VCE Economics Unit 3 AOS 3

Gains from international trade

lower prices, greater choice, access to resources, economies of scale, and increased competition and efficiency

Balance of Payments

A record of financial transactions between Australia and the rest of the world.

Current Account Deficit

When debits are greater than credits from the trade balance and net incomes

Debit

Money paid by Australians to an overseas party

Credit

Money received by Australians from an overseas party.

If Australia has a $30bn current account deficit. The value of the Capital and Financial Accounts will be:

$30bn surplus

Trade Balance

This is money received (credits) for exports sold minus money paid (debits) for imports.

Net incomes

This is the difference in value between income credits received from overseas minus income debits paid out abroad. Incomes include wages and salaries received for providing labour, interest relating to loans., dividends and profits relating to business ownership. This income is either received from overseas or paid to foreigners.

Financial Account

the total value of credits for investments and borrowing received by Australia from abroad (the inflow of funds) minus total value of debits for investments and lending by Australians abroad (the outflow of funds).

Components of the Balance of Payments

Trade Balance, Net Incomes, Capital Account, Financial Account

Cyclical influences on Australia's current account balance:

AD Factors that affect the value of X-M.

Examples of strong AD conditions in Australia

High disposable incomes

Low interest rates

High consumer and business confidence

Structural influences on Australia's current account balance:

Costs of production, savings and investment gap.

Net Foreign Debt

The difference between what Australia has borrowed from overseas lenders and what Australia has lent to overseas borrowers.

Net foreign equity

Foreign owned Australian assets minus value of foreign assets owned by Australians.

Exchange rate

the value of one currency expressed in terms of another.

How is the value of the AUD decided?

Floating exchange rate system where the rate is decided by the supply of and demand for the currency.

Appreciation

increase in the value of a currency

Depreciation

a decrease in the value of a currency

Appreciation of AUD will be caused by:

Increase in demand for AUD from foreigners, Decrease in supply of AUD by Australians.

Depreciation of AUD will be caused by:

Decrease in demand for AUD from foreigners, Increase in supply of AUD by Australians.

How is the value of the AUD measured?

Individual exchange rates, Trade Weighted Index (TWI)

Trade Weighted Index

represents the average exchange rate for a basket of foreign currencies each weighted according to its relative importance for Australia's trade

Factors affecting the value of the AUD

relative interest rates, commodity prices and the terms of trade, demand for exports and imports, foreign investment, relative rates of inflation, credit ratings and speculation

If interest rates overseas are higher than they are in Australia:

increase supply of AUD leading to a depreciation of the AUD

interest rates in Australia are higher than they are overseas

increase demand for AUD leading to an appreciation of the AUD

To buy Australian exports, foreigners need:

AUD

To buy imports, Australians need:

Foreign currency

Terms of Trade (formula)

Export price index/import price index x 100.

Terms of Trade (definition)

measures the ratio for the average price the world is prepared to pay Australia for our exports against the average price we pay the world for our imports

Factors that affect the Terms of Trade

Commodity prices, Production costs in trading partners.

Australias main export

Commodities

If the price of commodities increases

price of exports will increase leading to more favourable terms of trade

a decrease in the production costs of trading partners

decrease in the price of imports in Australia leading to a more favourable terms of trade.

International competitiveness

The ability of a country to compete effectively and become attractive compared to foreign made goods and services

How Australia can compete with foreign goods and services

Lower price, higher quality.

If Australian made goods and services are more internationally competitive:

Australian exports are more attractive leading to an increase in X

Local Australian goods are more attractive leading to a decrease in M.

Factors that influence international competitiveness

productivity, production costs, availability of natural resources, exchange rates and relative rates of inflation

What will happen if demand for Australian X increases?

Price of X increase (improving ToT)

X increase (increasing AD)

More credits in Current Account (improving Current Account Balance)

Ex rate's impact on AS?

A depreciation of the AUD will make imported factors of production cheaper, decreasing costs of production and increasing AS.