CHAPTER 18 International trade and finance Part 3

Flashcards covering key concepts from the International Trade and Finance lecture notes.

What determines the demand for Australian dollars?

Determined by the demand for Australian goods, services, and assets.

What determines the supply of Australian dollars?

Determined by the level of Australian purchases of overseas goods, services, and assets.

What does the exchange rate represent?

Equilibrium in the FOREX market.

What is a flexible or floating exchange rate system?

A system in which countries allow their currencies to adjust continuously according to the forces of supply and demand.

What are the four sources of shifts in supply and demand for foreign exchange?

Changes in tastes and preferences across countries, changes in relative incomes across countries, changes in relative price levels across countries, and changes in relative real interest rates across countries.

What is appreciation?

A rise in the price of one currency relative to another.

What is depreciation?

A fall in the price of one currency relative to another.

Ceteris paribus, what is the impact of a lower-value AUD?

Increases the competitiveness of a country's exports and import-competing industries; exports seem cheaper to foreigners, and imports are more expensive.

What are the advantages of a strengthening (appreciating) dollar?

Australian consumers see lower prices on foreign goods; lower prices on foreign goods help keep Australian inflation low; Australian consumers benefit when they travel to foreign countries; Australian investors can purchase foreign shares and bonds at 'lower' prices.

What are the disadvantages of a strengthening (appreciating) dollar?

Australian exporting firms find it harder to compete in foreign markets; Australian firms in import-competing markets find it harder to compete with cheaper foreign goods; Foreign tourists find it more expensive to visit Australia; It is more difficult for foreign investors to provide capital to Australia.

What are the advantages of a weakening (depreciating) dollar?

Australian exporting firms find it easier to sell goods in foreign markets; Import-competing firms in Australia can make higher profits; More foreign tourists can afford to visit Australia; Australian capital markets become more attractive to foreign investors.

What are the disadvantages of a weakening (depreciating) dollar?

Australian consumers face higher prices on foreign goods; Higher prices on foreign goods contribute to higher inflation in Australia; Australian consumers find traveling abroad more costly; It is more difficult for Australian firms and investors to expand into foreign markets.