1. Understanding Australia’s Place in the Global Economy

2. Why does Australia’s place in the Global economy matter?
To understand the impacts of changes in the global economy on the Australian economy, you need to consider the linkages between Australia and the global economy, that is:
Australia’s trade patterns and trade policies
Australia’s financial relationships with o/s countries
Influence of the exchange rate on the structure and performance of the Australian economy.

3. Why does Australia trade?
Australia has natural resources that are demanded by other countries
Our small population means we can not produce all our wants and we seek new technology and other items from other countries.

4. Australia Produces <2% of world economic output
Rest of world Production
Of this 2% of world production, Australia exports 25% of it’s production
Australian
Production
Exports
Other

5. We import 25% of what we buy
So, although we have little influence on the Global Economy, the Global Economy has a significant influence on us!

6. Australia’s trade patterns
1950s – Aust traded mainly with UK & other European countries
More recently, Aust has increased its exports to China, South Korea and ASEAN counties
This trend was a result of the UKs membership of the European Union (EU) which forced the UK to impose trade barriers on Aust

7. Aust responded to trade barriers by looking for export markets within the Northern East Asian and ASEAN countries
By 1960, Japanese economic growth was creating demand for product inputs such as minerals resulting in an increasing demand for Aust’s natural resources
As growth in Japan slowed, Aust began trading with countries experiencing high levels of growth

8. The Asia-Pacific is now the most important export market to Australia – by a significant margin
Exports to Japan peaked in 1980s
Trade with South Korea, China and ASEAN countries has grown rapidly
US & EU remain import sources of imports for business inputs and commodities

9. Japanese imports have reduced have the size since 1980s
Over the same period, imports from other countries in the East Asian region have almost quadrupled

10. Changing composition of trade
Aust exports have always been predominantly from primary industries due to our comparative advantage
Agricultural products eg wheat, wool and beef
Mineral products
Aust is less competitive in manufacturing markets and has continued its reliance on primary industries
High income economies have generally developed their manufacturing industries in the latter half of the 20th century

11. Composition of Imports has changed only moderately
Year
K goods (%)
Cons goods (%)
Int goods (%)
Services (%)
18.1%
15.5%
43.0
23.5
19.1
17.2
39.9
23.8
19.8
37.4
25.6
18.2
20.5
37.7
23.6
17.5
24.1
37.0
21.4
18.8
24.6
36.7
19.9
18.9
24.8
35.6
20.7
19.0
23.9
19.5
18.1
38.8
18.0
23.2
39.7
18.4
21.9
39.4
20.0
Sources
ABS
Catalogue
1350.0

12. Largely unchanged (1/5 of imports) Largely unchanged (1/5 of imports)
Year
K goods (%)
Cons goods (%)
Int goods (%)
Services (%)
18.1%
15.5%
43.0
23.5
19.1
17.2
39.9
23.8
19.8
37.4
25.6
18.2
20.5
37.7
23.6
17.5
24.1
37.0
21.4
18.8
24.6
36.7
19.9
18.9
24.8
35.6
20.7
19.0
23.9
19.5
18.1
38.8
18.0
23.2
39.7
18.4
21.9
39.4
20.0
Sources
ABS
Catalogue
1350.0
Largely unchanged (1/5 of imports)
Largely unchanged (1/5 of imports)

13. This all means that…
Australia’s composition of imports has been relatively stable of the past three decades

14. But what about exports?

15. Balance of Payments
The record of all transactions between Aust and the rest of the world over a given period
Consists of the current account and the capital and financial account

16. These transactions are NOT reversible!!!
Current Account
Shows receipts and payments for:
Goods and services
Transfer payments
Income flows between Aust and rest of world over a given period
These transactions are NOT reversible!!!

17. Shows receipts and payments for: Goods and services Transfer payments
Current Account:
Shows receipts and payments for:
Goods and services
Transfer payments
Income flows between Aust
and rest of world over a given period
These transactions are
NOT reversible!
Balance of Payments:
Record of all transactions between
Australia and the rest of the world
over a period of time
Capital & Financial Account:
Shows the:
Borrowing
Lending
Sales and purchasing of assets
Between Aust and rest of
world over a given period of time
These transaction ARE reversible!

18. Capital and Financial Account
Shows the:
Borrowing
Lending
Sales and purchasing of assets
Between Aust and rest of world over a given period of time

19. Aust’s BOP Current Account
Type of Transaction
Debit (payment abroad)
Credit (payment to Australia)
Exports of goods
Imports of goods
Exports of services
Imports of services
Int & profits payable by o/s residents
Int & profits to o/s residents
Source: Economics HSC. Cambridge, p.125

20. Aust’s BOP Current Account
Type of Transaction
Debit
Credit
Exporting iron ore
Importing clothing
Donating to o/s charity
Tourists coming to Aust
Int paid on o/s loan
Int paid on
Source: Economics HSC. Cambridge, p.125

21. Supply of foreign exchange
Financial Inflow

22. Reliance on raw materials
Australia’s exports are very heavily reliant on commodities (raw materials).
Demand for these products does not grow quickly and are usually highly influenced by fluctuations in the world economy.
Many of our imports are capital products.
This means that whenever Australia wants to expand, it will increase imports of capital, thus worsening the trade position.

23. Demand for AUD
Represents all those people who want to buy AUD, including:
Investors who wish to invest their money in Australia will need to convert it
Trading partners who wish to purchase our goods and services need to convert their currency to complete the transaction

24. Trade Flows
Money moving into or out of a country as a result of global trading
Money flows out of Australia as a result of importing
Australia
Money flows into Australia as a result of exporting

25. Importing Adds currency of the importing country to the market
Creates demand for the currency of the exporting country
Because goods are typically purchased in the currency in which goods are produced, so importer must exchange their currency

26. Effect of trade
Countries who rely heavily on imports will see a weakening effect on their currency
Export oriented countries will have a strengthened currency

27. How do we value a currency over time?
Measuring a currency against one other currency is misleading as both currencies will be moving for a number of reasons

28. Trade Weighted Index (TWI)
Provides an indication of the value of the $A against the currencies of Australia’s major trading partners
In Sept each year, the RBA measures the TWO based on the volumes of trade for the previous financial year
The TWI must cover at least 90% of Australian trade

29. Limitation of TWI
Weighted according to volumes of trade irrespective of the currency in which export and import contracts are invoiced

30. Reserve Bank Intervention
A dirty float
Fixed exchange rates
Managed flexible peg
Floating exchange

31. A dirty float
RBA intervening potential volatile deviations are likely and will have harmful effects pon the domestic economy, it acts as a buyer or seller to stabilise the $A
If $A is deteriorating rapidly, the govt will buy $A
If the $A is appreciating rapidly, the govt will sell $A

32. Reality Check
In second half of 2008 the $A depreciated by a third of its value to the $US
The RBA purchased $3.3 billion $A to depreciate the economy
The RBA sold the currency when the $A recovered in value
This generated profits for the govt

33. Flexible Exchange Rates
Prior to November 1976
RBA officially sets exchange rate (not the market)
RBA sets rate by either buying or selling $A in the forex market
Therefore, the govt requires foreign reserves of foreign currency and/or gold to make the trading possible

34. Fixed Rate to appreciate the $AS
Govt buys foreign currency in exchange for the $A
In this case, the govt is buying the excess supply ie Q2-Q1
$A increases from 80c to 90c
90c
fixed rate
80c
market rate D Q1 Q2

35. The managed flexible peg
Operated in Australia from Nov 1976 to Dec 1983
RBA ‘pegged’ the value at 9am each day and that price would operate throughout the day
Provides more flexibility than the fixed rate
Does allow the rate to move away from what it would have been if determined by market forces

36. Negative Effects of an appreciation
X become more expensive resulting in demand, resulting in X income and deterioration of CAD in medium term
M become more attractive, M spending worsening CAD.
M spending and X rev will ec growth
Foreign investors are deterred from investing, financial inflows (depending on speculation)
value of foreign income earned on o/s investments
value of foreign investments

37. The following graph shows a movement in the supply and demand of $A against the $US on the forex market. Which of the following may have caused a shift in demand for the $A from DD to D1D1? S
Price of $A in $US terms D1 D
Quantity of $A
A drop in tourism into Australia
A drop in interest rate levels in the Australian economy
An appreciation in Australia’s exchange rate
A significant boost in Australian export sales due to an Austrade promotion