPTPP Comprehensive & Progressive Agreement for Trans-Pacific Partnership (textbook check)
multilateral agreement betw 11 countries for AUS, canada, japan, mexico, NZ, singapore, vietname 2018-19
increases market access across borders for bus by:
* lowering tariff barriers,
* simplifying compliance requirements so bus access preferential trade treatment
* reducing foreign investment restrictions
* imposing rules around conduct of state owned enterprises
* far more modest than og plan for TPPA (trans pacific partership agreement) included US before its withdrawal under the Trump Adminsitration in 2017
assess the possible effects of a depreciation of currency on the CA
S< effects on CA
- ST ^ value imports bc locals pay more for imports –> CA deteriorate
- after MT, demand imports decrease & demand exports ^ bcd more int comp –> improve BOGS
- deteriorate NPI bc ^ debt servicing costs (also earn more on foreign investments
- overall impact M-LT likely positive for CA
what are the main advantages & disadv of foreign investment in AUS?
ADV
- transfer tech & management skills
- access forex
- create emp opps
- ^ access to export markets
one benefit of FDI is allows c to fund required infrastructure wehn dom savings insufficient. FDI projects can** create high paid dom emp opps** which contribute to dom wealth & improve LS. if FDI in infrastructure projects (roads, mines) then can help eco become mroe int comp by improving dom AS.
DISADV
- loss ownership & control of resources
- servicing costs overseas debt & equity borrowings
- volatile nature of speculative portfolio capital flows impact ER
some costs of FDI arise bc dom assets controlled by foreign residents, potentially foreign gvts which can –> political problems if foreign investors diff views on issues eg. enviro management. any incoem earned from asset in future flows to foreign investor neg impact for BOP
