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eco year 12 > topic 2: aus place in the global economy > Flashcards

topic 2: aus place in the global economy Flashcards

economics

1
Q

link 1

A

the balance on the current account is equal in magnitude but opposite in nature to the balance on the capital and financial account

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2
Q

link 2

A

Investment flowing through the financial account requires the investment returns to be provided to the investor. returns are recorded in the primary income component of the current account

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3
Q

link 3

A

Investment flows through the financial account are used by Australian firms to expand productivity/output. Thus Australian exporting firms can increase exports while import-competing firms can help lower imports. This generally strengthens the balance of goods and services component of the current account.

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4
Q

3 ways open economy is measured

A
  1. exports / gdp
  2. imports /gdp
  3. dependency ratio
    – X+M / GDP
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5
Q

macroeconimic exporting benefits 4

A
  1. export earning may help pay for imports
  2. exports add to eco growth (AD)
  3. increased output increases employment and national income
  4. protect from domestic downturns, exporting sectors of economy still do well
    – looks at demand side of econ
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6
Q

international financial flows meaning

A

flows of money/currencies and other financial flows (capital, inv) across international boundaries

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6
Q

microeconomic exporting benefits 3

A
  1. focus on comparative adv strengths
  2. exporters usually more innovative to compete with global marketplace or from opp. to benefit from transfer of knowledge and technology in foreign markets
  3. exploiting EOS, including diversification of sales risk by being in more than one market
    – looks at supply side of econ.
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7
Q

current account: what do they record?

A
  • records unilateral ‘earned’ transactions
  • when more M and financial outflows than receipts and inflows
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8
Q

capital and financial acct: what do they record?

A

record of international capital flow
- fdi more than 10%, long term (?)

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9
Q

trends in BOP: big picture

A
  • persistent CAD since 1970s (-3 to 6%)
    – up M, lack intl. comp. in protected econ.
  • protection down, specialisation and investment (net importer) in mining lead to structural change and increase in exports
  • china development of manufacturing lowers m prices
  • aus = net importer
    pitchford theory + 29/40 years of CAD eco growth
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10
Q

definition of structural change

A

refers to the broad change in an economy’s structure of production and level of technological progress as economic development takes place

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11
Q

terms of trade formula + terminology + importance

A

TOT index = X index / M index (as %)
- no direct impact of TOT on BOP
- price index more influenced by price and demand than XR

  • improve: X rise faster than M
  • deteriorate: M rise faster than X
    ~
  • favourable: up 100
  • unfavourable: down 100

TOT up when global eco strength is more powerful (can buy more M than before, improve SOL)
- SHORT TERM IMPACT OF APPRECIATING CURRENCY IS IMPROVEMENT IN TOT

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12
Q

definition international competitiveness

A

degree of ability for aus exporters and import-controlling firms to compete against foreign producers
- influences bogs

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13
Q

current trend of BOP - aus

A

CAS 1.1% of GDP
- BOGS: current change in trade, issues with china
- Yp: falling borrowing costs (historic low global int rates)
- FFA: global recession but search for higher returns

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14
Q

key factors of intl. compt 6

A

PRODUCTIVITY
quality
RETAIL PRICE
service

government policies
trade agreements

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15
Q

what makes an increase in intl. compt.

A

X rise, M fall → IMPROVEMENT IN CAD

flow on effects:
- higher trade earnings → companies can pay borrowings → reduce foreign liabilities hence debt servicing payments →further improve CAD
- primary income debit lower since liab. don’t exist anymore

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16
Q

trend intl. compt

A

2018-19: POOR PERFORMANCE
- poor perf. in G&S balance due to lower export demand while imports remained relatively inelastic in face of depreicating currency

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17
Q

what influences international compt. 3

A

productivity: ↑ technology and education
- microecon. reforms began 1980s boosted productivity of factor and commodity markets
- includes finance and labour market reforms, deregulation of airline and telecommunications industries

retail price: ↓ fx rates, inf, costs
- lower inflation: keeps production costs under control relative to other nations→ achieved through monetary policies

depreciating currency:
- makes X cheaper thus increase intl competitiveness

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18
Q

globalisation mining commodities structural story

A

biggest winner from globalisation due to
- key comparative advantage from rich natural resource base
- developing countries require natural resources as they develop+indsutrialise

BUT reliance in one sector can have risks, volatility in commodity prices may impact on production and unemployment in resources/mining sector
- MAIN ISSUE: aus still has a narrow ‘export base’ and export revenues susceptible to changes in commodity demand and prices

19
Q

exchange rate definition

A

bilateral price of one’s country currency in terms of another at a particular time
– also measure of purchasing power of a currency with respect to international trade
(enables international trade and investment)

20
Q

spot rate

A

your currency against USD at current time

21
Q

cross rate

A

when currency is not against USD

22
Q

trade flow definition + influences

A

sum of export inflows and import outflows (G&S)
- imports (supply of aud)
- export (demand for aud)
- prior commodity currency

23
Q

what are capital/investment flows + influences 3

A

sum of financial capital inflows from overseas investors capital outflows from aus investing abroad
- interest rate differential
- economic/inflation conditions
- speculation

24
Q

income flows

A

sum of returns on financial investments - income debits are paid out to oversea investors and income credits are received by aus investors
- changes in capital flow
- changing return levels

25
Q

determinants of exchange rates 5

A
  • trade flows
  • capital/investment flows
  • income flows
  • relative interest rates
  • investment opportunities
26
Q

factors affecting supply of aud 4

A

imports
- need to buy foreign money (dep.)

speculators
- attempt to profit from change in fx rate (expect
aud to fall so sell currency)

domestic savers/investors
- seek to invest oversea, send money overseas

government
- rba action and payment of loans/aid overseas
eg donation to other country

27
Q

factors affecting demand of aud 4

A

exports
- foreigners need to buy aud

speculators
- attempt to profit from fluctuating fx rate

foreign savings/investors
- seek to invest in aus

government
- through RBA actions and receipts of international loans
- floating XR is influenced

28
Q

interest rate differential

A

difference between two countries’ interest rates

29
Q

high int rate diff

A

foreigners more likely to invest in aud
- appreciate due to higher demand

30
Q

low int rate diff

A

fall → capital will move out → investors will NOT come in (some will leave and go to the US market)

  • when investors leave → convert aud to USD → more supply of aud → depreciation of aud
31
Q

impacts of fx changes

A

appreciation (AUD)
- X down M up
- X appear more exp to foreigners
- M into aus cheaper for aus
- decrease in supply, increase demand

depreciation (AUD)
- X up, M down
- X appear to be cheaper to foreigners
- M appear to be more exp for aus
- increase supply, decrease demand

32
Q

effect of fx on eco indicators 8

A
  • eco growth via AD
  • inflation (cost of imports)
  • employment (exporters + import-competing firms
  • intl compt
  • structural change
  • terms of trade
  • balance of payments / CAD
  • external stability
33
Q

trade weighted index

A

multilateral fx rate
aud exchange rate against aus top 17 major trading partners currencies

  • more reflective of real world impacts on exports and imports in general
34
Q

floating XR ; pegged/fixed ; dirty/managed

A

floating: price determined by ONLY market demand and supply of currency
- no gov intervention

pegged/fixed: XR of currency fixed in relation to anchor country

dirty: XR influenced by government via central bank buying and selling around preferred rate

35
Q

advantages of floating XR rate 6

A
  1. efficient mechanism for determining value of AUD (realistic)
  2. exposes econ to intl. compt. pressures + countercyclical economic stabiliser
  3. discourage destabilising currency speculation
  4. RBA monetary policy more independent – focus actions on inflation rather than XR
  5. insulates against external shocks (GFC)
  6. matches systems of trading partners
  • deregulation of financial system (1983) with independent monetary policy (micro-eco reform) focused solely on managing inflation (no4)
36
Q

disadvantages of floating XR 3

A

INCREASED VOLITALITY in XR flows
1. uncertainty about investment and savings
2. market sentiment overreacts and speculators jump on bandwagon of extreme views of currency so XR ‘overshoots’ new app. equilibrium
3. speculators and use of derivatives can create self-fulfilling currency investment ‘bubbles’

37
Q

determinants of exchange rates 4

A
  1. demand for foreign imports
  2. demand for aus exporters
  3. relative interest rates
  4. investment opportunities
    – speculation
38
Q

positive of appreciation 3

A

short run (market period)
1. M DOWN price, X UP price
- higher X income, lower M spending
- improvement in goods balance and CAD
2. M PRICE DOWN
- may lower domestic ‘imported’ inflation
- UP real income and living standards
3. DOWN NET FOREIGN DEBT denominated in foreign currencies
- lower interest payments (improves CAD)
- reduce debt servicing ration

39
Q

negatives of appreciation 4

A

LONG RUN
1. DOWN compt. of tradable sector (X appear dearer and M cheaper)
- lower X income, higher M spending
2. (may) UP levels cap outflow
- dom assets dearer than foreign assets
3. (may) result in structural UE in now uncompetitive
4. large appreciation may require central bank intervention indirectly by lowering cash rate to reduce demand for AUD
- UP EG EMPLOYMENT INVESTMENT AND INFLATION

40
Q

negatives of depreciation 2

A

SHORT TERM (MARKET PERIOD)
- UP price of M, domestic ‘imported’ inflation, part of foreign debt dominated to foreign currencies, debt servicing ratio
- may lead to RBA intervention to support XR

41
Q

positives of depreciation 3

A
  1. UP compt. of tradable goods sector – makes aus G&S more price competitive (X cheaper, M dearer)
    - UP X income, DOWN M expenditure
    - improves CAD - trade balance initially worsens then improves after depreciation
  2. UP cap inflow as dom. assets become cheaper relative to foreign assets
    - reduced foreign debt, UP FDI in aus
  3. structural adjustment and UP competitiveness in industry
42
Q

pegged/fixed and managed XR rba

A

maintain fixed XR below equil: sell more of its own currency
– shortage

maintain fixed XR above equil: buy more of its own currency
– surplus

43
Q

advantages for fixed rate 1/2

A

certainty about short term value of currency
- predictable investment environment
- assists importers and exporters and allows central bank to conduct monetary policy similar to that of country against which country is pegged

44
Q

disadvantages for fixed rate 5

A
  1. speculation increase
  2. destabilisation of currency
  3. central bank must have large amounts of reserves
  4. structural change
    - if XR rate does not respond to changes in market forces or external shocks then the country may not react to external structural change
    - may make long term economic management difficult
    —- if currency crisis: devaluations and revaluations and policy adjustment to force structural change
  5. BOP
    - impact domestic supply of money
    - CAS increase money supply –> inflation
    - CAD fall in money supply –> lower EG and UP UE
45
Q

market interest rates

A

increasing the money supply causes a decrease in cost of borrowing (market int. rate) as borrowers have more choice

46
Q

sterilisation of fx market intervention

A

rba offsets its foreign exchange $A purchase transaction with buying government securities to inject money back into the financial system

eg must counter buying of currency in fx market with buying of bonds from financial markets (inject money back into financial system)

  • when dirtying the float by buying/selling currency
  • may impact inflation and market interest rates

eco year 12 (4 decks)

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