TOT PPT 2 Flashcards
What happens to the income balance if Australian interest rates decrease compared to other countries?
↑ Income balance, ↑ current account due to ↓ foreign investment into Australia (less interest paid outward) and ↑ Australian investment abroad (more interest received).
How do lower interest rates affect foreign debt payments?
↓ Interest payments on existing foreign debt, improving the income balance.
What happens if the export price index (XPI) rises or import price index (MPI) falls
ToT improves (favourable movement).
What term should be used to describe differences in interest rates between countries?
Interest rate differential.
How do record profits by Australian companies affect the income balance?
Higher dividend payments to foreign shareholders → ↑ income debits → ↓ income balance & ↓ current account balance.
What happens if XPI falls or MPI rises?
ToT worsens (unfavourable movement).
Why is Australia considered a “price taker” in terms of export prices?
Commodity prices are set by global demand and supply.
What type of goods dominate Australia’s exports?
Mining and agricultural commodities.
What happens to ToT if commodity prices increase?
XPI increases → ToT improves.
What type of goods dominate Australia’s imports?
Manufactured goods.
How can rising oil prices affect Australia’s ToT?
↑ Oil prices → ↑ MPI → ↓ ToT.
How does improved technology impact ToT over time?
↓ Production costs → ↓ MPI → ↑ ToT.
How does the commodity price index relate to the export price index?
They follow a similar trend due to Australia’s export reliance on commodities.
What happens if a small-weighted commodity has a large price change?
Minimal effect on the overall commodity price index.
Why is the price of exports more volatile than imports?
Commodity prices fluctuate more due to global market changes.
What happens to the price of imports if the AUD depreciates?
Imports become more expensive → ↑ MPI → ↓ ToT.
How does a depreciating AUD affect exports?
Exports become cheaper for foreign buyers → ↑ Demand for exports → ↑ XPI.
How does a depreciating AUD impact the overall ToT?
Depends on the relative increase of XPI vs MPI:
If XPI ↑ more than MPI ↑, ToT improves.
If MPI ↑ more than XPI ↑, ToT worsens.
What is an increase in currency value called?
Appreciation.
