Topic 2: Australia's Place in the Global Economy

Question 1

List Australia’s most important resources in order

Answer 1

Resources (iron ore, coal) is the largest, then services (education, tourism), then manufacturing and rural (wheat, wool)

Question 2

How have imports, exports and the value of trade changed (since 1960)?

Answer 2

Exports increased from 12% GDP (1960) to 22% in 2018
Imports increased from 14% GDP (1960) to 21% in 2018
Total trade (exports + imports) inrreased from $32bn/ year (1960) to $820bn/ year in 2019

Question 3

How have resources, service and manufacturing and rural changed in value?

Answer 3

Resources have increased (largest export sector)
Services have increased (second largest export)
Manufacturing and rural have decreased
Capital imports boomed during the mining boom - slowed/ stopped since 2012

Question 4

List Australia’s top 3 most important exports and imports

Answer 4

Exports (per quarter):
     Coal: $67bn
     Iron ore: $63bn
     Natural gas: $43bn
Imports (per quarter):
     Personal travel: $45bn
     Petroleum: $39bn
     Passenger motor vehicles: $22bn

Question 5

Where has Australia traded with in the past?

Answer 5

50 years ago - UK (before they joined the EU)
1960s - Japan, due to strong growth
2007 - China
Push: of UK joining EU
Pull: strong Asian growth, buy services as they get richer

Question 6

How have trends in financial flows changed?

Answer 6

Increased significantly since deregulation in the 1980s
Increased at a faster rate than trade flows (easier to move)

$1.9tr of foreign investment in Au is portfolio, $1tr is direct. Gross foreign liabilities around $3.8tr
Around $3tr invested overseas, NFL around $975bn
Au is historically more reliant on debt although equity has increased recently

Question 7

What is the Current Account?

Answer 7

Balance on Goods and Services (BOGS) + net primary income (NPY) + net secondary income (NSY)
BOGS = exports - imports
NPY = income from foreign invesment - servicing costs of foreign liabilities
NSY = unrequited income received - unrequited income paid (remittances, untied foreign aid)

The CA records the monetary value of trade flows in goods and services and income flows - interest repayments, profits of foreign owned companies transferred overseas

Question 8

What is the Capital and Financial Account? (NB: needs finishing)

Answer 8

Direct and portfolio investment, other investment (e.g. bank loans), derivatives, reserve assets, tied foreign aid and non-produced non-financial asset payment (copyright)

The KFA records all international capital flows - financial investment borrowing + lending transactions between Au and the rest of the world.

Question 9

What is a link between key categories in the balance of payments?

Answer 9

1. CA + KFA + net errors = 0
   Any factor that causes an increase in the current account deficit (or KFAS) must cause an equal and opposite increase in the capital and financial account surplus (or CAD).

Question 10

What is a second link between key categories in the balance of payments?

Answer 10

2. Exchange rates
   Factors that cause the CAD to increase, cause exchange rates to depreciate, offsetting the fall in the CAD – boosting exports and reducing imports and vis versa
   Changes in exchange rates partially offset the impact of changes in the economy. E.g. an increase in demand for exports, causes a higher demand for $A making exports more expensive and leading to a partial reduction in demand in them (but not complete reversal)

Question 11

What is a third link between key categories in the balance of payments?

Answer 11

3. Net primary income and the financial account

Running a CAD increases NFL and tends to increase the deficit on NPY (and therefore the CAD in future years)

Question 12

What is a fourth link between key categories in the balance of payments?

Answer 12

4. Domestic saving and the capital and financial account
   The KFAS = domestic investment - domestic saving, so anything the effects either of these will also affect the KFAS and therefore the CAD

Question 13

What factors affect exports (& the BoP)?

Answer 13

• international business cycle
• terms of trade
• international competitiveness
• exchange rates

Question 14

What factors affect imports (& the BoP)?

Answer 14

• domestic business cycle
• terms of trade
• international business cycle
• exchange rates

Question 15

What factors affect the NPY (& BoP)?

Answer 15

• Domestic and global interest rates
• NFL ($975b)
• Domestic & global business cycle
• Growth in Au = increase in NPY deficit
• Growth in the global economy = decrease NPY deficit
• Exchange rates - decreased exchange rate = increased NPY deficit and vis versa

Question 16

How do changes in the $A exchange rate affect the CA and KFA?

Answer 16

Increase in $A exchange rate = increase in KFAS = increase in CAD

Question 17

How do changes in the $US exchange rate affect the CA and KFA?

Answer 17

Increase in $US exchange rate = decrease in KFAS = decrease in CAD

Question 18

Trends/ factors that influence the BoP (cyclical)

Answer 18

Cyclical (frequent change):

• Global and dom business cycle
• interest rates
• exchange rates
• terms of trade
• Investment - saving

Question 19

Trends/ factors that influence the BoP (structural)

Answer 19

Structural (slow change):

• Size of the NFL
• international competitiveness
• Lack of export diversity - revenue changes a lot
• Investment - saving

Question 20

Trends/ factors that influence the BoP (domestic)

Answer 20

Domestic:

• Domestic business cycle
• Domestic interest rate
• NFL
• International competitiveness
• Lack of export diversity

Question 21

Trends/ factors that influence the BoP (global)

Answer 21

Global:

• Global business cycle
• Global interest rate
• exchange rates
• terms of trade

Question 22

The current BoP

Answer 22

• Have been running a (reducing) CAS for 6 months
• Business investment in Au has decreased
  
  • Peaked at 18%, dropped to 12%
  • I - S is negative - less overseas investing than saving = KFAD/ CAS
• Domestic and global interest rates are low (0.25)
• NPY deficit but relatively low
• Commodity prices (ToT) still quite high relative to long term averages
• The exchange rate depreciated to 0.64