The Exchange Rate and International Trade Flashcards
(24 cards)
What are exports and imports?
Exports: Goods/services produced domestically and sold abroad.
Imports: Goods/services produced abroad and purchased domestically.
What is a tariff and how does it affect trade?
A tariff is a tax on imports, making imported goods more expensive.
It reduces consumer surplus, increases producer surplus, generates government revenue, but causes deadweight loss and reduces overall efficiency.
What is free trade and what are its benefits?
Free trade has no government-imposed restrictions.
Benefits include:
Lower input and consumer prices
Better resource allocation
Increased firm profitability
Boost to employment
What is a quota? How does it compare to a tariff?
A quota is a numerical limit on imported goods.
Like tariffs, quotas:
Raise prices
Reduce consumer surplus
Cause deadweight loss
But quotas do not raise revenue for the government.
What is protectionism and what are common justifications for it?
Protectionism uses trade barriers to shield domestic industries.
Arguments for it include:
Saving jobs
Protecting wages
Supporting infant industries
National security
What is dumping and how is it handled?
Dumping is selling goods abroad below production cost.
The WTO permits tariffs to offset dumping effects, though the practice is controversial.
How significant is international trade to Australia’s GDP?
Trade’s share of GDP has increased over time.
It’s less important than in Europe, but more important than in the US or Japan.
: What are Australia’s major export sectors (2023)?
Mining: 62%
Services: 14%
Agriculture: 11%
Manufacturing: 8%
What is the World Trade Organization (WTO)?
A global body that promotes multilateral tariff reduction and freer trade.
It has over 150 member countries.
What are arguments against globalisation/WTO
Erodes local cultures
Encourages poor labour/environmental practices
May lead to exploitation
Increases transport-related emissions
What is autarky and why is trade better?
Autarky = no international trade.
Trade improves efficiency, consumer choice, and total income by enabling specialisation and comparative advantage.
: What is the nominal exchange rate?
The value of one currency in terms of another.
E.g. 1 AUD = 0.64 USD.
What’s the difference between direct and indirect exchange rate quotations (AU perspective)?
Direct: 1 USD = 1.56 AUD
Indirect: 1 AUD = 0.64 USD
Both are reciprocals.
What does appreciation and depreciation mean?
Appreciation: Currency becomes more valuable
Depreciation: Currency becomes less valuable
What is the Trade-Weighted Index (TWI)?
A weighted average of the AUD vs. other currencies based on trade importance.
CNY (Chinese yuan) has the largest weight.
What causes demand for AUD?
Foreigners buying AU goods/services
Foreign investment into Australia
Speculation AUD will appreciate
What causes supply of AUD?
Australians buying imports
AU residents investing overseas
Speculation AUD will depreciate
What shifts demand for AUD rightward?
Rising foreign incomes
Foreign preference for AU goods
Higher AU interest rates
Expectations of AUD appreciation
What shifts supply of AUD rightward?
Higher AU incomes
AU preference for imports
Lower AU interest rates
Expectations of AUD depreciation
What happens to AUD if China has a recession?
Demand for AUD falls, causing depreciation.
What happens to AUD if the RBA cuts interest rates?
Capital outflows increase
Demand falls, supply rises
AUD depreciates
What is a fixed exchange rate and what can it lead to?
A set value for a currency by the central bank.
If above market rate: causes excess supply of AUD.
What does positive vs normative analysis mean in trade?
Positive: Objective effects (e.g. efficiency loss from a tariff)
Normative: Value judgment (e.g. whether a tariff is “bad policy”)
What are the learning outcomes of this topic?
Explain gains from trade using diagrams
Analyse effects of tariffs/quotas on consumers, producers, and efficiency
Interpret exchange rate movements
Model currency supply/demand and shifts due to economic events
