topic 2 aus place in global eco Flashcards

Question

balance on current account on BOP

Answer 1

addition of BOGS+ net primary income + net secondary income

Answer 2

**FINANCIAL assets & liabilities** * (**money flows** from **international borrowing, lending, purchasing assets** eg. shares, real estate) over **1 year betw AUS** and **world** * **reversible transactions**, (after transactions occur, can be **undone in future**) eg. borrowings can be paid back, **assets bought can be sold** again

Answer 3

1. **capital transfers** * 1 party **transfer ownership** to another **w/o receieving return** * **forgive(ness of) debt** (borrower no longer pay back) * **conditional grants for cpaital projects** (**foreign aid** to **build** roads, schools/**capital stock** eg. AUS donation to build bridge in Japan) * **wealth** taken **in & out** AUS by **migrants** 2. **purchase & sale of NON PRODUCED, NON FINANCIAL assets** * **intangible assets**, rights to use land/water (for mining/fishing) * mainly **intellectual property rights** eg. patents, copyrights, trademarks, franchises eg. AUS company buying rights from US company to operate kfc outlet in AUS

Answer 4

shows **AUS' transactions** in **foreign financial assets & liabilities** categorised by type of investment 1. **direct** investment 2. **portfolio** investment 3. **financial derivatives** 4. **reserve assets** 5. **other** investment * size of FA can change a lot from 1 time period to next as large money flows underlying the balance on the FA * **credit entries in FA** represent **net inflows** bc **^ foreign investment** in **AUS/reduction AUS investment overseas** * **debt entries = net outflows** * **AUS consistently** has **positive FA balance = during each yr, rise AUS' liabilities to rest of world higher than ^ liabilities of rest of world to AUS** --> draw **savings of rest of world** to **finance deficit on its CA**

Answer 5

foreign financial transactions to fund new investment in AUS/buy 10+% of shares in existing company * eg. a SK company brings funds to build motorway in Sydney

Answer 6

**BUY LAND, SHARES (<10%), other marketable securities (securities that can be easily sold eg. bonds)** in **existing companies** * **msot foreign debt** recorded * often **largest** item on **CFA**

Answer 7

investments derive value from performance of other assets (IRs/ERs) increasingly sig recent years * value of these investments usually derived from performance of specific assets, IRs, exchange rates, indices * important part of GFMs

Answer 8

**foreign financial assets available to & controlled** by **central autorities** for **financing/regulating payment imbalances** * **monetary gold** (gold held by RBA) * **Special Drawing Rights** * reserve positions in the IMF * **foreign ex**change held by **RBA**

Answer 9

**residual category** captures transactions **not meet requirements** of other 4 categories (direct inv, portfolio inv, financial deriv, reserve assets) * **trade credits** * **loans** eg. financial leases * **currency deposits**

Answer 10

add categories together, outcome should be **approx equal to deficit on current account** CA net goods + net services (BOGS)+ net primary income + net secondary income CFA **capital account** + **direct** investment + **portfolio** investment + **other** investment + **reserve assets + financial derivatives** BOP current acc + capital & financial acc + **net errors & omissions** = 0 * net 0s ^ emissions are statistical discrepancies bc under a **floating ER system**, **BOP** alaways **balances to 0** (deficit of 12 bill on CA offset by surplus of 12 bill o C&FA) added to C&FA to ensure BOP = 0 (can be -)

Answer 11

**CA + CFA = 0,** **BOP** * **CA deficit = CFA surplus** ( small category**net errors & omissions**) * **^** CA **deficit** --> **rise** C&FA **surplus** * **floating AUD** ensure **balance** **BOP**. under **floating ER, equilibrium**: **M - X + Y debits - Y credits (CAD) = K inflow - K outflow (CFA surplus)** * **strongest link** betw CA & CFA on **NPI** from **CA** * **LT, CFA surplus** --> **larger deficit** on **NPI acc** bc **foreign financial flow** **to AUS****earn returns** for **owner**, which is **debit/outflow** on **PI acc** * every transaction betw AUS resident & world, BOP record 2 entries **(value provided = credit, value receieved = debit**) * credit & debit same amt but credit + and debit - (offsets) * measurement errors bc **diff to record every transaction** betw residents & world, **sometimes not measured** at all

Answer 12

1. **international borrowing** / foreign debt * **regular interest repayments (servicing costs) not recorded** on **CFA**, **only repay**ment of the **principal** (og amt borrowed) **recorded** on **FA** * **AUS' high lvl borrowing from overseas** sig contribute to **NPI deficit** due to **servicing costs of foreign debt** 2. **foreign investment** / foreign **equity** * **returns on equity investment** * **equity financial inflows** from **foreign purchase** of **AUS assets (land, shares, companies)** * **foreign owners** of **AUS land receive rent,** owners of shares get **dividends**, owners of **ocmpanies receive profits** * **ROI** recorded as **debits** on **NPI of CA**

Answer 13

**widen**ing of **CA deficits** bc **servicing costs** from **^ foreign liabilities** **(higher foreign debt & foreign equity) ** * **extreme** --> '**debt trap'** where **eco borrows** from **overseas to pay interest-servicing costs** on its **existing foreign debt**

Answer 14

AUS historically **low savings lvl relative to invcestment demand** --> **large inflow on FA** * before assumed AUS BOP problems due to **lack of international competitiveness (BOGS on CA)** --> **successive gvts** intro **microeco reforms in trade, financial & LMs** to **^comp & productivity growth** * recently **savings & investment gap** causing AUS **LT external imbalances** bc **low savings --> need foreign cpaital inflow to fund AUS investment** (make **CA deficit a CFA problem)**

Answer 15

health of eco & ability for AUS to make obligations to rest of world * reflects key features of **eco structure** * highlights **imbalances** in relation betw **AUS and global eco** * BOP figures carefully watched by FMs * sig **influence** on **bus confidence & foreign investors**

Answer 16

**CA deficit**, esp **BOGS** and **net primary income** * **1980s** CA deficit first emerged as sig eco concern, as **% of GDP** avg 1.1% 1970s & 4% 1980s * sudden increase CA deficit prompted **major structural reforms** to **restore competitiveness** of AUS eco * 1980s --> 2015, CA deficit 3-6% of GDP vg 4.1% 1990s, 4.9% 2000s, 2.5% 2010s * **improvement** in **CA since 2010s** --> less concern for policymakers now

Answer 17

**S< domestic & ext influences** * size & movements on **BOGS and primary income acc** influenced to varying deg by **cyclical** (vary w/ **lvl eco activity** eg. **changes global demand** for **commodities, AUS' TOT, value of ER)** * & **structural** **(underlying/ persistent** influences on **BOP** eg. structure of AUS **export base, international competitiveness** of AUS **exports, lvl national savings**) factors

Answer 18

improvement mid **2019** CA surplus 1st time since 1975 mainly bc **trade surplus (value** g&s **export**s **exceed** value **imports** * improvement CA during COVID recession driven by * **high (resource) commodity prices & ^production** iron ore, LNG, coal * **low global IRs** * **larger contraction in imports > exports** * sustained by **^surge commodity prices** that ended 2023 **BUT ST factors**, reflected in CAD return **(weaker commodity prices & higher debt servigin costs due to ^IRs)**

Answer 19

**global commodity prices, doubling** * besides temporary decline during 2009 global recession, **increasing trend in terms of trade continue**d until 2nd half 2011, peaked at 85% above abg lvl entire 1900s. * terms of trade reached **low pt March 2016** but **recovered** due to **rising prices** for **key commodity exports** * during inital onset of **global recession 2020**, despite **volatility AUS' terms of trade onlyl moderate fall** * **storng ^ price for iron ore (AUS' highest value export) --> terms of trade** reach **high**est lvl **record 2020-21**

Answer 20

**BOGS, ER** * higher TOT --> **higher export prices** for **same output** --> **^ export revenue & improves BOGS** * BUT **^ demand for AUS exports** --> **^ demand AUD** --> **appreciate ER** --> **weaken international comp of AUS' non-commodity exports** --> **lower lvl of non-commodity exports** partially **offset benefits** of **rising** TOT

Answer 21

influenced by * types g&S AUS exports & imports * prices received/paid for thsoe g&s * since AUS **Comparative adv** in **resource & agri** commodities, large share of **exports** but **volatile prices** --> **trade balance fluctuate alongside** changes commodity prices * TOT index s**trong growth** over **2 decades** * **2016-24 ^ 63-95.** * commodity **prices ^** bc global eco **recover**ed from **COVID recession**, further after **Russia** invades Ukraine 2022 (reduce **supply** commodities & reduced gas supplied, subject **eco sanctions**) * improved TOT --> **boost surplis BOGS** but **^ mining profits (AUS outflow dividend payments)** * **change BOGS > change NPI --> improved TOT overall improved CA --> surplus** 2019. 2024 began dec bc **slowdown China reduce demand** for commodities --> reverse some effects & reduced surplus on BOGS in CA

Answer 22

RISK: * **imports > exports** (maybe **lack int comp)** * **net receiever foreign investment, (national savings < investment)** * series **large CADs accumulate NFLs --> ^ servicing costs (interest foreign debt, dividends foreign equity)** * over **time ^ foreign debt weaken credit rating, demand ^IR risk lending** * **large ext imbalances undermine int confidence** in eco --> **depreciate AUD & ^volatility**

Answer 23

relative movements in prices of an eco's imports & exports over PIT * expressed as a no. known as terms of trade index showing ratio of export price index : import price index * export price index shows proportional change in lvl export prices vice versa * prop change relative to a base yr/starting pt - a given index no. of 100 * terms of trade index calculated as export price index divided by import price index x100

Answer 24

by affecting **demand for imports** * **upturn** in domestic bus cycle --> **^bus investment & hgiher disposable income** --> higher **consumption** * higher lvls bus investment & HH consumption --> **higher imports** esp since imports **which are large prop both capital & consumer spending** --> **worsen BOGS**

Answer 25

* high growth in invesment esp in resources sector & HH disposable income lvls despite rising terms of trade

Answer 26

weaker HH consumption & lower lvls investment in capital

Answer 27

demand for AUS exports * slowdown in global eco growth & weaker growth in AUS' key regional trading partners reduce growth in demand for AUS exports --> worsen BOGS

Answer 28

more closely integrated to faster growing ecos than many developed countries. depends on strenghtening trade linkages with ecos msot likley drive global eco growth in 2020s (india, china)

Answer 29

aka trade balance * strong surpluses recent yrs since 2016-17 --> strong growth in income from AUS resources & energy exports * surplus decreased due to elevcated commodity prices, strong activity in travel & tourism sectors, return international students to AUS cities

Answer 30

1. exchange rate 2. terms of trade 3. rate eco growth in AUS eco & global eco

Answer 31

* movements affect **international competitiveness**of AUS' **exports** & **relative price** AUS **imports (& dom prod goods)** * **depreciation decreases foreign currency price** of AUS' **exports** --> **^ int competitiveness** of AUS exports on **world markets** * also **^ AUD price of imports** & **discourages consumers** from **purchasing** imports encourage **purchase dom goods**, **improve BOGS** acc ## Footnote depreciating AUD contribute BOGS improvement since 2016-17

Answer 32

**cyclical factor** affecting **BOGS** * * **greatest influence**o n **AUS BOP recent** yrs * shows **relationship betw prices AUS received for exports & prices paid for imports** * if **export prices ^ relative to import prices, AUS terms of trade improve** * import prices increasing relative to export prices, terms of trade deteriorate * **improvement** = **same volume of exports can buy more imports** * **unless signfiicant decrease in export volumes compared to import** volumes --> **improve** on BOGS **(larger surplus/smaller deficit) & decrease CA deficit**

Answer 33

* **dom** EG influences BOGS by affecting **import demand** (**upturn BC** **--> ^bus investment & consumption** --> ^ imports **(sig prop capital & consumer spending**) --> **worsen BOGs** esp if **dom EG > global EG --> slower growth in exports > imports**) * if EG **driven by investment in productive capacity** that'll **expand exports in future**, worsened BOGs **reverse MT** bc **imports** of **capital** goods replaced by exports * POOR bogs DURING **1ST PHASE GLOBAL MINING BOOM** THEN **2010S PROJECTS COMPLETE** & mining **output expand)** * **IBC** changes impact BOGS by affecting **demand for AUS exports** * **slowdown/weaker growth** global EG & **major (regional) trade partners** reduce demand --> **wrosen** BOGS (**depend on AUS dom EG & how impacts imports** [China's growth > AUS' so BOGS improved]) * **eco closely integrated** to fast growing **emerging** ecos must **strengthen trade links** w/ ecos likely **drive global EG** 2020s. eg. SE Asia * 2000s AUS exp largest sustained TOT in its history * impact of global commodities boom strongest behind changes in **CAD** for over decade * commodities AUS largest **export**, sig **impact** on **TOT & BOGS** * AUS exporters received higher prices for exports, **^ export revenue** --> **^ value** of AUS **exports** --> **improve BOGS** while rise of **low cost emerging ecos** flooded **world markets** w/ **low cost manuf goods** --> **reduce import prices** --> further **^ AUS TOT**

Answer 34

1. **NARROW EXPORT BASE**, * heavily weighted towards **small no. commodities** * **comparative adv** in products w/ **no large value added component - minerals, agri** (which together acc **2/3** AUS **export earnings)** * AUS highly **exposed** to **movements in prices & demand** in these markets, **volatility** contirbutes **large fluctuatiosn** ni **BOGS** ever yr * recent decades **upturn prices agri exports** (but **^smaller** than **mining** sector) reflects **^ global food demand, rising incomes in developing c's, rising prices agri inputs** (oil, fertilisers), war in **Ukraine, climate change reducing agri productivity** (weather patterns, natural disasters) * need to **reduce dependence on fossil fuel exports** as ecos shift **away** from **carbon-intensive fossil fuels** (aus exports coal, gas). 2. AUS **LACKS INTERNATIONAL COMPETITIVENESS** (in **manuf**) * relies on **importing value-added products (consumer & capital goods**) & **export bulk commodities** **w/o value-adding** **--> BOGS deficit** bc **import payments outstrip export revs** * **LT, diversify** **exports** towards **high-growth, high value-added sectors** of global trade (**tech, ETMs** aka tech advanced g/s) **> simply transformed** manuf goods/commodity exports * **FMIA** policy Albanese Gvt 2024 manuf **solar cells, batteries, clean energy tech** * **service exports strong growth opp** bc AUS **proximity to emerging Asian ecos** * service-based eco * int comp **also** affected by **infrastructure for transport & info (capacity of ports, road & rail & braodband networks) --> investment** **alleviate infrastructure capacity constraints & ^export growth**

Answer 35

downard, worsen **^ global demand for commodities exports** far more valuable since beginning 2000s * although **volatility in TOT past decade, TWIndex** remained well **above LT avgs --> sig improvementsi n AUS TOT** & extraordinary **growth in export revenues**

Answer 36

1. AUS' need ot **import** vast amt **capital equip to expand** its **mining capacity** --> surge in imports 2. **time lags betw increases in comodity prices & increased export volumes** * **^ production capacity takes time** bc **delays in investment deciions** & **time to construct new mines**, **railways, shipping facilities** **(low capacity at ports, ineff road & rail networks) physically prevent AUS exporter from taking adv of favourable cyclical conditions** by ^ export volumes * influx of both **gvt & private sector investment in infrastructure** gradually **eased infrastructure constraints** during **2010s** and **end of decade** AUS g&S **exports wroth 3x total when mining boom began 2004**

Answer 37

central role in trends of CA balance * income AUS residents earn - pay to world from owning FOP & **financial ivnestments** (dividends/pay interest overseas borrowings) * difference betw in & outflows of **earnings on overseas ivnestments**/income earned as **return** on **overseas FOP** * interest payments on overseas borrowings & ROI foreign owned companies/shares/land * **foreigners invest** in **AUS, income** as **interest, rent, dividents, profits flow overseas** while AUS invest overseas income flows back * deficit 2-3% of GDP usually

Answer 38

* NPI deficit reflects **AUS' net servicing costs for** its **foreign liabilities** as **interest repayments on foreign debt/dividend payments from profits on foreign equity**

Answer 39

cyclical 1. **domestic EG** * strong dom EG --> **^company profits --> redistribute to SHs** **as dividends (outflow) --> ^equity servicing costs -->^NPI deficit** * ~40% AUS public share market foreign owned * eg. mining sector 2. **ER** * ER movements change **AUD value debt denominated in foreign currencies 'valuation effect'** * **appreciate** --> decrease AUD value debt denom foreign currencies --> **decrease AUS debt servicing costs in AUD** **--> reduce value NPI outflows** & **reduce NPI deficit** 3. **changesi n IRs** * can take out **AUS' overseas loans w/ overseas IRs** (when **borrowed in foreign currencies)/AUS IR (borrowed in AUD)** * IRs change --> change **foreign debt servicing cost**

Answer 40

* **movements** in ER **alter AUD value** of **debt** **denominated in foreign currencies** aka '**valuation effect**' * **appreciation decreases AUD value of debt** denominated in **foreign currencies** --> **decreasing value of AUS' debt service in AUD** terms --> **reduce value of NPI outflows & improve NPI deficit** * deprecitaion ^ AUD value of debt denominated in foreign currencies --> **^ value of AUS' interest repayments & worsen NPI deficit** * in practice, argued that valuation effect **only small impact on NPI acc (in ST at least) bc large amt AUS' foreign debt 'hedged**' (**lender & borrower** will agree to **fix ER over course of loan** to reduce **risk** of large ER **fluctuations**) * **sig part of AUS' foreign debt denominated in AUD** --> immune from ER movements

Answer 41

**change** in the **value** of a **country's assets & liabilities** due to **fluctuations** in **ERs**, asset prices, (FM factors) * **impact** changes in **market value of foreign investments** (such as stocks, bonds, and foreign reserves) on a **country's BOP** esp its **NPI**.

Answer 42

* ongoig NPI **deficit** is - ** savings & investment gap** * **relatiely small eco** w/ **historicall low lvl national savings** but **require high lvls capitla investment** for **EG** (AUS **major minerals export industry** requires high lvls **investment** in exploration, **capital equip for extraction, transport infrastructure from remote locations)** * **open eco**, **firms** use **foreign sources of finance** to **fund** investment --> AUS funds a lot of investment through **overseas borrowing** **(^ foreigndebt)/sell ownership in AUS bus' (^ foreign equity)** --> **^ AUS foreign liabilities**, creates **future servicing obligations as interest repayments on debt & dividends on equity** * servicing costs **outflows on NPI acc** big reaoson why **CA remained in deficit** **until recent** yrs **even** if sustaining **trade surpluses**

Answer 43

^AUS **investment overseas** (led by AUS **large volume** of **superfunds**) results in **inflows** of **earnings** on the **investments**--> **improve NPI** balance 1. **savings & investment gap** 2. requires **high lvls capital investment for EG (export industry)** 3. **open** eco --> **firms foreign sources finance** to fund investment **(servicing costs** become **outflow** on **NPI acc --> CAD**) 4. growth in AUS overseas investments from superfunds **(returns on overseas equity by AUS investors, low ER)** 5. **low** lvls **HH & public savings**

Answer 44

1. increased returns on overseas equity held by AUS investors 2.a lower exchange rate

Answer 45

* AUS historically low lvls HH & public savings (HHs 2x debt as prop of HH income than 2 decades ago) * HH savings ^dramatically COVID ression 2019-20 bc fewer opps to spend but not sustained bc rising IRs and cost of living pressures * AUS gvts substantially ^borrowings during past decade --> detract overall national savings

Answer 46

implement **policies to ^ lvl personal savings** * ^ rate compulsory super, * **removce incentives** in **tax system** encouraging **^ debt** & encouraging ^ savings through tax incentives **^ public savings** by **reducing budget deficits** & moving public sector **into surplus** through **fiscal consolidation** * **budget deficit = negative public savings** * budget surplus positive contr to lvl nationa lsavings * key issue 2020s speed of deficit reduction --> LT influence savings/investment gap --> BOP

Answer 47

1. **growth of foreign liabilities** * ^foreign liabilities (financial inflow on CFA as **borrowings from overseas** (foreign debt)/**selling equity** eg. **property & companies (foreign equity**) -->**lenders reluctant to lend to /invest in AUS** 2. **^ servicing costs** due to high lvls foreign liabilities * lead to **larger outflows on NPI acc** --> **worsen CAD** * **foreign debt** **serviced thorugh interest payments** that vary according to lvl **IRs in AUS & overseas** * **profits** must be **returned** on **foreign equity investment** * higher lvls foreign debt --> **foreign lenders demand 'risk premium' on loans (extra amt added to base IR to compensate for ^risks in lending eg. volatile fluctuations, default on debt, --> force up IRs** 3. **^ volatility for exchange rates** * high CADs can **undermine confidence** of **overseas investors** in AUS eco --> **reducing demand for AUS' currency**, can **depreciate** AUD 4. **constraint on future eco growth** **(LT)** * higher lvls eco growth involve ^ imports & deterioration in CAD * forced ot limit growht to lvl which CAD sustinable aka **BOP constraint** 5. **more contractionary eco policy** * if necessary to **reduce high CAD in ST, gvts** must **tighter macroeco policies** & accelerate implementation of **microeco reform** * in **ST**, tighter fiscal & monetary policies **reduce eco grwoth & lower CAD** 6. **sudden loss of international investor confidence** * eco crises sometimes triggered by sudden shift in attitude of GMs towards country whose **external imbalance appears unsustainable** * **investor confidence can change suddenyl** & **countries with high CADs & foreign debt** mroe **vulnerable** to **shifts in investor sentiment**

Answer 48

different lvl concern abt AUS historic pattern of high deficits on CA & foreign liabilities * if gvt not borrowing money, any external imbalances are result of normal market transactions in global eco * others argue CAD & foreign debt can be benefitical bc borrowing from overseas can ^ investment & help eco grow faster

Answer 49

if avgs over 4% in medium-LT/above 6% in ST

Answer 50

**decreased** * **scale & persistence** of **mining boom** clearer last 2 decades * **globalisation** era, **FMs more willign accept ext imbalances** & **confident** AUS' **natural resource wealth** continue **strong export growth** in future & allow **AUS service foreign liabilities**

Answer 51

* changes in **eco conditions** eg. **loss of Chinese export markets/rise in global IRs** --> return **higher CA deficits** * **sustained** CADs make AUS **dependent** on financial inflows to **fund servicing costs** of its **high foreign liabilitie**s * while AUS high CAD **hasnt affected growth in recent yrs**, due to **favourable external conditions** that could change in future (GFC lenders willing lend man ecos who later deep eco crises) * a **diversified export base, lower net foreign liabilities** could make AUS eco more **resilient**

Answer 52

NFL: AUS' obligations to rest of world **(foreign debt + foreign equity)** - rest world's financial obligatiosn to AUS (stock of debt and equity AUS owers to foreigners - foreigners owe AUS) net foreign debt: foreign debt + foreign equity all other things equal **DSR: prop export revnue to make repayments on foreign debt,** common measure to assess **sustainability** of foreign debt

Answer 53

* **^ foreign debt bc deficits financed partly by selling bonds to foreigners** * servicing cost of interest payments on bonds sold to foreigners --> impact **CA & NPI** * impact AUS' **AAA credit rating --> ^cost** of servicing **foreign loans** * **S&I gap mroe diff** reduce if gvt **continues** borrowing --> **private sector** may need **borrow offshore** --> crowding out impact **ER** (when ^gvt spending decreases [reduce supply borrowable funds for investors])/^demand funds ^ IRs "crowding out"—government borrowing takes up financial resources that would otherwise have been available for **productive private investment.** slower EG

Answer 54

* **imports** from **major trading partners** more **expensive --> ^prices (inflation)** * **inputs **in PP imported from **major trading partners** more expensive --> **^prod costs** --> ^inflationary pressures * ^TWI = **appreciate AUD**\ * **(reduce int comp exports, imports cheaper, worsen BOGS, slow EG,** * **deter foreign investment (expensive to convert currency to purchase AUS assets), value assets AUS owns overseas fall in AUD terms)**

Answer 55

* **2000s** sustained **appreciation --> depreciation since 2011** * low in 2001 (US47c) --> **2003 began strong appreciation (^commodity $)** * response to **Ukraine** wair **2022** c's imposed **sanctions on Russia (large commodity exporter) --> ^demand AUS commodity** exports (coal, iron ore, gas) --> **7.5% appreciate AUD** from **Jan to March (iron ore prices jumped 30%) --> depreciated** * **recent volatility** also bc when **AUS' CR > adv ecos, foreign investors** (high saving nations eg Japan) likelier **invest savings in AUS --> strong** AUD **last 2 decades** * **LT** factors: **EG, commodity prices, ROI** past decade shows **affect through impact on GFMs (speculators influenced by ST)**

Answer 56

* exports more int competitive --> ^volume exports --> employment in export industries * ^volume exports improve BOGS & CA * imports more expensive --> domestic import competing cus more competitive --> ^emp in those industries ^ emp * depreciat --> **^foreign debt lvls (valuation effect) --> ^NPI debits on CA** --> worsen CA (exports dont cause inflation)

Answer 57

* slowing eco --> less dividiends & profits flow out NPI as debits * lot of money in super (often invested overseas) --> profits, dividends, interest flow into AUS as NPI credits * ^ commodity prices (mining problems overseas & covid affect global supply), ^ iron ore to china --> ^BOGs surplus & CAS * slowed imports bc disrupted supply chains & less demand for imports during lockdown * demand agri products strong despite global slowdown

Answer 58

price of AUS' currency in terms of antoehr country's currecy - **price** which **traders & investors swap** AUS **currency** **for another** currency * necessary bc **exporting firms** wanna be **paid in own currency** --> **importers** need mechanism to **convert domestic currency into** a **foreign** currency to **make payments** * currency conversion occurs in **forex market** where **forces supply & demand/fixed ER, gvt/its representatives determine price** of a country's currency in terms of antoehr * all **trade & financial relations betw countries mediated** through exchange of curerncies --> **ER movements** sig impact on **international competitiveness, trade flows, investment decisions, inflation**, etc

Answer 59

* **floating** system (**clean/dirty float**) * **fixed** rate system * **flexible peg** * another option for countries w/ **similar regional interests** is a **monetary union** w/ **major trading partners** eg. euro, currency of 19 EU members aka eurozone & 4 non EU countries

Answer 60

when value of an eco's currency is determined by forces of demand & supply in forex markets

Answer 61

Dec 1983 AUS switched from a managed flexible peg to a **floating ER system**, imp **structural change** bc opened up the eco to global financial flows * ER determined by **free market forces** (not gvt intervention) * suppy & demand establish **equilibrium price for AUD i nterms of anotehr ocuntry's currency** * **equilibrium changes regularly** (every **minute** even) as supply & demand in **forex market** change

Answer 62

* **size of financial flows into AUS** **from foreign investors** who wanna invest in AUS & **need to convert** their currency into AUD - **lvl AUS IRs relative to overseas IRs** - relatively **higher AUS** IRs make AUS **mroe attractive** location for **foreign savings --> ^demand** - **availability of investment opps in AUS** - more opp for investors overseas to **start new bus/buy existing** via **share market**, demand ^ * **expectations of future movements of AUD** - if **expect appreciation, ^ current demand** for AUD by **speculators** * **demand for AUS exports** since **foreigners who buy AUS' exports** need to convert their currency into AUD to **pay AUS exporters** - **changes in commodity prices & TOT** **immediate** effect. **rise commodity prices** & **improve** **TOT** --> **^ value** of AUS **exports. FM respond** by **^ value** of AUD **expect**ing that value of exports **^ over S-MT**. - demand for AUS exports influenced by **degree of international competitiveness** of **domestic exporters** & AUS' **inflation rate relative** to overseas countries. if domestic firms **competitive **in world markets & AUS' **inflation** rate **relatively low**, AUS' **exports relatively cheaper** & **more attractive** to foreign buyers - **changes in global eco conditions** influence **overseas demand for exports.** demand for AUS' commodity exports highly dependent on growth rates of AUS' **trading partners** - if world eco **upturn, demand & prices** for AUS' **exports rise.** - **tastes & preferences of overseas consumers** affect demand for AUS' exports.

Answer 63

measure of abilitty of AUS producers to compete w/ overseas producers in local & world markets

Answer 64

ppl who sish to **Sell AUD** * **lvl financial flows out of AUS** by AUS investors who wanna **INVEST OVERSEAS** & need to **sell AUD** to **purchase foreign currency** 1. **lvl of AUS IRs RELATIVE to OVERSEAS IRs** influence financial flows out of AUS & supply of AUD. relatively **lower AUS IRs** make investing **savings overseas more attractive** --> **^ supply** of AUD 2.**availability of INVESTMENT OPPS OVERSEAS** influence financial flow out of AUS. * greater **opps to start bus' overseas/purchase shares** in **overseas companies ^ financial flows out** of AUS & ^ supply of AUD 3. **SPECULATORS in FOREX market** who **expect value** of AUD to **DEPRECIATE** will **sell** AUD, ^ supply of $A 4. ER affected by **Domestic DEMAND FOR IMPORTS** since AUS **importers** who **buy** **from overseas** need to **sell $A** to **obtain foreign currencies** to make **import payments** * **demand for imports** mainly determined by **lvl domestic INCOME (rising)**. **strong EG, EMPloyment** --> demand for imports also rising --> **^ supply** of $A 5. **DOMESTIC INFLATION rate & COMPETITIVENESS of IMPORT-COMPETING domestic firms** affect import lvls. * if Aus' **domestic INFLATION** rate **HIGHER** & its **import-competitng firms RELATIVELY UNCOMPETITIVE**, **imports relatively ****cheaper** than **domestic products** & **demand** for **imports ^** 6. **TASTES & PREFERENCES of domestic consumers** change over time, ^ preference for g&s from overseas raise supply of $A on forex market

Answer 65

one for each of the currencies of the countries for which forex transactions required --> possible at any time that AUS' ER appreciating against some currencies & depreciating against others

Answer 66

* ^ AUS **IRs**/decrease overseas IRs (relative) * improved investment opps in AUS/**deterioration in foreign investment opps** * **rise commodity prices** & **improvement**in AUS **TOT** * improvement in AUS **international competitiveness** * **lower inflation** in AUS * **^ demand** for AUS **export**ed g&s * **expectations** of a **currency appreciation** based on **forecasts** of **above factors** ## Footnote high inflation, prices rise, each unit of currency buys fewer. erode PP less attractive to investors, depreciate against currencies

Answer 67

* decrease in AUS IRs / ^ overseas IRs * deterioration in investment opps in AUS/improvement in foreign investment opps * fall in commodity prices & deterioration in AUS terms of trade * deterioration in AUS international competitiveness * higher inflation in AUS * ^ demand for imported g&s * expectations of currency depreciation basedo n forecasts of abovce factors

Answer 68

* unique factors affecting both currencies eg. USD depreciated against most currencies. if examien only USD & AUD, think AUD appreciated itself over 100% its value BUT AUD rising while USD falling creating exaggeration of rise in AUD - it rose by a smaller amt against other currencies

Answer 69

**measure value** of **AUD agaisnt** a **basket** of foreign **currencies** of major **trading partners weighted** according to their **significance** to **AUS' trade flows** (prop of AUS 2 way trade with MTPs not weight) * **value of AUD moving against all currencies** **compared with a base year** * **currencies** of c's more prominent in AUS' **trade** **higher weighting** so they have **greater influence on TWI basedo n volumes of trade for previous FY** * each year, RBA amends measurement * total no. countries included in TWI must cover 90/+% of AUS trade

Answer 70

* **directly invervene** in **forex market** by buy & sell foreign currency (dirty float) eg. GFC AUD depreciated 30% so RBA purchased $3.3bn to ^demand & stabilise currency * intervene INDIRECTLY in DOMESTIC MONEY market by changing cash rate (hence IRs) --> encourage capital inflow to AUS --> ^demand AUD, appreciate. / RBA purchases bonds in the bond market to ^ liqudiity & put downward pressure on IRs & ^ supply of $A * jawboning/forward guidance (?) RBA governor influences ind & bus influence speculators &direction(hint CR drop, seculators sell AUD anticipating future depreciating --> actual)

Answer 71

ADV * **automatic stabiliser** (floats up in **boom** --> slow **export** sales & dampen **AD**, floats down in slowdown --> boost export **demand** & raise AD) [help protect eco from external booms/busts. * eg. mining boom ^ **demand for AUS resources --> ^commodity prices --> appreciate** AUD --> industries didnt directly beenfit from mining boom **^costs** & demand for output fall --> **re-allocate labour & capital to mining sector --> reduce inflationary pressures & maintain stable employment lvl]** * **MP** more **independent & effective** bc **no change in moeny supply** (inflation, emp, stability w/o adj IRs to maintain fixed ER, not pegged to another currency = no need to maintain foreign currency reserves) * greater **integration** itno **global capital markets** DISADV * AUD much **more volatile esp speculation** --> ^ uncertainty for bus, investors, consumers exporter competitiveness import inflation

Answer 72

**weighting** only **based on trade volumes regardless** of **currency** in **exports & imports are invoiced** * **AUS** often **sells** its **commodities in USD** even when **trading** w/ **another country** eg. Japan --> **AUD/USD ER** far **more important than weight** it received in **TWI** calculation * imp when **analysing impact of movements in AUD against USD** & **TWI on AUS' trade & financial flows**

Answer 73

* while often sustained trends (appreciation, depreciation), also some yrs where there's a break in sustained, LT trend

Answer 74

Chinese yuan is basic unit of the Chinese currency, the renminbi. Its usage is similar to the way that economists refer to the British currency as Sterling and its unit as the British pound.

Answer 75

although AUS relies primarily on market forces to determine ER, RBA sometimes influences value of currency * RBA cant change value f AUD in LT but can smooth out swings relating to ST factors by 1. **Dirtying the float** & 2. monetary policy intervention

Answer 76

when RBA feels **large ST change in ER** (eg. **excessive speculation) harm**ful to **dom**estic eco, intervene in **forex** market as **buyer/seller** to stabilise AUD**** * to curb rapid depreciation of currency, RBA **buy $A --> upward pressure** on ER * sell $A --> prevent rapid appreciation (recover in value) * stabilises currency & generates profits contributing to RBA's dividend payment to the gvt * limited by **size** ofi ts **foreign currency holdings** (its **reservces** of foreign currency & gold that can be used to **fund** said purchases) * sum **total** of RBA's foreign currency reserves **relatively small,** **not** equal to even **1 day's total transaction in the currency** * hence RBA has **limited power to sustain prolonged intervention**s, as it may quickly run out of foreign currency to continue influencing the exchange rate.

Answer 77

* **indirect** way influencing **ER**, rarely used * if RBA **curb rapid depreciation, raise IRs** --> **attract** mroe **foreign savings, (must be converted** into AUD) --> **^ demand for $A** and **upward pressure on ER** * policy **only effective** for **limited time** * **unusual** for RBA to **change IRs** in **resposne to currency movements** as primary focus is to influence **domestic eco** esp **inflation** rate * BUT ER movements sometimes **so large affect stability** of eco/lvl **inflation**

Answer 78

since Dec 1983 AUS had floating ER system but previosu decades operated on range of fixed ER systems * prior Nov 1976, AUS had fixed ER system which AUD was pegged at diff times to UK pound sterling, USD & TWI * NOV 1976 - DEC 1983, AUS had a variation of the fixed ER aka **managed flexible peg**

Answer 79

**gvt/RBA officially sets the ER** (not left to forces of S&D) * gvt **maintain/intervene in forex market** **by buying/selling foreign reserves of foreign currency and/or gold in exchange for AUD** * **RBA** **obtain**ed foreign reserves by insisting that **all forex holdings be lodged w/ them** * **risk** of system is that to **^ value of AUD, RBA** could **exhaust** its **foreign reserves** by continually **exchangign** them f**for excess supply of AUD** --> complete **collapse** of trade in the **currency** * gvt could also change the ER 'officially' so it's closer to real marekt value --> **devalue** **AUD when lowers ER** & **revalue** AUD **when^ ER** * **limits ability of RBA** to **influence IRs**for **MP**

Answer 80

variation of fixed ER * system operated in AUS Nov 1976 to Dec 1983 * RBA '**peg' value of AUD** to **basket of foreign currencies at 9am daily** --> price operate throughout day * flexible peg system **more flexibility than fully fixed rate** & allow **official rate** to **drift away** from under **pure market forces**

Answer 81

in AUS open eco, value of ER can change sig in response to eco developments * perf of BOP very imp influnece on ER * value of dollar also influence BOP w/ other areas of eco

Answer 82

under **floating ER, quantity of AUD supplied** **= quantity** of AUD **demanded** * **net OUTFLOW of funds on CA (SUPPLY of AUD) = net INFLOW of funds on CPA** **(DEMAND for AUD)** ...but statistical mistakes through **net errors & omissions** on BOP] * if **disequilibrium** in BOP, **temporary** & **automatically corrected** by **movement in ER** effects depends on **perceptions of FMs** too * if FMs concerned that **^ CA deficit not sustainable**, **less willing to buy AUS assets** **--> value of AUD** **fall** further bc **capital inflow reduced** * AUD **appreciate despite** ^ in CA deficit if FMs **believe CAD sustainable** & confident AUS' CA problems only **ST risk** to eco, expecting **high commodity prices** eventually **reduce CAD** * improvement in BOP may not be largest influence on ER in a year * **recent** years, **most sig influence on ER** **movements** is how **FMs react** to developments in eco indicators eg. BOP, sometimes **diff to predict reactions** --> greater **instability in forex markets** bc market sentiment can quickyl change

Answer 83

* if **value of imports ^** & **exports unchanged** --> **deterioration in CA deficit** & **^ supply AUD** **(importers selling** more **AUD** to **buy** more **foreign currency**) --> **depreciatr** currency --> **given lvl financial inflows** able **buy more AUD** --> **positive** balance on **CFA** ^ in AUD terms to **match biger deficit on CA** * any other **^d outflow** of funds on **CA** (eg. payment of services, income payments, current transfers) likely **depreciate AUD & ^surplus on CFA** * **imporve** **CA deficit** --> **appreciate AUD** & **decrease** in **surplus on CFA**

Answer 84

* increasing value of AUD in terms of other currencies --> AUS **exports mroe expensive on world markets**, more diff to sell --> decrease export income & **deteriorate AUS CAD medium term** * **imports less expensive** --> encouraging import spending & **worsening AUS CAD**. **domestic production of import substitutes** likely **fall** * higher import spending & reduced export rev reduce AUS' **eco growth** * **foreign investors** find more **expensive to invest** in AUS --> **lwoer** **financial inflows**, which may continue if foreign investors **expect** currency to **continue rising** * appreciation **reduces value AUD of foreign income earned on AUS' investments abroad** --> **deteriorate** **NPI of CAD** * **reduce value of foreign assets** in AUD terms '**valuation effect**'

Answer 85

appreciation/depreciation of currency causes immediate change in AUD value of foreign debt that's borrowed in foreign currencies/foreign assets held by AUSSIES

Answer 86

* **AUS consumers** suffer **reduced purchasing power** (can **buy fewer imports** (overseas **produced goods) **w/ same quantity of AUD**) * **^ interest servicing cost** on **AUS' foreign debt** bc AUS can buy less foreign currency with its domestic currency to pay interest --> **^ income outflow on net income on CA --> ^ CAD** * **^ AUD lvl foreign debt borrowed in foreign currency in AUD** **'valuation effect"** * **raise price of overseas assets** purchased by **AUS investors** * **inflationary pressures** in AUS ^ (**imports** more expensive,) ^ pressure on **RBA** to **raise IRs** to defends its **inflation target**

Answer 87

* AUS **consumers** enjoy **^ purchasing power**, can buy more **overseas produced** goods w/ **same quantity of AUD** * **DECREASES intererst servicing cost on foreign debt** bc aussies can buy mroe foreign currency w/ AUD --> **reduce outflow** on **NPI** (component of) **CA** in **future yrs** --> reduce AUS' **CAD** * **reduce** AUD **value of foreign debt** **borrowed in foreign currency 'valuation effect**" * for aussie investors trying to purchase **overseas assets**, **reduce price** of the assets * **inflationary pressures** in AUS **reduced** as **imports cheaper** --> reduce pressure on RBA to **raise IRs** to defend its inflation target

Answer 88

* **decreases value** of **AUD** in **terms of other currencies** --> AUS **exports cheaper** on **world markets**, easier to sell --> **^ export income** & **improve AUS' CAD** in **medium term.** weaker AUD following end of commodities boom largely credited w/ helping AUS eco adjust to reduced income from mining by **^ international competitiveness** of other sectors * **imports** mroe **expensive, discouraging** import spending & **improving** **AUS' CAD**. **domestic prod of import subs** should **^** * lower import spending & greater export revenue **(Combo)** will **^ AUS' growth rate** **unless** AUS **unable replace** its **imports** w/ domestically produced goods * **^ $A value of foreign income earned** on **AUS' investments abroad** --> **improve NPI** (component of) **CA deficit** * **foreign investors less expensive** to **invest** in AUS --> **greater financial inflows** BUT they made **dry up if** foreign investors **expect currency** to **continue falling**

Answer 89

mostly favour ER values that **reflect true forces of supply & demand** * 'true' --> from **exchange g,s, finance betw AUS & rest of world** but **not ER changes** due to **speculators** who **buy/sell AUD** anticipating change in currency **distort** ER movements & **^ ER volatility** by **exaggerating** upwards & downwards cycles

Answer 90

it's a **small eco rely**ing on substantial **financial inflows** address its **external imbalances,** --> AUD **more vulnerable to speculators than other adv ecos** * **excessive speculation & volatile currencies** **major global eco concern** bc **large currency movements** can **destabilise** ecos

Answer 91

multilateral agreement betw 11 countries for AUS, canada, japan, mexico, NZ, singapore, vietname 2018-19 increases market access across borders for bus by: * lowering tariff barriers, * simplifying compliance requirements so bus access preferential trade treatment * reducing foreign investment restrictions * imposing rules around conduct of state owned enterprises * far more modest than og plan for TPPA (trans pacific partership agreement) included US before its withdrawal under the Trump Adminsitration in 2017

Answer 92

**S<** effects on CA * **ST ^** value **imports** bc locals pay more for imports --> CA deteriorate * after **MT,** demand imports **decrease** & demand exports ^ bcd more int comp --> improve BOGS * **deteriorate NPI** bc **^ debt servicing costs (also earn more on foreign investments** * **overall** impact **M-LT** likely **positive** for CA

Answer 93

ADV * **transfer tech** & management skills * **access forex** * **create emp opps** * **^ access to export markets** one benefit of FDI is allows **c to fund required infrastructure** wehn **dom savings insufficient**. **FDI projects** can** create high paid dom emp opps** which contribute to **dom wealth & improve LS**. if FDI in **infrastructure** projects (roads, mines) then can help eco become **mroe int comp** by improving **dom AS.** DISADV * **loss ownership & control of resources** * **servicing costs** overseas debt & equity borrowings * **volatile** nature of **speculative portfolio capital flows impact ER** some costs of FDI arise bc **dom assets controlled by foreign residents,** potentially **foreign gvts** which can --> **political problems if foreign investors diff views** on issues eg. **enviro manage**ment. any **incoem earned from asset in future flows to foreign investor** neg impact for BOP

topic 2 aus place in global eco Flashcards

(118 cards)