Economics: Australia's Place in the Global Economy Statistics

Direction of Trade Flows Trend

Movement from US and Europe as major trading partners to larger focus on Asian nations I.e. China due to their growing middle class and need for commodities. China now makes up 31% of Australia's imports and almost 30% of exports. Australia lost a lot of trade with the EU area following the establishment of the EU in the 1990s, where trade protections were implemented to outside nations, however following BREXIT, Britain’s share has begun to increase marginally.

Describe the trends in the direction of Australia’s trade over the past two decades

In the early 2000s, China experienced rapid growth that enabled them to become Australia’s largest trading partner in 2007. The 2020s have seen major shifts in the direction of Australia’s trade, with the rapid growth in economies such as South Korea, India, and Indonesia, along with several others, causing exports from Australia to these economies to grow at an average rate of more than 10%. This follows a massive decrease in trade to European nations, especially as trade to Asian emerging nations such as India grows in importance in order to sustain the Australian market.

Trends in Australia’s composition of trade

Minerals and metals has grown from 49% in 1990 to 71% in 2024. Manufacturing has halved in significance whilst rural agriculture has fallen from 29% to 13%. Services has grown in importance from 12% to 22%. Intermediate goods make up a large proportion of exports. Australia is the largest producer of iron ore, and also exports predominantly coal. Agriculture and mineral exports make up 2/3 of Australian export earnings

Trends in Australia’s financial flows

The floating of the exchange rate in the early 1970s and the deregulation of the banking system (along with the relaxing rules on foreign direct investment) made it easier to shift finance between countries. Australia has a high amount of financial inflows as a result of the resource-intensive nature of mining and the savings-investment gap. The amount of financial outflow has increased due to superannuation funds leaving australia. Total Foreign Investment in Australia is approximately $4.7 trillion (2023)

Trend in the size of Australia’s Balance of Payments

Australia has had a sustained Current Account Deficit averaging at around 4% of GDP, with the exception being in the period between 2019 and 2022, when the COVID19 pandemic increased the marginal propensity to save of Australians. This brought the CAD to 3% of GDP at its peak in 2020, steadily decreasing again to another deficit in the 2023 to 2024 period. The IMF only considers a CAD an issue if it averages over 4%, or 6% in the short term.

Trend in the composition of Australia’s balance of payments

Balance on goods and services has seen improvement in recent years, in comparison, a significant deficit in the primary income (high international borrowing/FDI) results in a CAD.

What are equity flows?

The amount foreigners have invested in Australia minus the amount of Australian investment overseas. This is the purchase of assets, dividend flows, and sale of assets

Balance of Payments

A record of all transactions made between entities in one country and the rest of the world over a defined period

Comparative advantage

The ability of an individual or country to produce a good or service at a lower opportunity cost than others

Debt servicing costs

The price required to cover debt repayments

Dumping

The practice of selling goods in a foreign market at prices below the home market price or cost of production, may be to establish market control or to dispose of a surplus

Floating exchange rate

An exchange rate system where a currency’s value is determined by supply and demand via market forces in the Foreign Exchange market

Protection

An artificial benefit given to domestic firms by the government in order to give them an advantage over international competitors. Shields businesses from international competition, resulting in allocative inefficiency

Tariff

A tax on imported goods to make them more expensive than domestically produced goods. It is a form of government revenue (the gov. pockets the difference)

Quota

A limit on the amount of a good that can be imported, forcing domestic consumers to buy the domestically produced goods. I.e. China met their quota faster than expected because of their rising middle class.

Subsidies

A payment made to domestic producers to cover some of their costs, making them more competitive (gov. expenditure)

Local Content Rules

Having rules that mean that a certain percentage of parts to a good must be made in the domestic country.

Export subsidies

Payments to domestic businesses to allow them specifically to grow their capacity to export

Infant industry argument

New industries find establishment hard due to initial costs and problems → Protection should be provided to let them establish themselves

Issues with the infant industry argument

Some infant industries have received protection for so long they become ‘geriatric’. These industries may never become competitive, and protection can be seen as retaliatory.

Dumping argument

Due to dumping, local businesses often fail and unemployment results as local businesses cannot compete with low, foreign prices. Once the local competition is eliminated, the foreign producer may raise prices again. This is one of the few economically viable arguments for protection. WTO has an anti-dumping agreement

Protect domestic employment argument

The most common argument used to justify the implementation of protectionist policies, as by protecting a domestic economy from cheap foreign foods, domestic jobs are saved. This argument is not a valid one because protected industries misallocate resources. The employment is structural.

Defence argument for protection

Some nations argue that they need to protect industries which are related to the defence of the country (i.e. agriculture → COVID19). Still misallocates resources.

Benefits of protection

• Protect industries providing goods and services in times of turmoil

• A nation can sanction another country with suspect practices

• Protects infant industries

• Protects from dumping

• Promotes domestic employment

• More domestically produced goods will be demanded

• Maintains living standard

Costs of protection

• Higher prices for domestic consumers under tariffs, quotas, and local content rules

• Decreases import spending, which may lead to other nations retaliating and not buying exports

• Props up inefficient industries which should be working towards increasing productivity

• Incorrect resource allocation means a misallocation of income as well

• Eventual removal of protection causes business failure and unemployment anyway.

Economic effects of tariffs

Stimulates domestic production and employment, reallocates resources towards less efficient producers, consumers pay a higher price and receive fewer goods (redistributing income from consumers to domestic producers), the tariff raises revenue for the government (not the primary objective), a retaliation effect can be experienced

Economic effects of a quota

Domestic producers supply a greater quantity of the good, stimulating production and employment, resources will be reallocated in the economy to the production of that good, consumers pay a higher price and receive fewer goods, no gov revenue, may lead to retaliation

Economic effects of a subsidy

Domestic producers supply a greater quantity of the good, stimulating production and employment, allocative inefficiency, consumers pay a lower price and receive more goods, but pay indirectly through taxation, subsidies impose direct costs on government budgets, abolished quicker and therefore preferred by economists

Cyclical factors affecting Balance of Payments

Domestic and global business cycles, commodity prices and terms of trade, exchange rates

Structural factors affecting Australia’s balance of payments

Australia’s high labour costs, narrow export base, small population, low household savings, capacity constraints

What are the dangers of a persistent high CAD (over 4%, or 6% short term)

Constraint on future GDP growth through tighter macro policies, loss of international investor confidence, compromise exchange rate stability, possibility of default on foreign loan repayments

What are the results of a persistent current account surplus?

Higher exchange rate, lower international competitiveness, inflationary pressures and lower domestic investment and consumption

What is the Current Account?

All transactions of a current nature such as exports and imports of goods and services, net primary income, and net secondary income. These are non-reversible.

What is the capital and financial account?

The Capital account records capital (financial) transactions which tends to be long-term, such as foreign aid. The financial account records financial transactions of an investment nature (direct, portfolio, and other investments)

What does the capital account include?

Non-produced, non-financial assets (mainly intellectual property rights) such as sales of patents, copyrights, trademarks, franchises, and conditional aid. Also includes assets migrants bring with them when they come to Australia and debt forgiveness.

What is a key link between the CA and the KAFA

In the long term, a capital and financial account surplus will result in an increased CAD. THis because while the OG investment is recorded on the KAFA account, the income payments are recorded on the CA.

Benefits of free trade in comparison to protection

comparative advantage and benefits that accrue as a result, allocative efficiency, economies of scale, competition and innovation, reduces prices and improves QoL, allows for economic development HOWEVER the benefits have not been spread evenly

What type of economy is Australia?

A small open economy, australia’s aggregate demand is significantly influenced by the prices and volumes of trade and financial flows with the rest of the world.

Why does australia have high investment flows into the country?

Resource-rich country with a lot of need for FDI in mining, savings investment gap, strong interest rate differential

What is the balance of payments?

A summary of all the financial transactions that Australia has with the rest of the world over a given period of time. It is an economic indicator of the relationship between Australia and the Global Economy.

What factors influence the demand for AUD?

Size of financial flows via interest rates (interest rate differential) and investment opportunities, expectations (i.e. speculators), demand for exports

What factors influence the supply of AUD

Level of financial flows via interest rates and investment opportunities, speculators, domestic demand for imports

Downfalls of a bilateral exchange system

Comparing the AUD against a single currency can create a misleading impression on the trends in the AUD, as there are unique factors that influence the AUD there are also unique factors that influence the value of other currencies.

What is the trade weighted index?

A measure of the value of the AUD against a basket of major trading partners. These currencies are weighted according to their significance to Australia’s trade flows.

Fixed exchange rate system

The govt or RBA officially sets the exchange rate by buying/selling foreign currencies in exchange for AUD

Managed exchange rate system

Similar to a fixed exchange rate system, but the currency is pegged or adjusted daily to variations in a major trading partner’s currency

Flexible/floating exchange rate system

A system whereby the value of a currency is determined through market forces

Benefits of a floating exchange rate system

More efficient method of determining the value of the currency, gain greater control over monetary policy, expose the economy to international competitive markets, cushions the economy from external shocks. No need to hold foreign currency reserves.

how is a fixed exchange rate maintained?

The govt or central bank uses foreign reserves to either buy or sell foreign currency in exchange for the AUD

Benefits of a fixed exchange rate system

Certainty over the value of the currency, more internationally competitive, controls inflation

Appreciation effect (long term)

Less competitive = bad for exports, imports cheaper = bad for ToT, lowers price of imports = good for inflation, more expensive to invest in australia = bad for foreign investment, interest repayments reduced = good for servicing foreign debt, valuation effect means value of debt reduces = good