Topic 2: Australia's Place in the Global Economy Flashcards
Trends in Australia’s Trade Pattern
Trade balance is the difference between exports and imports and is currently positive
Australia has a comparative advantage in
-Commodities
-Agricultural products
-Services
Trade as a percentage of GDP increased from 12% in 1980s to 22% in 2018
Trends in financial flows - debt and equity
The adoption of the floating exchange rate in 1983 allowed for greater accessibility of Australian firms to world capital market and FDI into Aus
FDI into Aus and investment overseas by Australians has doubled in the past decade
Equity: The ownership of money or the money of other owners/investors
Net Foreign Equity: The difference between foreign investment and Australian-owned foreign investment
Net Foreign Debt: difference between loans
Balance of payments
Summarises the economic transactions of an economy with the rest of the world
Structure of BoP
Current Account
Capital and Financial Account
Current Account
Trade Balance - value of goods and services that we export minus the ones we import
Net Primary Income (NPY) - rent, return, dividend
Net Secondary Income - pension, foreign aid, tax
Capital and Financial Account
Capital Account Capital transfers - involves the net inflow of funds to Australia by permanent migrants Acquisition/disposal of non-produced, non-financial assets Financial Account Direct Investment Portfolio Investment Financial Derivative Reserve Assets Other Investment
trends in size and composition
-International Competitiveness Competitiveness affects export volumes -Protection policies also impact -Exchange rate + productivity -Terms of Trade Higher ToT will help achieve a CAS Refers only to price, not quantity -International Borrowing The more we borrow from international sources The more of a capital/financial account surplus Increase in debits in the current account -Foreign Investment in Australia 8% increase
terms of trade
Represent the ratio between export prices and import prices
Favourable ToT: when export prices rise faster than import prices or when export prices fall less than import price
factors that affect the BOGS
Domestic growth Overseas growth Exchange rate Terms of trade Narrow Export Base
exchange rate
the value of a currency in comparison to another currency
floating exchange rate
when the value of a currency is determined by demand and supply
trade weighted index (TWI)
The average value of the AUD compared to Australia’s major trading partners currencies, weighted according to their significance
Factors affecting the demand for and supply of AUD
- financial flows
- trade flows
- economic conditions
Factors affecting the demand for and supply of AUD - Financial flows
Level of Australian interest rates relative to overseas interest rates
- High domestic rates attract foreign investment,
creating higher demand for AUD
- Low domestic rates incentivise saving funds in
overseas banks, creating a high supply of AUD
Investment opportunities
- High opportunities domestically support high demand
for AUD
- High foreign opportunities create a high supply of
AUD
Speculation
- If there is an expectation of future appreciation, there
may be high demand for AUD
- If there is an expectation of a future depreciation
investors may sell AUD, increasing supply
Factors affecting the demand for and supply of AUD - trade flows
Exports
- High demand for domestic exports leads to high
demand for AUD
Imports
- High demand for imports results in high supply of AUD
Commodity prices and terms of trade
- Improvements in commodity prices and terms of trade
increase the value of exports, causing high demand
for AUD
- A decrease in commodity prices and terms of trade
decreases the value of exports, causing high supply of
AUD
Factors affecting the demand for and supply of AUD - economic conditions
Expansionary period
- Upturn in domestic and/or international business cycle
may increase demand for Australia’s exports, creating
high demand for AUD
Contractionary period
- A downturn in the domestic and/or international
business cycle may decrease demand for Australia’s
exports, creating a high supply of AUD
Tastes and preferences
- Affect demand of Aus exports and imports, and
therefore the demand and supply of the AUD
Changes in exchange rate - appreciation
An increase in the exchange rate of one currency in terms of another
Occurs when demand increases and/or supply decreases
changes in exchange rate - depreciation
A decrease in the exchange rate of one currency in terms of another
Occurs when demand decreases and/or supply increases
fixed exchange rate
When the government or RBA officially sets the exchange rate for an economy
clean float
pure demand-supply model with no central bank intervention (only exists in theory)
dirty float
a flexible exchange rate but managed to a certain extent
managed exchange rate
Any official intervention by a government in setting the exchange rate
Advantages of a flexible over fixed rate
More accurately reflects international competitiveness which encourages free trade
Dutch disease: a boom in one export causes an appreciation in exchange rates making other industries less competitive
Disadvantages of flexible over fixed rate
volatile or sudden changes cause future transactions to become uncertain, which heavily influences speculative investment
Depreciations may cause inflation, as imports are more expensive and this price increase can be reflected in the domestic interest rate
Direct intervention by RBA on exchange rates
The RBA buys/sells foreign exchange when the AUD goes either too high or too low
If AUD is too high the RBA sells AUD reserves to increase supply, and decreases its value
If the AUD is too low, the RBA buys AUD reserves to increase demand and increase its value
Indirect Intervention by RBA on exchange rates
Monetary policy: Interest rates set by the RBA have a secondary function of changing the interest rate between Australia and overseas
Effects of fluctuations in exchange rates on the economy - Positive Impacts of Appreciation
Cheaper imports may cause lower import inflation as prices are lower
Cheaper imports encourage allocative efficiency of resources resulting in a long term shift to more competitive industries
Cheaper imports mean consumers and firms can buy a greater quantity of products due to increased purchasing power, therefore improving living standards and lowering input costs
Valuation effect on debt decreases interest servicing costs on foreign debt and the overall AUD value of foreign debt
Effects of fluctuations in exchange rates on the economy - Negative Impacts of Appreciation
Exports are more expensive, and we expect a fall in the quantity demanded, leading to a long term loss of investors, causing slower economic growth
Cheaper imports may cause domestic firms to lose competitiveness which may increase unemployment
Valuation effect on assets
Effects of fluctuations in exchange rates on the economy - Positive Impacts of Depreciation
exports are cheaper, so we expect an increase in quantity demanded causing a long term increase in investment and economic growth
More expensive imports may cause domestic firms to increase competitiveness which may increase employment
Valuation effect on assets
Effects of fluctuations in exchange rates on the economy - negative Impacts of Depreciation
Imports are more expensive, which may cause imported inflation
More expensive imports decreases living standards and increases input costs due to decreased purchasing power
Valuation effect on debt
australia’s policies regarding free trade
Since 1988 the government has reduced protection on manufacturing industry
2011 the government released a Trade Policy statement outlining its commitment to free trade
Became a member of GAT in 1947 and WTO in 1994
Heavily protected between WW2 and 1970
Average tariff rate of 25% in 1970
APEC
AANZFTA
TPP
RCEP
JAEPA
Around 98% of Australian merchandise exports to Japan will receive preferential access or enter duty free
Reduction or elimination of tariffs on agricultural commodities - 38.5% tariff on Aus beef will be halved over 15 years
Elimination of 15% tariff on Australian wine by April 2021
Removal of tariffs om Japanese goods such as cars, electronics and whitegoods
Aus law firms have greater access to Japanese legal market
13% of exports go to Japan
Japan previously had a very protected agricultural industry
ASEAN
Regional intergovernmental organisation made up of 10 southeast asian countries which promotes intergovernmental cooperation and facilitates economic, political, security, military, educational and socio cultural integration among its members
Aus and NZ joined in 2010 (ASEAN-Australia-New Zealand Free Trade Area) - ASEAN nations committing to eliminating tariffs on 96% of Australian exports to the region
This is the largest preferential trade agreement that Australia has concluded representing 20% of Australia’s trade in goods/services.
CHAFTA
China is Australia’s top export destination - 30%
Tariffs to be eliminated in ag and resources
More opportunities for foreign investment
Reduced barriers to labour mobility
Work and holiday arrangements
Exports to China nearly doubled from 87 billion in 2015 to 169 billion in 2019
CPTPP
11 countries around the pacific
Eliminates 98% of tariffs
New trade agreements with Canada and Mexico
No foreign equity limits on foreign ownership of uranium mines
implications of Aus FTA for individuals
Reduction in prices
More choice in products
More employment opportunities
Likely to cause more structural unemployment
implications of Aus FTA for firms
Must become more competitive
Lower costs through cheaper inputs
Larger export markets
implications of Aus FTA on government
Less expenditure on protection
More tax revenue from businesses making profits due to more exports
Implications for Australia of protectionist policies of other countries and trading blocs
Weakens world growth
Reduced exports and foreign investment
Rising prices
