Topic 2 - AUSTRALIA'S PLACE IN THE GLOBAL ECONOMY

Question 1

Outline trends in Australia’s trade DIRECTION

Answer 1

Australia has moved away from trade with the UK and European countries due to the formation of the EU and more towards Japan as major buyer of Australia’s exports. More recently, Australian trade has moved towards China, South Korea and ASEAN countries showing a clear gear towards Asian countries.

Question 2

Outline trends in Australia’s trade COMPOSITION

Answer 2

Australia focuses on primary industries as we have a comparative advantage in commodity goods (wheat, wool, beef, coal iron ore and gold). We are less competitive in manufactured consumed goods as cost of labour is high in Australia.
Agriculture DECREASED and Minerals have INCREASED in proportion of Australian exports.

Question 3

What are trends in Australia’s financial flows

Answer 3

• High rate of financial flows
• Exchange rates floated allowing financial flows to grow rapidly
• Prior to deregulation, most financial flows were direct investment
• Now, benefits of portfolio investments seen with foreign equity and debt increasing dramatically

Question 4

What is the balance of payments

Answer 4

record of transactions between Australia and rest of world OVER PERIOD OF TIME

Question 5

Difference between credit and debit?

Answer 5

Money inflow is CREDIT (+)

Money outflow is DEBIT(-)

Question 6

What is on the current account?

Answer 6

Net goods and services (bogs), Net income (credit-debit), secondary income

Question 7

What is on the capital and financial account?

Answer 7

Capital:
Transfer on foreign aid, Purchase/sale of non-financial assets, Capital transfers, record of all borrowing and lending
Financial:
Direct investment, Portfolio investment, Financial derivatives, Reserve assets, Net errors and omissions

Question 8

Outline the link between balance of payment categories

Answer 8

CURRENT ACCOUNT + CAPITAL AND FINANCIAL ACCOUNT = 0

Capital and financial account surplus will lead to deficit in current account. Due to foreign investment increasing (capital and financial account) leads to Net income decreasing (current account)

Question 9

What are the cyclical factors affecting BOGS

Answer 9

Exchange rate, terms of trade, levels of domestic economic growth and international business cycle.

Question 10

What are the structural factors affecting BOGS

Answer 10

Narrow export bades, lacking international competitiveness in manufacturing and capacity constraints

Question 11

What are the consequences of a high CAD

Answer 11

• Large build up in foreign liabilities
• Increasing debt servicing cost
• Volatility in exchange rates
• Investors reluctant to invest

Question 12

define exchange rate

Answer 12

Price of one countries currency in terms of another countries currency. Australia has a floating exchange rate determined by the forces of demand and supply

Question 13

What are the measurements of relative exchange rates

Answer 13

comparing one currency to another. E.g, $1 AU will buy $0.82 US (January 2015). The Trade Weighted index is a measure of the Australian dollar against a basket of currencies of major trading partners.

Question 14

What factors affect demand for Australian dollars?

Answer 14

• Domestic Interest rates
• Investment opportunities
• Demand for exports
• Terms of trade
• Commodity prices
• Expectations

Question 15

What factors affect supply for Australian dollars?

Answer 15

• Foreign interest rates
• Investment opportunity
• Speculation
• Import levels
• Domestic income
• Domestic competitiveness

Question 16

What are the 4 key indicators of a countries exchange rate?

Answer 16

1. Tastes
2. Price level
3. Income
4. Interest rates

Question 17

Outline a fixed exchange rate

Answer 17

Keeping the exchange rate at the same level always

Question 18

Outline a flexible peg exchange rate

Answer 18

adjusting the exchange rate value each day and fixing it every 24 hours

Question 19

Outline a floating exchange rate

Answer 19

allowing market forces of demand and supply to determine exchange rate (currently used)

Question 20

How can the RBA directly influence exchange rate

Answer 20

Dirtying the float: To avoid depreciation of Australia currency, RBA can buy large amounts of $AU increasing demand and allowing it to appreciate in value

Question 21

How can the RBA Indirectly influence exchange rate

Answer 21

Monetary policy: Rarely used but used to influence exchange rate by increasing demand for $AU by increasing interest rates. This attracts foreign investors who demand more of $AU in hope of saving in Australia to receive better returns.

Question 22

How does BOP influence exchange rates?

Answer 22

> Imports ☝-> negative balance of CAD ☝(bad thing) -> Supply $AU ☝-> value of $AU

Question 23

What are the positives and negatives of APPRECIATION of $AU

Answer 23

Positives:

• Australians can afford to import MORE
• Lower amount of foreign debt in foreign currency
• Lower debt servicing ratio

Negatives:

• Lower investment into Australia as it cost more for investors
• Higher structural-unemployment in short-term as domestic industries disadvantaged internationally forcing more efficient structure

Question 24

What are the positives and negatives of DEPRECIATION of $AU

Answer 24

Positives:

• More internationally competitive as exports cost less to foreigners
• Higher capital inflow to Australia (investment) reducing foreign debt

Negatives:

• Increase prices of imports
• Higher import inflation
• Increase in net foreign debt value in foreign currency
• Higher debt servicing ratio
• Indirect intervention by RBA may result in raising interest rates

Question 25

explain Australia’s policy regarding free trade and protection

Answer 25

Australia has been typically heavily relied on trade historically protected in manufacturing although in recent decades has taken measures in reducing protection levels leading it to being one of the most open economies.

Question 26

Outline Australian government achievements in embracing free trade

Answer 26

• Decline in average tariff levels from 36% in 1969 to 2.5% in 2008.
• Phasing out of other barriers such a quotas and subsidies
• Whitlam gov reduced tarrifs by 25% across board in 1973
• Comprehensive trade liberalisation program continued into 1990’s
• Today 50% of all goods are tariff free
• Wider trade initiatives than just recommended by WTO

Question 27

What is the impact on the Australian economy of trading blocs?

Answer 27

Australia has a limited and hindered penetration of the protected economy. Australian exports become less competitive as prices are higher to countries in the trading bloc. This leads to a lower derived demand, and higher unemployment due to domestic industries being limited to strive in international markets.