1. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Chapter 25 External policy External policy FDI controls Export promotion A$ stability Industry assistance

2. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-2 Lecture Plan External policy and external balance Objectives of external policy The current account and economic policy The capital and financial account and economic policy The exchange rate and economic policy

3. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-3 External Policy One of the major instruments used by governments for promoting stabilisation and economic growth External balance = a level and pattern of transactions with the rest of the world consistent with the welfare and growth of the Australian economy

4. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-4 External Balance Versus Domestic Balance The government is attempting to achieve some degree of balance between total payments to non- residents and total receipts by residents (companies, individuals, government) Since the float, fluctuations in the balance of payments have been transferred to the exchange rate

5. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-5 Objectives of External Policy A competitive export sector A steady capital inflow A reasonably stable exchange rate

6. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-6 The Current Account and Economic Policy The trade balance is affected by three groups of policies: Export promotion Industry assistance and structural adjustment Support to international competitiveness of manufacturers

7. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-7 Advantages of Capital Inflow Provides scarce funds to our economy Creates jobs and new skills Helps building of technology Can generate exports

8. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-8 Disadvantages of Capital Inflow Burden of foreign debt Increased degree of foreign ownership Discourages local research and development Foreign investment tends to de-industrialise Australia

9. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-9 Government Influence on Net Capital Inflows Direct controls over private capital flows – Removal of capital flows restrictions after 1983 Indirect measures to encourage capital inflow – High domestic interest rates – A depreciating exchange rate

10. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-10 The level of foreign investment in Australia as at 31 December 2003 was A$978.1 billion. Leading investor countries were: Source: ABS, International Investment Position, Australia: Supplementary Country Statistics, cat. no. 5352.0, July 2004. Level of Foreign Investment in Australia

11. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-11 Australian Investment Abroad ‘Exporting Australian jobs?’ Suitable for labour-intensive activities Overcoming the natural barrier of high transport costs Required by overseas artificial trade barriers Benefits of globalisation for the company Better company profit prospects

12. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-12 Australian Investment Abroad by Destination, A$ Billion, %, Dec. 2003 Source: ABS, International Investment Position, Australia: Supplementary Country Statistics, cat. no. 5352.0, July 2004

13. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-13 The exchange rate policy is undertaken by the government through the Reserve Bank After the floating of the A$ the exchange rate is set by the demand for and supply of A$s The government allows intervention by the Reserve Bank only to smooth out A$ fluctuations A floating dollar allows more government control over money supply The Exchange Rate and Economic Policy