topic 2 Flashcards
1
Q
Key flows
A
- trade flows (exports + imports)
- capital flows (capital inflows + capital outflows)
- income flows (income credits + income debits)
2
Q
How do the 6 flows affect the value of the currency
A
- outflows set AUD supply
- inflows set AUD demand
3
Q
Major statistics for all 3 flows
A
- value ($ volumes of flows)
- composition (categories the flows fall under)
- direction (destination of flows)
4
Q
International trade definiton
A
flow of exports and imports of G&S across national borders known as the tradeable sector.
5
Q
last decades structural trends in trade flows
A
- increase in specialisation and comparative advantage
- reduced protection levels
- growth in TNC’s amd FTA’s
- increased integration of global economies
6
Q
Intermediate goods def
A
a good imported from an overseas business to finish a product production in Australia which ultimately adds to output and employment
- shows strong production base
7
Q
How is the openness of an economy measured
A
- % of exports of GDP
- % imports of GDP
- % of exports and imports of GDP
8
Q
Benefits of exporting (macro demand):
A
- increase export earnings which pay for imports (imports=exports AUD stabilises)
- exports add to AD and EG (increase output, employment, income)
- protection from domestic downturns (rely on international economies)
9
Q
Benefits of exporting (micro supply)
A
- focus on comparative advantage
- exporters innovate to compete in foreign markets or from foreign tech
- exporting EOS and diversifying sales
10
Q
International financial flows def and trends
A
flows of money/currencies and other financial flows across international borders. The growing trend of FDI is driven from the deregulation of financial markets. Can be from
- long term direct investment
- short term speculative or portfolio investment
11
Q
Australia’s financial trends
A
- net importer of capital as Foreign investment»>Domestic investment
- australia has a large net foreign liability
- Australia attracts FDI because of their returning mining industry and high/skilled human capital
- FDI will increase GDP and EG and employment
- Australia has a low savings rate, high home ownership, low population
12
Q
Income flows def
A
the sum of returns on financial investments which are income debits paid to overseas investors and income credits paid to domestic investors
- reliant on capital flows and avg global return rate on investment
13
Q
exchange rate def
A
the bilateral price of one countries currency against another at a particular time
- measure a currencies purchasing power in International trade
14
Q
spot rate def
cross rate def
A
a currency against USD
a currency against any currency except USD
15
Q
how to convert currencies
A
- if converting to currency is > OG currency = multiply by rate
- if converting to currency < OG currency = divide by rate
- smaller = smaller and bigger = bigger
16
Q
appreciation def
A
is a rise in the AUD value in relation to other currencies (AUD buys more of the other currency so the other currency automatically depreciates)
17
Q
Clean Floating exchange rate def
A
is when the exchange rate is set my free market forces of supply and demand for a currency without government invention
- supply of currency = demand for currency
- determined by 3 market flows
- effectively determines true economic performance/value
- introduces int. comp. which causes currency to act counter-cyclically
18
Q
depreciation def
A
is a fall in the AUD value in relation to other currencies (AUD is worth less and so the other currency automatically appreciates)
19
Q
How do trade flows determine exchange rate
A
- imports (buying foreign goods, sells AUD to buy foreign currency, increase supply of AUD, depreciate)
- exports (selling domestic exports, increases demand for AUD, appreciates)
- commodity currency (price of commodities on Pw affects trade flows)
20
Q
how do capital flows determine exchange rate
A
- economic/inflation conditions (booming economy, increases $AUD value, appreciation)
- interest rate differential (higher interest rates, higher returns for FDI, more FDI, appreciation)
- speculation (thinks its going to appreciate, more FDI, appreciates)
21
Q
how do income flows determine exchange rate
A
- changes in capital flows (changes return levels)
- changes in interest rates
22
Q
Factors affecting AUD demand
A
DERIVED DEMAND FOR:
- exports (foreigners buying AUD)
- speculators (if ppl think $AUD appreciate they buy more and make it appreciate)
- foreign savers/investors (AUS’ strong economy attracts investors)
- government (RBA actions e.g dirtying float and interest rate changes)
23
Q
Factors affecting AUD supply
A
DERIVED DEMAND FOR:
- imports (AUS citizens buy more forgien goods)
- speculators (think AUD will depreciate so they cash out and make it depreciate)
- domestic savers/investors (seek to invest overseas, buy foreign goods, sell AUD, depreciate currency)
- government (RBA actions interest rates)
24
Q
interest rate differential def
A
is the gap of interest rates in various places around the world
- investors will invest in countries with high interest rates
- depends on both AUD and foreign countries interest rates
24
International Competitiveness def
degree of ability for Australian exporters import - competing firms to compete against foreign producers
- increase int comp. = increase demand for goods = appreciation)
25
factors affecting int. comp
- Productivity of nations workers
- Quality (reputation)
- Retail price (fx rates, inf, cop)
- Service
26
textbook list of things changing AUD
1. cross-border flows
2. interest rates
3. int. comp.
27
exchange rates cycle
1. Fx market for AUD
2. appreciation or depreciation
3. impacts int comp
4. determines Fx
- where to start depends on the question
28
effect of fx on eco indicators
- economic growth
- inflation
- employment
- int. comp.
- structural change
- terms of trade
- BOP
- external stability
29
trade weighted index
AUD exchange rate against broad basket of 17 currencies (major trading partners) weighted based on the countries composition of AUS' export weight
30
TWI calc
weight/100 x AUD rate (1AUD: __other currency)
31
increase of demand graph (holder of foreign currency demand for AUD)
demand for AUD, creates a shortage of supply of AUD, Fx rate increases to the new POI of supply and demand (appreciation)
32
increase in supply graph (holder of AUD selling it)
quantity of AUD increases, creates a surplus of AUD, Fx rates decreases to the new POI of supply and demand (depreciation)
33
appreciation positive impacts
SHORT TERM
- decrease in import prices and spending and inflation, increase in import quality
- decrease in net foreign debt in foreign currencies (for companies), decrease in interest payments
- decrease in debt servicing ratio
34
appreciation negative impacts
SHORT TERM
- increase in export prices and income, decrease in int. comp and increase in import spending
- increase in capital outflows (cash out while AUD is appreciated) and decrease in capital inflows (expensive assets)
- increase structural U/E
35
depreciation negative impacts
SHORT RUN
- increase in import prices and inflation (cost push inflation), decrease import quantity
- increase in net foreign debt in foreign currencies
- increases debt services ratio
36
depreciation positive impacts
LONG RUN
- decrease in export prices and increase in int. comp. (widen export base and improve CAD)
- increase capital inflows (cheap AUD assets)
- structural change (consumers buying domestic products)
37
floating rate positives
- realistic reflection of true value of AUD (can lead to structural change)
- discourage destabilisation currency speculation
- RBA can focus on domestic inflation (counter-cyclical)
- insulated against external shocks
38
floating exchange range negatives
- increased volatility of exchange rates
- uncertain investments
- market overreacts
39
Pegged exchange rate def
Exchange rate is fixed by governments central bank, artificially controlled and not reacting to market forces (counteracts market forces)
- done by buying or selling currency in Fx markets
- horizontal supply line (pegged rate)
40
fixed rate positives
- usually kept currency artificially low to increase int.comp.
- avoids financial contagion
41
artificially low exchange rate graph
- since pegged low, there is a shortage of AUD to meet demand
- RBA sells AUD to increase market supply
- need AUD
42
artificially high exchange rate graph
- since pegged high, there is a surplus of AUD to meet demand
- RBA buys AUD to decrease market supply
- need foreign currency
43
Managed exchange rate def
is when the currency is adjusted in the event of a huge volatility with major trading partners and there is usually a target zone or corridor the currency must be in, if not the government intervenes
44
revaluation def
planned adjustment setting the peg higher
45
devaluation def
planned adjustment setting the peg lower
46
fixed rate negatives
- increased speculation
- rapid movement shock as government overrules market forces
- country doesn't feel true volatility or value (no structural response)
- balance of payments impacts domestic money supply
47
currency volatility - rapid depreciation graph
RBA will have a support level and buy excess supply of AUD at support rate
- continuous dirtying can make RBA run out of foreign reserves
- buy bonds to sterilise
47
dirtying the float def
convert action by the RBA to reduce floating exchange rate volatility in the short term by converting sudden imbalances
- sudden depreciation = buy AUD
- sudden appreciation = sell AUD
48
foreign reserves def
currencies and other liquid assets held by a central bank, used to settle international transactions
- locked away hence affects money supply as a leakage
- can affect inflation and interest rates
49
sterilisation of fx market intervention def
RBA offsets its AUD purchase by buying government securities to return money supply (e.g bonds)/ RBA offsets its AUD selling by selling government securities to take money out of supply
50
currency volatility AUD - rapid appreciation
RBA sets rate a target level and to fix shortage of AUD, RBA must sell AUD at the target rate
- continuous dirtying can make RBA run out of AUD reserves
- sell bonds to sterilise
51
RBA interest rates
RBA only changes interest rates to manage domestic inflation
51
balance of payments def
is a record of all financial transactions for a period of one year, between Australia and the rest of the world, typically in the domestic currency (AUD). Recording system tracks 3 flows
- trade flows
- capital flows
- income flows
51
PPP def
when ranking countries based on economic data (GDP, etc.) a more accurate picture of comparison of economic indicators occurs when PPP conversions reflect costs of input and output in each economy
52
Current account def
records the money value of trade flows (G&S) and income flows (interest repayments, etc.)
- transactions are non-reversible
53
CAD
current account deficit when export & income inflows <<< import & income outflows
53
CAS
current account surplus export when export & income inflows >>> import & income outflows
53
Capital and financial account def
is a record of all international capital flows (sum of financial investment borrowing and lending) between Australia and the rest of the world
- transactions are reversible
53
BOP equation is
balance on current account +
balance on capital & financial account +
errors and emission +
= 0
54
CA sections
- goods (positive goods export receipts minus negative goods import payments)
- services (positive service export receipts minus negative service import payments)
- primary income = income earned on investments (positive primary credits minus negative primary debits)
- secondary income = financial resources donated without reciprocated payment (positive secondary credits minus negative secondary debits)
55
CFA sections
- capital account (non-commercial credit & debit capital transfers e.g permanent migrants)
- the financial account (Australia's net transactions of foreign financial assets & liabilities)
56
net errors and emissions def
are statistical discrepancies which are added to the account balances
57
BOPS = 0
under a floating exchange rate system the BOPS must be 0 as the exchange rate is set at market equilibrium
58
equation for BOPS = 0
X + Ycredits + Kinflows = M + Ydebits + Koutflows
(X-M) + (Ycredits - Ydebits) + (Kinflows - Koutflows) = 0
CA deficit by x = CFA surplus by x
59
How open an economy is measure by:
- exports (% GDP)
- imports (% GDP)
- dependency ratio
60
3 links between CA and CFA
1. the balance on the CA is equal to but opposite in sign to the CFA
2. Investment inflows in CFA are recorded as primary income debits in the CA (require interest returns)
3. Investment inflows in CFA strengthen BOGS in CA (improve output)
61
Why is BOPS = 0 question
1. assume floating exchange rate
2. explain link 1
3. write equation
4. give examples
62
link 2 details
AUS is usually a net capital importer with negative CA and positive CFA (strong economy attracts FDI)
63
BOGS factors
NPY factors
intermediate goods and final goods
interest on capital and interest on mortgages
64
Valuation effect definition
when changes to the exchange rate affects the CA's net primary incomes
- currency appreciates debt in foreign currency decreases
- currency depreciates debt in foreign currency increases
65
Key measures of the extend of net foreign debt
1. net foreign debt as a percentage of GDP
2. debt servicing ratio: interest payments as a proportion of export revenues
66
debt trap def
When a country uses borrows money to improve their CAD however must repay the interest on the money borrowed which adds to their net primary income debts and worsens their CAD --> cycle
67
international competitiveness def
degree of ability for Australian exporters and import-competing firms to compete against foreign producers
68
key factors affecting int. comp.
- Productivity (from increase in tech and education which reduces COP)
- Quality
- Retail price (affected by INF, Fx rate, COP)
- Service
- Government policies --> minor
- FTA's --> minor
69
effects of int. comp. increase
- export revenue increase
- import payments decrease
- can pay back debt using export rev therefore decrease foreign liabilities and debt servicing
- improvement in CA position
70
positive influences of increased Int. Comp.
- increase productivity
- decrease inflation
71
structural change in sectors' int. comp due to globalisation
- manufacturing decreased int. comp. due to high AUS wages (increase COP and prices) compared to cheap unskilled labour overseas --> e.g vehicle industry
- services increased int. comp. in sectors like education, tourism and finance
- mining increased int. comp. as AUS is a low cost producer due to our rich natural resource base (factor endowment/comp. advantage) and AUS is geographically close to developing countries which need mining resources (low transport cost) --> however narrow export base now
72
terms of trade definition
refers to the relative price a country receives for it's exports and pays for it's imports
--> a ratio of export price index to import price index
73
terms of trade formula
export price index/import price index x 100/1
74
TOT terminology
- if TOT index prior > TOT index now = TOT DETERIORATION
- if TOT index prior < TOT index now = TOT IMPROVEMENT
- if TOT index < 100 = FAVOURABLE TOT
- if TOT index > 100 = UNFAVOURABLE TOT
75
