2. Australia's place in the global economy

Question 1

International Trade Flows (definition)

Answer 1

Flows of goods and services across different countries

Question 2

International Trade Flows (types)

Answer 2

Debt, Foreign exchange (FDI), derivatives trading across borders. = International finance and investment

Question 3

Investment (types)

Answer 3

Portfolio / Direct / Others (loans, deposits) / Derivatives

Question 4

Portfolio Investment

Answer 4

purchase of shares, bonds & securities, etc.

Question 5

Direct investment

Answer 5

When foreigners establish a subsidiary or buy a controlling interest in a local firm.

Question 6

International trade contains…

Answer 6

Trade in more than 1 currency / Risks (exchange rates, changes in commodity prices, IR or government policy) / MNCs dominated / Affected by changes in the economic cycle

Question 7

Foreign investment in Australia

Answer 7

Other countries established subsidiaries or bought controlling interests in manufacturing, agriculture, mining and services.

Question 8

Foreign investment refers to…

Answer 8

foreign liabilities owed by Australian residents to non-residents.

Question 9

Debt and equity borrowing trends

Answer 9

Australians are net borrowers

Question 10

Australian Balance of Payments components

Answer 10

Current Account / Capital and financial account / Errors and omissions.

Question 11

BOP Formula

Answer 11

CA +k + net errors & omissions = 0

Question 12

Current Account Components

Answer 12

Balance on Trade (X-M) + Net Primary Income account + Net Secondary Income Account

Question 13

Net primary income account

Answer 13

receipts and payments of employee compensation paid to non-resident workers and investment income

Question 14

Net secondary income account

Answer 14

income from a property, dividend income from stocks, or royalties from intellectual property.

Question 15

Current account shows…

Answer 15

all transactions involving money received(income, credits) and money spent(expenditure, debits) for exports and imports and the net primary and secondary income accounts.

Question 16

Capital and financial account record…

Answer 16

foreign financial and investment transactions including borrowing, lending, sales and purchases of assets.

Question 17

Capital Account

Answer 17

Records all credits and debits of the acquisition or disposal of non-financial assets.

Question 18

Financial Account

Answer 18

Credits and debits of transactions associated with investments

Question 19

Trends in current account

Answer 19

Australia has a CAD - Net primary account = main reason

Question 20

Trends in k

Answer 20

usually small deficits. Usually in surplus

Question 21

Exchange Rates

Answer 21

Rate at which a unit of currency is exchanged for a given amt. of foreign currency. Measure of relative value of purchasing power.

Question 22

Relative exchange rates can be…

Answer 22

determined by D&S (floating exchange rate) or Govt. (fixed exchange rate) and are usually measured through bilateral or cross rates.

Question 23

TWI (Trade weighted index) is used to…

Answer 23

represent one’s currency in terms of another.

Question 24

Factors affecting demand for AUD

Answer 24

Demand for AUD is a derived demand based on demand for our X and domestic assets by foreigners.

Question 25

Current account influences demand for M&X in... (examples)

Answer 25

Difference in inflation rates between AUS & others = Decreased demand for X / ToT (price of exports relative to imports) - rise in world economy = +D / International and domestic growth = +D for M = +S

Question 26

Supply is derived from demand for...

Answer 26

Imports and purchase of foreign assets

Question 27

Capital and financial account impacts demand for M&X in...

Answer 27

Differences in domestic & international IR. if higher in AUS = +D. if lower = -S for aud / Expectations about future changes

Question 28

Factors affecting supply of the AUD

Answer 28

Supply is derived from demand for M and purchase of foreign assets

Question 29

Fixed exchange rates

Answer 29

Central bank fixes exchange rates daily to another currency

Question 30

Advantage of fixed ex. rates

Answer 30

Advantage: Certainty for importers and exporters ; monetary policy can be conducted to whichever currency fixed XR is pegged against.

Question 31

Disadvantage of fixed exchange rates

Answer 31

Disadvantage: Speculation increase / central bank must hold more foreign reserve / XR does not respond to external shock (eg. GFC) Dis > Adv.

Question 32

How does RBA intervene w XR market

Answer 32

1. XR might differ from long term equilibrium 2. Smooth volatility if too much speculation 3. Use foreign reserves to minimise excessive highs and lows

Question 33

Sterilised intervention

Answer 33

when buying AUD (taking currency out of the economy) RBA offsets this by buying or selling govt. securities through exchange settlement accounts

Question 34

Positive Economic effects of exchange rate depreciation

Answer 34

Positive - enhancing international competitiveness ; higher capital inflow, due to assets becoming cheaper.

Question 35

Unsterilised intervention

Answer 35

RBA does not do sterilised intervention, leading to changes in IR.

Question 36

Negative Economic effects of exchange rate depreciation

Answer 36

Negative - increase in import prices lowering in export prices. Short run = decrease in export income ; can lead to ↑ capital outflow as it reduces cost of foreign assets ; could lead to ↑ unemployment in exporting industries ; large appreciation will force RBA to intervene and reduce AUD by reducing r.

Question 37

Economic effects of exchange rate appreciation

Answer 37

Negative - In the long run appreciation will reduce competitiveness of exports ; greater capital outflow ; Increased unemployment in exporting business ; large appreciation will force RBA to reduce AUD by reducing r.

Question 38

J-Curve

Answer 38

effect of depreciation on a country’s trade balance - a depreciation = increase in export sales, having an expansionary effect on Aussie Economy.

Question 39

Structural Change example

Answer 39

In appreciation, Australia struggled to compete w China, India & ASEAN on exports such as education, tourism & ETMs. Since 2013, the AUD has depreciated by 26%. As a result, resources moved from mining to non-mining sectors such as construction and residential building.

Question 40

Australia's trade policy examples

Answer 40

In 1973, the Whitlam Government announced a 25% reduction in protection to encourage efficiency and lower the prices of imports. Increased specialisation and economies of scale in production would result in a lower cost structure.