Topic 2: Australia's Place in the Global Economy

Question 1

Trends in Australia’s Trade Pattern

Answer 1

Trade balance is the difference between exports and imports and is currently positive
Australia has a comparative advantage in
-Commodities
-Agricultural products
-Services
Trade as a percentage of GDP increased from 12% in 1980s to 22% in 2018

Question 2

Trends in financial flows - debt and equity

Answer 2

The adoption of the floating exchange rate in 1983 allowed for greater accessibility of Australian firms to world capital market and FDI into Aus
FDI into Aus and investment overseas by Australians has doubled in the past decade
Equity: The ownership of money or the money of other owners/investors
Net Foreign Equity: The difference between foreign investment and Australian-owned foreign investment
Net Foreign Debt: difference between loans

Question 3

Balance of payments

Answer 3

Summarises the economic transactions of an economy with the rest of the world

Question 4

Structure of BoP

Answer 4

Current Account

Capital and Financial Account

Question 5

Current Account

Answer 5

Trade Balance - value of goods and services that we export minus the ones we import
Net Primary Income (NPY) - rent, return, dividend
Net Secondary Income - pension, foreign aid, tax

Question 6

Capital and Financial Account

Answer 6

Capital Account
Capital transfers - involves the net inflow of funds to Australia by permanent migrants
Acquisition/disposal of non-produced, non-financial assets
Financial Account
Direct Investment
Portfolio Investment
Financial Derivative
Reserve Assets
Other Investment

Question 7

trends in size and composition

Answer 7

-International Competitiveness
Competitiveness affects export volumes
-Protection policies also impact
-Exchange rate + productivity
-Terms of Trade
Higher ToT will help achieve a CAS
Refers only to price, not quantity
-International Borrowing
The more we borrow from international sources
The more of a capital/financial account surplus
Increase in debits in the current account
-Foreign Investment in Australia
8% increase

Question 8

terms of trade

Answer 8

Represent the ratio between export prices and import prices

Favourable ToT: when export prices rise faster than import prices or when export prices fall less than import price

Question 9

factors that affect the BOGS

Answer 9

Domestic growth
Overseas growth
Exchange rate
Terms of trade
Narrow Export Base

Question 10

exchange rate

Answer 10

the value of a currency in comparison to another currency

Question 11

floating exchange rate

Answer 11

when the value of a currency is determined by demand and supply

Question 12

trade weighted index (TWI)

Answer 12

The average value of the AUD compared to Australia’s major trading partners currencies, weighted according to their significance

Question 13

Factors affecting the demand for and supply of AUD

Answer 13

• financial flows
• trade flows
• economic conditions

Question 14

Factors affecting the demand for and supply of AUD - Financial flows

Answer 14

Level of Australian interest rates relative to overseas interest rates
- High domestic rates attract foreign investment,
creating higher demand for AUD
- Low domestic rates incentivise saving funds in
overseas banks, creating a high supply of AUD
Investment opportunities
- High opportunities domestically support high demand
for AUD
- High foreign opportunities create a high supply of
AUD
Speculation
- If there is an expectation of future appreciation, there
may be high demand for AUD
- If there is an expectation of a future depreciation
investors may sell AUD, increasing supply

Question 15

Factors affecting the demand for and supply of AUD - trade flows

Answer 15

Exports
- High demand for domestic exports leads to high
demand for AUD
Imports
- High demand for imports results in high supply of AUD
Commodity prices and terms of trade
- Improvements in commodity prices and terms of trade
increase the value of exports, causing high demand
for AUD
- A decrease in commodity prices and terms of trade
decreases the value of exports, causing high supply of
AUD

Question 16

Factors affecting the demand for and supply of AUD - economic conditions

Answer 16

Expansionary period
- Upturn in domestic and/or international business cycle
may increase demand for Australia’s exports, creating
high demand for AUD
Contractionary period
- A downturn in the domestic and/or international
business cycle may decrease demand for Australia’s
exports, creating a high supply of AUD
Tastes and preferences
- Affect demand of Aus exports and imports, and
therefore the demand and supply of the AUD

Question 17

Changes in exchange rate - appreciation

Answer 17

An increase in the exchange rate of one currency in terms of another
Occurs when demand increases and/or supply decreases

Question 18

changes in exchange rate - depreciation

Answer 18

A decrease in the exchange rate of one currency in terms of another
Occurs when demand decreases and/or supply increases

Question 19

fixed exchange rate

Answer 19

When the government or RBA officially sets the exchange rate for an economy

Question 20

clean float

Answer 20

pure demand-supply model with no central bank intervention (only exists in theory)

Question 21

dirty float

Answer 21

a flexible exchange rate but managed to a certain extent

Question 22

managed exchange rate

Answer 22

Any official intervention by a government in setting the exchange rate

Question 23

Advantages of a flexible over fixed rate

Answer 23

More accurately reflects international competitiveness which encourages free trade
Dutch disease: a boom in one export causes an appreciation in exchange rates making other industries less competitive

Question 24

Disadvantages of flexible over fixed rate

Answer 24

volatile or sudden changes cause future transactions to become uncertain, which heavily influences speculative investment
Depreciations may cause inflation, as imports are more expensive and this price increase can be reflected in the domestic interest rate

Question 25

Direct intervention by RBA on exchange rates

Answer 25

The RBA buys/sells foreign exchange when the AUD goes either too high or too low If AUD is too high the RBA sells AUD reserves to increase supply, and decreases its value If the AUD is too low, the RBA buys AUD reserves to increase demand and increase its value

Question 26

Indirect Intervention by RBA on exchange rates

Answer 26

Monetary policy: Interest rates set by the RBA have a secondary function of changing the interest rate between Australia and overseas

Question 27

Effects of fluctuations in exchange rates on the economy - Positive Impacts of Appreciation

Answer 27

Cheaper imports may cause lower import inflation as prices are lower Cheaper imports encourage allocative efficiency of resources resulting in a long term shift to more competitive industries Cheaper imports mean consumers and firms can buy a greater quantity of products due to increased purchasing power, therefore improving living standards and lowering input costs Valuation effect on debt decreases interest servicing costs on foreign debt and the overall AUD value of foreign debt

Question 28

Effects of fluctuations in exchange rates on the economy - Negative Impacts of Appreciation

Answer 28

Exports are more expensive, and we expect a fall in the quantity demanded, leading to a long term loss of investors, causing slower economic growth Cheaper imports may cause domestic firms to lose competitiveness which may increase unemployment Valuation effect on assets

Question 29

Effects of fluctuations in exchange rates on the economy - Positive Impacts of Depreciation

Answer 29

exports are cheaper, so we expect an increase in quantity demanded causing a long term increase in investment and economic growth More expensive imports may cause domestic firms to increase competitiveness which may increase employment Valuation effect on assets

Question 30

Effects of fluctuations in exchange rates on the economy - negative Impacts of Depreciation

Answer 30

Imports are more expensive, which may cause imported inflation More expensive imports decreases living standards and increases input costs due to decreased purchasing power Valuation effect on debt

Question 31

australia's policies regarding free trade

Answer 31

Since 1988 the government has reduced protection on manufacturing industry 2011 the government released a Trade Policy statement outlining its commitment to free trade Became a member of GAT in 1947 and WTO in 1994 Heavily protected between WW2 and 1970 Average tariff rate of 25% in 1970 APEC AANZFTA TPP RCEP

Question 32

JAEPA

Answer 32

Around 98% of Australian merchandise exports to Japan will receive preferential access or enter duty free Reduction or elimination of tariffs on agricultural commodities - 38.5% tariff on Aus beef will be halved over 15 years Elimination of 15% tariff on Australian wine by April 2021 Removal of tariffs om Japanese goods such as cars, electronics and whitegoods Aus law firms have greater access to Japanese legal market 13% of exports go to Japan Japan previously had a very protected agricultural industry

Question 33

ASEAN

Answer 33

Regional intergovernmental organisation made up of 10 southeast asian countries which promotes intergovernmental cooperation and facilitates economic, political, security, military, educational and socio cultural integration among its members Aus and NZ joined in 2010 (ASEAN-Australia-New Zealand Free Trade Area) - ASEAN nations committing to eliminating tariffs on 96% of Australian exports to the region This is the largest preferential trade agreement that Australia has concluded representing 20% of Australia’s trade in goods/services.

Question 34

CHAFTA

Answer 34

China is Australia’s top export destination - 30% Tariffs to be eliminated in ag and resources More opportunities for foreign investment Reduced barriers to labour mobility Work and holiday arrangements Exports to China nearly doubled from 87 billion in 2015 to 169 billion in 2019

Question 35

CPTPP

Answer 35

11 countries around the pacific Eliminates 98% of tariffs New trade agreements with Canada and Mexico No foreign equity limits on foreign ownership of uranium mines

Question 36

implications of Aus FTA for individuals

Answer 36

Reduction in prices More choice in products More employment opportunities Likely to cause more structural unemployment

Question 37

implications of Aus FTA for firms

Answer 37

Must become more competitive Lower costs through cheaper inputs Larger export markets

Question 38

implications of Aus FTA on government

Answer 38

Less expenditure on protection | More tax revenue from businesses making profits due to more exports

Question 39

Implications for Australia of protectionist policies of other countries and trading blocs

Answer 39

Weakens world growth Reduced exports and foreign investment Rising prices