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Unit 3 AOS 3 (Exchange rates (Factors affecting the value of the exchange…
Unit 3 AOS 3
Exchange rates
Measured in USD or the trade weighted index which is an index based on the currencies of our major trading partners weighted based on how much we trade with them
Appreciation means that the value has increased caused by either an increase in demand or decrease in supply of the AUD
Depreciation means the value has decreased caused by either a decrease in demand or an increase in supply of the AUD
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Impact on SSEG - they act as an automatic stabiliser, increasing or decreasing growth when the opposite is occurring to ensure growth is not excessive e.g. when growth is strong = appreciation = decreases demand for exports = decreases growth
Full employment - similar stabilising effect, when unemployment is high because growth is low the AUD will depreciate and tend to increase employment
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Low inflation - appreciation of AUD = reduction in inflationary pressures as on the demand side it reduces net exports and thus demand inflation and on the supply side it makes imported inputs cheaper and thus reduces cost inflation
CAD - appreciation of AUD = increases CAD as exports are more expensive and imports are cheaper = reduce surplus or increase deficit of trade balance
Terms of trade
Index which measures the ratio of average prices for Australian exports to the average prices for Australian imports
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Impact on living standards - increase in the terms of trade tends to increase living standards as if export prices rises, Australian exporters receive more profits which can be passed on as increasing in wages, investment and dividends, if import prices drop this reduces the costs of imported capital and intermediate goods which can be passed on as a decrease in selling prices
SSEG and full employment - a higher ToT will raise consumption and investment, increase AD and real GDP
Low inflation - higher ToT caused by decreases in import prices will reduce inflationary pressures as it reduces the risk of cost inflation as the costs of imported capital and intermediate goods decreases BUT if caused by increases in export prices this can increase inflationary pressures as it increase demand inflation (increased net exports)
CAD - higher ToT will reduce the CAD as increases in export prices or decreases in import prices will increase the trade balance
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Balance of payments
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Relationship between the CAD and CAFA - if Australia runs a CAD, money must be borrowed in order to finance this debt which increases CAFA therefore Australia must run a CAFA surplus in the same period
Trade liberalisation
Pursuing government policies that promote free trade between countries such as reduction in tariffs, removals of import quotas
Impact on international competitiveness - forces Australian firms to compete in the global market and thus increase technical efficiency so they can compete better on price, encourages them to focus on areas of comparative advantage, reduces costs of imported inputs
SSEG - helps to achieve as it encourages technical and allocative efficiency thus increasing AS and reducing the costs of imported inputs = increases AD
Full employment - helps to achieve as it encourages growth and thus the derived demand for labour BUT may increase structural unemployment in the short term as firms are outcompeted and shut down
Low inflation - helps to increase AS and thus reduce the risk of demand inflation and reduces the costs of imported inputs and reduces CPI directly decreasing cost inflation
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CAD, NFD and NFE
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NFD
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Reasons to worry about NFD - can default on debt, too big of an NFD would down grade Australia's credit rating which would result in higher interest payments, more national income is devoted to paying off the debt
Reasons not to worry about NFD - most of it is private borrowing, there has been an improvement in current times, if GDP is growing at a fast enough rate to afford the level of NFD then it is okay