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Flashcards in Week 12 - Open Economy Markets Deck (31):

What are the 3 dimensions of openess

1) openness in goods markets (fully open is free trade)
2) Openness in financial markets (free flow of financial assets)
3) openness in factor markets (firms choose where to locate production)


What is the balance of payments

records of a country's international trade, borrowing and lending, capital and investment flows


What is the current account

records current (short-term) flows of funds in and out of a country


Why is service exports the focus?

many developed economies are focusing on serice exports. Developing economies specialise in lower cost manufacturing which is more readily available while developed economies have an advantage in highly skilled, more expensive labour


What is the net secondary income?

transfers made to residents of other countries - transfers received by Australians. This includes overseas aid, pensions and migrant's funds.


What is net primary income?

income received by Australian residents from investment in other countries - income paid overseas on investment in Australia.


Why is net primary income persistently negative

Includes profits, dividends and interest repayments persistently negative in Australia as there is insufficient domestic savings leads to australians borrowing from abroad and foreign investment generates dividends and profits, which flow from overseas.


What is the capital account?

records migrants' asset transfers, debt foreign and sales/buying of non produced, non-financial assets.


What is the financial account?

records purchases of physical and financial assets a country makes abroad and subtracts foreign purchases of these. Includes directs investment, portfolio investment, financial derivatives, RBA assets


What do the balance of payment =



What is the nominal exchange rate?

value of one country's currency in terms of another


formula for the real exchange rate?

real exchange rate = domestic price level/foreign price level


What are 6 factors that can change the exchange rate?

1) changes in overseas demand for australian goods and services
2) changes in the desire to invest in Australia and Australian firms to invest overseas
3) changes in expectations of currency traders
4) changes in income and economic growth
5) changes in relative interest rates
6) speculation


What is a freely floating exchange rate

determined entirely by the free market


what is a fixed exchange rate?

value of currency is fixed against the value of another currency


What is a managed exchange?

currency is allowed to float in a pre-defined rage, outside of which gov intervention is used


What is the gold standard

National currency is redeemable in a certain amount of gold and all currencies adhered to a common standard.


What is the impact of currency appreciation

1) revenue in au falls for exporters
2) exports fall for things whose prices is determined in Australia as price is higher
3) imports are cheaper
4) NX falls


Define a flow

movement of real and financial resources across borders during a period of time


Define a stock

accumulation of those flows at a points in time


What does the AE model suggest about the international balance?

AE model and associated national income accounting suggests domestic savings that exceed domestic demand go overseas and vice-versa


Define terms of trade

ratio of export to import prices, higher means earning more on each unit of exports than it pays for imports


Formula for net foreign liability

net foreign debt + net foreign equity


What happened with Japan's gov debt

very high debt level but mostly owned by the Bank of Japan and private people in Japan. It doesn't have to be repaid but it limited scope for spending.


Why is fiscal policy less effective in open economies?

- if borrowing from domestic, interest rates rise
- if borrowing from global financial markets, there is little to no interest rate effect unless gov spending lead to higher inflation
- higher interest rates can lead to crowding out and less exports


Why does monetary policy become more effective in open markets

- expansionary policy leads to interest rates being lower
- higher investment and consumption
- lower exchange rate
- higher net exports


What are the three elements of the policy trilema

1) stable exchange rate
2) monetary policy autonomy
3) free financial flows


What is the policy trilema

a country can only pick 2 of the 3 elements


What were the Hawke-Keating reforms?

-until 1970's Australia was relatively closed off
- stagflation hit and the active use of keynesian demand management
- tariffs were cut, the dollar was floated, commonwealth and quantas privatised and rba became independence


What is the twin deficit hypothesis

high persistent public dissaving (G>T) would lead to a compensating borrowing from overseas in the form of a persistent trade deficit. Doesn't match with Australia as we had budget surpluses and current account deficits.


Why is the policy trilema a thing?

When a country fixes its exchange rate against the US dollar and is also open to foreign capital, if its central bank sets interest rates above those set by the Fed , foreign capital in search of higher returns would flood in. These inflows would raise demand for local currency , evenutally the peg with the dollar would break.

If interest rates are kept below those in America, capital would leave the country and the currency would fall.