Major exchange rate question - from syllabus! (1 Viewer)

[rsingh]

Hey guys,

the syallbus wants "the effects of fluctuations in exchange rates on the Australian economy"

I have the simple stuff (+ve/-ve effects for app/dep) but i now need the more complex stuff .. in terms of cad, terms of trade, and balance of payments .. if you guys could give me a rundown of positive/negative effects for a rise/fall in $A, that would be great!

Thanks.

 

[Will Hunting]

I'm not sure where to draw the line between your "simple stuff" and the "complex stuff" you're still missing, so I'll give you a quick speal on the lot, just to be sure

Movements in the value of the $A will, obviously, have greatest instrumentality in external issues, by the definition of the Australian (A'n) exchange rate as the value of $A in terms of foreign currencies.

An appreciation in the $A is positive because:

- The value of A's external debt, in foreign currency terms (since receipts are denominated in foreign dollars) will fall due to the relative rise in currency value between lender and debtor nations. Furthermore, servicing costs on this debt will fall since repayments are made in foreign dollars.

- Levels of imported inflation will decline since imports are now cheaper.

- A's international credit rating should improve, along with it's attractiveness as a site for overseas capital investment. A rise in foreign confidence in the A'n economy could force the $A further upwards, where investors exert greater demand for $A in FOREX markets due to anticipation of further rises, thereby contributing to the predicted rises.

An appreciation in the $A is negative because:

- Imports become cheaper and exports become more expensive, prompting increased relative (net) outflows on the Goods and Services item on the Current Account and contributing to a rise in the CAD.

- Overseas investment, and therefore capital inflows on the Capital and Financial Account, could weaken in the short term, unless investors forecast a continued ascent in the value of the $A.

Overall, an appreciation in the $A will usually improve A's TOT and widen A's CAD, in the case of G & S trade, and improve A's CAD, in the case of external liabilities and the Income item on the Current Account.

A depreciation in the $A is positive because:

- Imports become more expensive and exports become cheaper, improving A's international competitiveness, strengthening domestic industry and leading to an improvement in A's CAD in the medium term.

- The level of capital inflows could mount due to both the lower costs involved and, also, improvements to foreign investor confidence accompanying the growing competitiveness of the A'n economy.

- Since a depreciation in the $A makes A'n products more competitive on global markets, a steady fall in currency value should engineer sustainable economic growth, provided inflation does not outstrip any of the benefits of the depreciation.

A depreciation in the $A is negative because:

- The value of A's external debt will, by the "valuation effect", rise in response to the decline in the relative value of the $A. In addition, the servicing costs imposed on this debt will place a greater burden on A'n debtors , manifesting in increased outflows on the Current Account and a widening CAD.

- If imports are highly price inelastic, then the increases in import prices that accompany a decline in the value of the $A will result in a higher deficit on the balance on G & S on the Current Account.

- Levels of imported inflation will rise since imports are now more expensive. This may necessitate changes to macroeconomic policy settings and, in particular, rises in general interest rate levels, tightening monetary policy and curbing aggregate demand and, therefore, economic growth.

Overall, a depreciation in the $A will usually weaken A's TOT and improve A's CAD, in the case of G & S trade, and widen A's CAD, in the case of external liabilities and the income item on the Current Account.



Hope this works out for you, bro. Feel free to fire away with any more questions if you're still having trouble.

 

[rsingh]

Thanks a lot dude!
You've really been a help. You've actually allowed me to see the exchange rate from a different angle.

I do have a question. Regarding the CAD, I'm confused about how you said in the case of G+S and in the case of external liabilities and the net income item on the Current Account? Just a lil' confused with that .. i'm not sure what you mean ..

Anyway .. juss a lil' hitch i hope ..
thanks again for your help!

 

[Will Hunting]

I do have a question. Regarding the CAD, I'm confused about how you said in the case of G+S and in the case of external liabilities and the net income item on the Current Account? Just a lil' confused with that .. i'm not sure what you mean ..

No worries, man.

In the case of G & S trade, an appreciation in the $A will make imports cheaper and exports more expensive. This will make the net outflow of funds on the BOGS increase (unless import/export volumes are adjusted). This will shift the Current Account toward deficit.

However, in the case of external liabilities and the Income item on the Current Account, an appreciation in the $A will make the size of Australia's foreign debt, and any servicing costs, less. This will make the net outflow of funds on the Income item decrease (unless capital inflows increase by a great margin). This will shift the Current Account toward surplus. This is the reverse of what happens in the case of G & S trade.

This same logic can be applied to a depreciation, too, except that it's the reverse.

What is meant by this is that an appreciation will have opposite effects on the BOGS and the Net Income Account. The same can be said of a depreciation.

As to finding the effect of a currency movement on the size of the CAD in total, you would need actual statistics for this. Even then, though, the sheer volume of other factors involved would make this task trying, at best.

(i.e. It's like science, where too many uncontrolled variables can mean that it is impossible to analyse one particular variable in isolation. Imagine that the CAD shift is the dependent variable. To test the effect of a currency movement on the CAD, you would need to make the currency movement the independent variable, but how can you do this when the CAD responds to so many other uncontrolled variables?)

 

[rsingh]

Thanks man, I get ya.
haha .. thanks dude .. that clears a lot of things up. thanks again.

i hope i'm not annoying you and taking up too much of your time .. but i do have juss anoither question .. i guess you did the hsc last yr and went well in economics .. i'm not very good at extended responses in eco .. juss wondering if you could offer me any tips so to increase my marks ... i've juss been getting 13-15/20 for all my responses .. imy teacher says to write reports for extended responses .. however everyone here is writing essays??? so i'm not too sure .. any adive or examples would be appreciated..

thanks again dude .. you've been a big help..

 

[Will Hunting]

Yeah, no worries, man!

I'm HSC 2005 by the way, so I'm just as inexperienced as anyone else

The marks you're describing aren't bad, bro. Most of my classmates average 14-15 in any of their 20 mark tasks. They could be better, though, but I just want you to know you aren't screwed or anything. You have plenty of time to pick up, and provided you really deliver in the HSC exam, you can redress anything that's happened (to an extent)

First of all, reports and essays. What's the difference? Although I'm sure there may be differences, neither I, nor my teacher, have ever found any cause to distinguish between the two (you should note, however, that essay is the most commonly used term hereof). As to tightening the screws on your essays to start pulling those 18-20s, the advice I'm able to offer on this is limited, and, furthermore, the work I'm able to do to help you is almost naught (unless you want me to tutor you or something, but I'm in Byron, so... ya, good luck with that one! )

There are a few pointers I can throw your way, though. Firstly., don't throw away your past papers or burn them or anything like that. The only way you're going to improve upon deficiencies is to identify areas of weakness in your work, learn from them, and take measures to ensure they don't happen again (or, at least, not too often). Hang onto your stuff, ask the teacher as much as you like about the places in which you've been penalised and, yeah, don't view these things as failures. Look at them not as disasters but as positive events from which you can learn and grow.

Of course, you need to synthesise and seamlessly integrate statistics and examples into your argument, which, never forget, is what any essay is. It's like English without all the bullshit Just make certain you're always well stocked on facts, figures and such, and, above all, make sure that you know your stuff! Actually understanding the Economics and, in particular, the actual syllabus content, will boost your marks tremendously, without you even knowing it Finally, try not to think or worry too much about structure and the fine points of essay writing, especially during the actual exam. It will take you enough time as it is getting everything you need down on the paper without you agonising unnecessarily. Just relax, be confident, and all these fine points should just flow.

Oh yeah, I could fax in a few of the essays I got full marks in if you want, or my past exams, if you think tht might help, but remember that the improvement must come largely from you and your own actions.

I hope you get something worthwhile out of this. Hope I've been able to help. Cya!

 

[Mandy101]

^Agree with everything you said, except the bit about the structure. It is important - one of the prerequisite's for the top band is "a sustained, logical and well structured response"

 

[sunjet]

Hey.. I did this for my Half yearly exam, got 17/20 which was top mark. l'll scan it sometime if you really want it, its about 8 pages written.

 

[Lorie]

look at last years HSC exam, one of the essay questions was simliar to this. Not sure if they are gonna realise astandards package, but if they do, some of the essays for that essay will make it clearer.

 

[Will Hunting]

^Agree with everything you said, except the bit about the structure. It is important - one of the prerequisite's for the top band is "a sustained, logical and well structured response"

Yeah, I know it's important. It's also easy to master, though. All I was saying was not to give it any unduly great attention, because of how easy it is (and how naturally it should come out).

 

[rsingh]

Thanks for your advice guys. It has given me a boost in my confidence!

I know I have to put in the hardwork myself, but I was wondering if you could post or e-mail me you're past extended response reponses that you've done well in. I just want to get a "feel" and know what i need to be doing.

that would be great thanks!