Australia’s Place in the Global Economy

Structural change: need this to diversify export base through better labor practices, sustained productivity improvements, address, maintain wage growth w/prod growth, idea of small public sector is more competitive.

Savings: need more to avoid debt trap. “Today”s account deficit reps the amt by which national inv exceeds national savings and so has to be covered by borrowing the savings of foreigners.”

A high Current Account Deficit will see growing liabilities, service costs, and volatile ex rates, restricted eco growth, concretionary policies and loss of investor..

Government addresses through tightening FP and MP to accelerate MER less eco growth and CAD. LT sees unemployment rise but this sees less inflows and positive effects on CAD.

EXCHANGE RATES

• The price of $AU to other currencies, central role in relations balance of trade and global economy. Impacts international competition, trade flows, IR and inf.

• Read more in Economics

  « Our Passions, Self-interest, and the Economic Mess

  Key Economic Issues Facing Australia in 2008 »

  Measured to other individual currencies when the value of one unit of currency is stated relative to another currency. Changes reflect a change in purchasing power.

  • Indirect quotation: one domestic to it’s for. equivalent $1AU = $US0.75

  • Direct quotation: domestic units needed to buy foreign $AU1.33 = $US1

• TWI measured against 23 other currencies of Australia’s major trading partners, which account for 92% of Australia’s aggregate trade. More accurate.

• Factors affecting Supply and Demand for $AU:

Demand factors for Australian dollar are:

Strong global economy

Tourism from overseas

Expects a rise/ fall

International competition level

Overseas payments into Australia

Supply factors of Australian dollar are:

Imports Level in Australia

Tourism overseas from Australia

Expect a fall/rise

Australian payments overseas

Factors leading to appreciation/depreciation:

Appreciation factors

Increase in Australian Interest rate or decrease in overseas interest rate

Increased investment opportunities in Australia

Increase in price of export commodities

Increase in Australia’s terms of trade

Increase in competition levels of Australia’s exports

Decrease in inflation

Increased demand for Australian exports

Depreciation factors

Decrease in Australian interest rate or increase in overseas interest rate

Decreased investment opportunities in Australia

Decrease in commodities prices

Decrease in Australia’s terms of trade

Decrease in international competition levels

Increase inflation

Increased demand for imports into Australia

Exchange rates determined:

• FIXED: RBA sets rate, governmentt maintains by buy/sell foreign $ for $AU.

  • PEG: RBA sets daily, flexible but argued to have overvalued $AU.

  • FLEXIBLE: float freely determined by the forces of D and S, Dec “83.

  • MANAGED: similar to flex but govt can intervene.

• Influence of RBA and govt seen in:

  • DIRTYING: like managed, RBA can buy/sell $AU to stabilize.

  • MP: RBA will manipulate cash rate to indirectly impact $AU by IR.

• How exchange rate fluctuations impacts the Australian economy:

Positive appreciation effects

More purchasing power

Reduced interest in servicing debt

Decrease in the value of overseas Australian debt

Decreased inflation pressure due to cheaper imports

Negative appreciation effects

Decreased Exports profits due to increase in price in less demand for exports

Decreasing Current account deficit due to increased level of imports

Increased imports and reduced economic growth

Increased dollar amount of overseas investment in Australia

Decreased value of foreign income

Increased demand for imports in to Australia

Positive depreciation effects on Australian economy:

Cheaper exports

Increased in imports prices and less demand for imports

Increased growth

Increase in foreign income earned

Increase in the value of foreign assets

Cheaper to invest in Australia

Negative effects of Australian Dollar depreciation

Less purchasing power

Increased servicing costs

More foreign debt

Increased inflation pressure

FREE TRADE AND PROTECTION

• Australia”s policies see overall reduction on tariffs from 1968 (36% average) to the unified 25% cuts in ‘73 and the 3.1% average by 2005. Tariffs are slow to decline in TCF and PMV.

• Not all barriers have been reduced due to dumping, infant, self-sufficiency and the want to balance our imports to our exports.

• The implications of less protection in Australia:

  • INDIVIDUALS: more Goods which has higher quality, lower $, more real income and structural unemployment.

  • BUSINESSES: efficiency improvement, diverse exports base, less costs, can have more profit.

  • GOVERNMENT: lost revenue, more welfare, bigger CAD, less inflow pressure.

• The implications of overseas protection on Australia:

  • Agriculture is at an international disadvantage, impedes global eco growth, Australia seeks domestic trade agreements

  • Uruguay round of WTO talks saw decreased agriculture subs for US and European in compliance with the WTO agriculture rules on governmentt subs, more access in service trade saw more service exports

  • Doha began 2001 (probably due to agricultural issues) saw Australia seeking further market access