topic 2: aus place in the global economy Flashcards
economics
link 1
the balance on the current account is equal in magnitude but opposite in nature to the balance on the capital and financial account
link 2
Investment flowing through the financial account requires the investment returns to be provided to the investor. returns are recorded in the primary income component of the current account
link 3
Investment flows through the financial account are used by Australian firms to expand productivity/output. Thus Australian exporting firms can increase exports while import-competing firms can help lower imports. This generally strengthens the balance of goods and services component of the current account.
3 ways open economy is measured
- exports / gdp
- imports /gdp
- dependency ratio
– X+M / GDP
macroeconimic exporting benefits 4
- export earning may help pay for imports
- exports add to eco growth (AD)
- increased output increases employment and national income
- protect from domestic downturns, exporting sectors of economy still do well
– looks at demand side of econ
international financial flows meaning
flows of money/currencies and other financial flows (capital, inv) across international boundaries
microeconomic exporting benefits 3
- focus on comparative adv strengths
- exporters usually more innovative to compete with global marketplace or from opp. to benefit from transfer of knowledge and technology in foreign markets
- exploiting EOS, including diversification of sales risk by being in more than one market
– looks at supply side of econ.
current account: what do they record?
- records unilateral ‘earned’ transactions
- when more M and financial outflows than receipts and inflows
capital and financial acct: what do they record?
record of international capital flow
- fdi more than 10%, long term (?)
trends in BOP: big picture
- persistent CAD since 1970s (-3 to 6%)
– up M, lack intl. comp. in protected econ. - protection down, specialisation and investment (net importer) in mining lead to structural change and increase in exports
- china development of manufacturing lowers m prices
- aus = net importer
pitchford theory + 29/40 years of CAD eco growth
definition of structural change
refers to the broad change in an economy’s structure of production and level of technological progress as economic development takes place
terms of trade formula + terminology + importance
TOT index = X index / M index (as %)
- no direct impact of TOT on BOP
- price index more influenced by price and demand than XR
- improve: X rise faster than M
- deteriorate: M rise faster than X
~ - favourable: up 100
- unfavourable: down 100
TOT up when global eco strength is more powerful (can buy more M than before, improve SOL)
- SHORT TERM IMPACT OF APPRECIATING CURRENCY IS IMPROVEMENT IN TOT
definition international competitiveness
degree of ability for aus exporters and import-controlling firms to compete against foreign producers
- influences bogs
current trend of BOP - aus
CAS 1.1% of GDP
- BOGS: current change in trade, issues with china
- Yp: falling borrowing costs (historic low global int rates)
- FFA: global recession but search for higher returns
key factors of intl. compt 6
PRODUCTIVITY
quality
RETAIL PRICE
service
government policies
trade agreements
what makes an increase in intl. compt.
X rise, M fall → IMPROVEMENT IN CAD
flow on effects:
- higher trade earnings → companies can pay borrowings → reduce foreign liabilities hence debt servicing payments →further improve CAD
- primary income debit lower since liab. don’t exist anymore
trend intl. compt
2018-19: POOR PERFORMANCE
- poor perf. in G&S balance due to lower export demand while imports remained relatively inelastic in face of depreicating currency
what influences international compt. 3
productivity: ↑ technology and education
- microecon. reforms began 1980s boosted productivity of factor and commodity markets
- includes finance and labour market reforms, deregulation of airline and telecommunications industries
retail price: ↓ fx rates, inf, costs
- lower inflation: keeps production costs under control relative to other nations→ achieved through monetary policies
depreciating currency:
- makes X cheaper thus increase intl competitiveness
globalisation mining commodities structural story
biggest winner from globalisation due to
- key comparative advantage from rich natural resource base
- developing countries require natural resources as they develop+indsutrialise
BUT reliance in one sector can have risks, volatility in commodity prices may impact on production and unemployment in resources/mining sector
- MAIN ISSUE: aus still has a narrow ‘export base’ and export revenues susceptible to changes in commodity demand and prices
exchange rate definition
bilateral price of one’s country currency in terms of another at a particular time
– also measure of purchasing power of a currency with respect to international trade
(enables international trade and investment)
spot rate
your currency against USD at current time
cross rate
when currency is not against USD
trade flow definition + influences
sum of export inflows and import outflows (G&S)
- imports (supply of aud)
- export (demand for aud)
- prior commodity currency
what are capital/investment flows + influences 3
sum of financial capital inflows from overseas investors capital outflows from aus investing abroad
- interest rate differential
- economic/inflation conditions
- speculation
income flows
sum of returns on financial investments - income debits are paid out to oversea investors and income credits are received by aus investors
- changes in capital flow
- changing return levels
determinants of exchange rates 5
- trade flows
- capital/investment flows
- income flows
- relative interest rates
- investment opportunities
factors affecting supply of aud 4
imports
- need to buy foreign money (dep.)
speculators
- attempt to profit from change in fx rate (expect
aud to fall so sell currency)
domestic savers/investors
- seek to invest oversea, send money overseas
government
- rba action and payment of loans/aid overseas
eg donation to other country
factors affecting demand of aud 4
exports
- foreigners need to buy aud
speculators
- attempt to profit from fluctuating fx rate
foreign savings/investors
- seek to invest in aus
government
- through RBA actions and receipts of international loans
- floating XR is influenced
interest rate differential
difference between two countries’ interest rates
high int rate diff
foreigners more likely to invest in aud
- appreciate due to higher demand
low int rate diff
fall → capital will move out → investors will NOT come in (some will leave and go to the US market)
- when investors leave → convert aud to USD → more supply of aud → depreciation of aud
impacts of fx changes
appreciation (AUD)
- X down M up
- X appear more exp to foreigners
- M into aus cheaper for aus
- decrease in supply, increase demand
depreciation (AUD)
- X up, M down
- X appear to be cheaper to foreigners
- M appear to be more exp for aus
- increase supply, decrease demand
effect of fx on eco indicators 8
- eco growth via AD
- inflation (cost of imports)
- employment (exporters + import-competing firms
- intl compt
- structural change
- terms of trade
- balance of payments / CAD
- external stability
trade weighted index
multilateral fx rate
aud exchange rate against aus top 17 major trading partners currencies
- more reflective of real world impacts on exports and imports in general
floating XR ; pegged/fixed ; dirty/managed
floating: price determined by ONLY market demand and supply of currency
- no gov intervention
pegged/fixed: XR of currency fixed in relation to anchor country
dirty: XR influenced by government via central bank buying and selling around preferred rate
advantages of floating XR rate 6
- efficient mechanism for determining value of AUD (realistic)
- exposes econ to intl. compt. pressures + countercyclical economic stabiliser
- discourage destabilising currency speculation
- RBA monetary policy more independent – focus actions on inflation rather than XR
- insulates against external shocks (GFC)
- matches systems of trading partners
- deregulation of financial system (1983) with independent monetary policy (micro-eco reform) focused solely on managing inflation (no4)
disadvantages of floating XR 3
INCREASED VOLITALITY in XR flows
1. uncertainty about investment and savings
2. market sentiment overreacts and speculators jump on bandwagon of extreme views of currency so XR ‘overshoots’ new app. equilibrium
3. speculators and use of derivatives can create self-fulfilling currency investment ‘bubbles’
determinants of exchange rates 4
- demand for foreign imports
- demand for aus exporters
- relative interest rates
- investment opportunities
– speculation
positive of appreciation 3
short run (market period)
1. M DOWN price, X UP price
- higher X income, lower M spending
- improvement in goods balance and CAD
2. M PRICE DOWN
- may lower domestic ‘imported’ inflation
- UP real income and living standards
3. DOWN NET FOREIGN DEBT denominated in foreign currencies
- lower interest payments (improves CAD)
- reduce debt servicing ration
negatives of appreciation 4
LONG RUN
1. DOWN compt. of tradable sector (X appear dearer and M cheaper)
- lower X income, higher M spending
2. (may) UP levels cap outflow
- dom assets dearer than foreign assets
3. (may) result in structural UE in now uncompetitive
4. large appreciation may require central bank intervention indirectly by lowering cash rate to reduce demand for AUD
- UP EG EMPLOYMENT INVESTMENT AND INFLATION
negatives of depreciation 2
SHORT TERM (MARKET PERIOD)
- UP price of M, domestic ‘imported’ inflation, part of foreign debt dominated to foreign currencies, debt servicing ratio
- may lead to RBA intervention to support XR
positives of depreciation 3
- UP compt. of tradable goods sector – makes aus G&S more price competitive (X cheaper, M dearer)
- UP X income, DOWN M expenditure
- improves CAD - trade balance initially worsens then improves after depreciation - UP cap inflow as dom. assets become cheaper relative to foreign assets
- reduced foreign debt, UP FDI in aus - structural adjustment and UP competitiveness in industry
pegged/fixed and managed XR rba
maintain fixed XR below equil: sell more of its own currency
– shortage
maintain fixed XR above equil: buy more of its own currency
– surplus
advantages for fixed rate 1/2
certainty about short term value of currency
- predictable investment environment
- assists importers and exporters and allows central bank to conduct monetary policy similar to that of country against which country is pegged
disadvantages for fixed rate 5
- speculation increase
- destabilisation of currency
- central bank must have large amounts of reserves
- structural change
- if XR rate does not respond to changes in market forces or external shocks then the country may not react to external structural change
- may make long term economic management difficult
—- if currency crisis: devaluations and revaluations and policy adjustment to force structural change - BOP
- impact domestic supply of money
- CAS increase money supply –> inflation
- CAD fall in money supply –> lower EG and UP UE
market interest rates
increasing the money supply causes a decrease in cost of borrowing (market int. rate) as borrowers have more choice
sterilisation of fx market intervention
rba offsets its foreign exchange $A purchase transaction with buying government securities to inject money back into the financial system
eg must counter buying of currency in fx market with buying of bonds from financial markets (inject money back into financial system)
- when dirtying the float by buying/selling currency
- may impact inflation and market interest rates
