Presentation is loading. Please wait.

Presentation is loading. Please wait.

PowerPoint to accompany Chapter 19 Macroeconomics in an Open Economy.

Similar presentations


Presentation on theme: "PowerPoint to accompany Chapter 19 Macroeconomics in an Open Economy."— Presentation transcript:

1 PowerPoint to accompany Chapter 19 Macroeconomics in an Open Economy

2 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Learning Objectives 1.Explain the main components of the balance of payments and understand how it is calculated. 2.Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports. 3.Understand how different exchange rate systems operate. 4.Discuss the three key aspects of the current exchange rate system.

3 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Learning Objectives 5.Explain the saving and investment equation. 6.Explain the effect of a government budget deficit or surplus on investment in an open economy. 7.Discuss the difference between the effectiveness of monetary and fiscal policy in an open economy and in a closed economy.

4 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Australian universities face crunch from rising dollar  The appreciation of the Australian dollar against major currencies increases the cost of studying in Australia for international students.

5 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Open economy: An economy that has interactions in trade and finance with other economies.  Closed economy: An economy that has no interactions in trade or finance with other economies. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

6 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Balance of payments: The record of a country’s international trade, borrowing, lending, capital and investment flows with other countries.  Current account: The part of the balance of payments that records a country’s net exports, net income and net transfers.  Australia’s current account is always in deficit. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

7 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Net exports (NX): The income received for the export of goods and services minus the amount paid for imports of goods and services.  Net exports fluctuate between positive and negative over time.  Balance of trade in goods and services: The difference between the value of the goods and services a country exports and the value of the goods and services a country imports. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

8 Balance on goods and services, Australia, 1960-2008: Figure 19.1 Source: Australian Bureau of Statistics (2009), Balance of Payments and International Investment Position, Australia, Cat. No. 5302.0, Time Series Workbook. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

9 Net income (NY): Income paid overseas on investments in Australia by residents of other countries, eg: profits, dividends and interest repayments on loans, minus income received by Australian residents from investments in other countries. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

10 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Net income is always in deficit for Australia.  Insufficient domestic saving leads to Australians borrowing from overseas – the interest repayment on loans is the largest deficit component of net income.  Foreign investment in Australia generates dividends and profits which flow back overseas. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

11 Net income, Australia, 1960-2008: Figure 19.2 Source: Australian Bureau of Statistics (2009), Balance of Payments and International Investment Position, Australia, Cat. No. 5302.0, Time Series Workbook. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

12 Net transfers (NT): The difference between transfers made to residents of other countries and transfers received by Australian residents from other countries, including overseas aid, pensions and migrants’ funds.  Net transfers fluctuate between positive and negative over time. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

13 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  The capital account: The part of the balance of payments that records migrants’ asset transfers, debt forgiveness and sales and purchases of non-produced, non- financial assets.  The capital account usually has a small surplus, largely due to positive net migration. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

14 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  The financial account: The part of the balance of payments that records purchases of physical and financial assets a country has made abroad and foreign purchases of physical and financial assets in the country.  Contains direct investment, portfolio investment, financial derivatives, other investments and Reserve Bank assets.  The financial account must always be in surplus, to balance the current account deficit.  LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

15 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia The financial account.  Net foreign investment: The difference between capital outflows from a country and capital inflows, also equal to net foreign direct investment plus net foreign portfolio investment. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

16 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia The balance of payments always sums to zero.  A current account deficit will be exactly offset by a capital and financial account surplus.  Some countries have current account surpluses, which are exactly offset by capital and financial account deficits. LEARNING OBJECTIVE 1 The balance of payments: Linking Australia to the international economy

17 Balance of payments, Australia, 2007/08: Table 19.1 Source: Australian Bureau of Statistics (2009), Balance of Payments and International Investment Position, Australia, Cat. No. 5302.0. Please insert Table 19.1 from page 615. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

18 The balance of payments  A media commentator noted that exports of Australian goods were set to exceed imports for year 2009, hence he predicted that the Australian economy would no longer run a current account deficit.  Is the media commentator correct?  STEP 1: Review the material in the text book under the section ‘The balance of payments: Linking Australia to the international economy’. LEARNING OBJECTIVE 1

19 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia The balance of payments  STEP 2: The media commentator is incorrect. He is confusing the balance on merchandise trade (exports of goods minus imports of goods), with the balance on the current account. The balance on merchandise trade is only one item in the current account, which includes the balance on goods and services, net income and net transfers.  Even if the balance on merchandise trade is positive, other components of the current account, especially net income, are likely to remain negative, with the overall current account remaining negative. LEARNING OBJECTIVE 1

20 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Nominal exchange rate: The value of one country’s currency in terms of another country’s currency.  The market exchange rate is determined by the interaction of demand for and supply of currency. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

21 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Exchange rates in the financial pages  The financial pages of most newspapers provide information on exchange rates. Money changers, hotels and numerous websites also provide up-to- the-minute exchange rates. MAKING THE CONNECTION 19.1

22 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Three sources of foreign currency demand for the Australian dollar: 1.Foreign firms and consumers who want to buy goods and services produced in Australia. 2.Foreign firms and consumers who want to invest in Australia (direct or portfolio investment). 3.Currency traders who believe that the value of the dollar in the future will be greater than its value today. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

23 Exchange rate (¥/$) Quantity of dollars traded 0 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia 100 Supply Equilibrium in the foreign exchange market: Figure 19.3 Demand Shortage of dollars Surplus of dollars 80 ¥120 Demand for dollars in exchange for yen. Supply of dollars in exchange for yen.

24 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Currency appreciation: Occurs when the market value of a currency rises relative to another currency.  Currency depreciation: Occurs when the market value of a currency falls relative to another currency. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

25 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Shifts in the demand and supply curves for foreign exchange  Three main factors cause the demand and/or supply curves in the foreign exchange market to shift: 1.Changes in demand for Australian-produced goods and services and/or changes in the demand for foreign-produced goods and services. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

26 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Shifts in the demand and supply curves for foreign exchange 2.Changes in the desire to invest in Australia and/or changes in the desire to invest in foreign countries. 3.Changes in the expectations of currency traders about the likely future value of the dollar and/or the likely future value of foreign currencies. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

27 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Shifts in the demand for and supply of foreign exchange.  Income levels and economic growth rates in Australia and in other countries.  Changes in relative interest rates between countries.  Speculation.  Speculators: Currency traders who buy and sell foreign exchange in an attempt to profit from changes in exchange rates. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

28 Exchange rate (¥/$) Quantity of dollars traded 0 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia 120 S1S1 Shifts in demand and supply curves resulting in a higher exchange rate: Figure 19.4 D1D1 ¥130 1. The supply curve of dollars shifts to the right … D2D2 S2S2 A B 2. …while the demand curve for dollars shifts further to the right … 3. … causing the equilibrium exchange rate to rise.

29 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia How movements in the exchange rate affects exports and imports. Exchange rate appreciation.  Revenue in Australian dollars falls for exporters whose goods are traded in $US.  Exports of goods and services fall for goods whose prices are determined in Australia, as they are now more expensive to overseas buyers.  Imports become cheaper.  Net exports fall, ceteris paribus, reducing the rate of increase of aggregate demand and real GDP. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

30 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia How movements in the exchange rate affects exports and imports. Exchange rate depreciation.  Revenue in Australian dollars rises for exporters whose goods are traded in $US.  Exports of goods and services increase for goods whose prices are determined in Australia, as they are now less expensive to overseas buyers.  Imports become more expensive.  Net exports rise, ceteris paribus, increasing the rate of increase of aggregate demand and real GDP. LEARNING OBJECTIVE 2 The foreign exchange market and exchange rates

31 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Real exchange rate: The price of domestic goods and services in terms of foreign goods and services. LEARNING OBJECTIVE 2 Real exchange rate = Nominal exchange rate x The foreign exchange market and exchange rates

32 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Exchange rate determination  Suppose the Australian dollar and Japanese yen are initially in equilibrium at ¥100 = $1. Imagine now the Japanese economy experiences a strong recovery with rising GDP and falling unemployment, while conditions in the Australian economy remain stable.  How will this change the exchange rate between the dollar and the yen? LEARNING OBJECTIVE 2

33 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  STEP 1: Review the material. This problem is about shifts in demand and supply for a currency, so you may like to review the section in the text book ‘How do shifts in demand and supply affect the exchange rate?’ LEARNING OBJECTIVE 2 Exchange rate determination

34 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  STEP 2: Strong growth in Japan will lead to an increase in income for Japanese consumers, increasing demand for goods and services, including imported goods and services from trading partners such as Australia.  More importantly, demand for Australian resources to fuel Japanese production will also increase.  This will result in an increase in demand for the Australian dollar, as Japanese consumers and producers exchange yen for dollars to purchase Australian resources and other goods.  The Australian dollar will therefore appreciate against the yen. LEARNING OBJECTIVE 2 Exchange rate determination

35 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Not all exchange rates are determined in the market.  A country’s exchange rate can be determined in several ways.  Exchange rate system: An agreement between countries on how exchange rates should be determined. LEARNING OBJECTIVE 3 Exchange rate systems

36 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Floating currency: The outcome of a country allowing its currency’s exchange rate to be determined by demand and supply.  Managed float exchange rate system: The current exchange rate system under which the value of most currencies is determined by demand and supply, with occasional central bank or government intervention. LEARNING OBJECTIVE 3 Exchange rate systems

37 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Fixed exchange rate system: A system under which countries agree to keep the exchange rates between their currencies fixed.  Pegging: The decision by one country to keep the exchange rate fixed between its currency and another currency. LEARNING OBJECTIVE 3 Exchange rate systems

38 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  The current exchange rate system has three important aspects. 1.Australia, like Britain, the USA, Japan and much of Europe, allow their currencies to float against other currencies, with occasional central bank intervention. 2.Many nations in the European Union have adopted the single currency, the Euro. 3.Some developing countries have attempted to keep their currencies fixed against the US dollar or another major currency. LEARNING OBJECTIVE 4 The current exchange rate system

39 Trade-weighted index of the Australian dollar, 1970-2009: Figure 19.5 Source: Reserve Bank of Australia, Statistics (2009), Exchange Rates, Table F11, viewed 27 March 2009, at Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

40 What determines exchange rates in the long run? The theory of purchasing power parity.  Purchasing power parity: The theory that in the long run exchange rates move to equalise the purchasing power of different currencies. LEARNING OBJECTIVE 4 The current exchange rate system

41 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Three real world complications keep purchasing power parity from being a complete explanation of exchange rates, even in the long run. 1.Not all products can be traded internationally. 2.Products and consumer preferences are different across countries. 3.Countries impose barriers to trade. LEARNING OBJECTIVE 4 The current exchange rate system

42 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Barriers to trade include:  Tariff: A tax imposed by a government on imported goods which makes them more expensive on the domestic market.  Quota: A limit on the quantity of a good that can be imported. LEARNING OBJECTIVE 4 The current exchange rate system

43 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia The Big Mac theory of exchange rates.  The Big Mac Index shows what the exchange rate should be if purchasing power parity held for Big Macs. MAKING THE CONNECTION 19.2

44 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia The four determinants of exchange rates in the long run. 1.Relative price levels. 2.Relative rates of productivity growth. 3.Preferences for domestic and foreign goods. 4.Tariffs and quotas. LEARNING OBJECTIVE 4 The current exchange rate system

45 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Current account balance (CAB) equals net foreign investment. CAB = NX + NY + NT Current Account Balance + Financial Account Balance = 0 or, Current Account Balance = - Financial Account Balance or, Net Exports + Net Income + Net Transfers = Net Foreign Investment Note: Assumes Capital Account balance is zero. LEARNING OBJECTIVE 5 The international sector and national saving and investment

46 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Domestic saving, domestic investment and net foreign investment Private saving = national income – consumption - taxes or, S private = Y – C - T Government saving = taxes – government spending or, S public = T - G National saving = private saving + public saving or, S = S private + S public LEARNING OBJECTIVE 5 The international sector and national saving and investment

47 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Domestic saving, domestic investment and net foreign investment  Remember the basic macroeconomic equation for GDP or national income: Y = C + I + G + NX LEARNING OBJECTIVE 5 The international sector and national saving and investment

48 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Gross national income (GNY): Is equal to GDP (C+I+G+NX) plus the income transfers received from other countries, including dividends and interest earned. It measures the total income that a country has for expenditure and saving. GNY = C + I + G + NX + NY + NT GNY = GDP + NY + NT LEARNING OBJECTIVE 5 The international sector and national saving and investment

49 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Recall that national saving is what remains after C and G have been paid for.  Therefore national saving can be expressed as: S = GNY – C – G = GDP + NY + NT – C – G = (C + I + G + NX) + NY + NT – C – G LEARNING OBJECTIVE 5 The international sector and national saving and investment

50 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  As the consumption and government expenditure parts of the equation cancel each other out this leaves: S = I + NX + NY + NT  Recall that NX + NY + NT equals the current account balance (CAB), therefore: S = I + CAB LEARNING OBJECTIVE 5 The international sector and national saving and investment

51 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  Saving and investment equation: An equation showing that national saving is equal to domestic investment plus net foreign investment.  National saving = domestic investment + net foreign investment or, S = I + NFI LEARNING OBJECTIVE 5 The international sector and national saving and investment

52 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  For Australia, net foreign investment is negative; its domestic saving is less than its domestic investment.  Therefore, S – I = NFI LEARNING OBJECTIVE 5 The international sector and national saving and investment

53 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Fiscal policy revision :  Recall that if the Federal government runs a budget deficit, it must raise an amount equal to the deficit by selling bonds and securities.  To attract investors, the interest rates offered must be increased, which also causes other interest rates to rise.  Higher interest rates can lead to crowding out, as private investment and consumption are lowered. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

54 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Fiscal policy revision:  Higher interest rates can also lead to an exchange rate appreciation, reducing net exports.  A budget deficit concurrent with a current account deficit is known as the twin deficits hypothesis. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

55 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia  The twin deficits hypothesis was widely discussed in Australia from the mid 1970s and through to the 1980s.  The theory appeared to be supported by the evidence during this time.  However, the twin deficits hypothesis does not match Australia’s experience in the 1990s and early 2000s, as large budget surpluses were accompanied by large current account deficits. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

56 The twin deficits, 1974/75-2007/08: Figure 19.6 Sources: Australian Bureau of Statistics (2009), Balance of Payments and International Investment Position, Australia, Cat. No. 5302.0, Time Series Workbook; Australian Government (2007), 2007-08 Budget Overview, Appendix G, historical budget and net debt data, viewed 5 May 2008 at ; Australian Government (2008), 2008-09 Budget Overview, Appendix I, historical budget and net worth data, viewed 29 March 2009, at www.ato.gov.au Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

57 Is Australia’s current account deficit a problem?  Australia’s current account is always in deficit.  Largely due to Australian net foreign investment being negative.  Australians borrows funds from overseas and foreigners purchase Australian assets.  Therefore there is an outflow of interest repayments and profits and dividends. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

58 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Is Australia’s current account deficit a problem?  Net foreign debt: The difference between the amount Australia lends to other countries and the amount that Australia borrows from overseas.  Net foreign liability = net foreign debt liabilities + net foreign equity liabilities.  Both have risen significantly as a proportion of GDP over time. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

59 Net foreign debt and total net foreign liabilities as a percentage of GDP, Australia, 1975/76-2007/08: Figure 19.7 Source: Australian Bureau of Statistics (2009), Balance of Payments and International Investment Position, Australia, Cat. No. 5302.0, Table 30 and Table 39, Time Series Workbook. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

60 Is Australia’s current account deficit a problem? The issues to consider include: 1.Australia must borrow from overseas to finance investment required for economic growth, as domestic savings are not sufficient to fund domestic investment. 2.Can Australia service its debt, and what proportion of GDP is required to service the debt? LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

61 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Is Australia’s current account deficit a problem? 3.What proportion of debt is private and what proportion is government?  Private debt does not burden tax payers.  For Australia, borrowing is essential to finance investment, and the debt burden is a relatively small proportion of GDP. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

62 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Is Australia’s current account deficit a problem?  For some developing countries, debt servicing burdens are so high (much of which is government debt), that at times borrowing occurs to just to make the interest repayments on borrowing.  Spiralling debt for developing countries has led to debt forgiveness initiatives. LEARNING OBJECTIVE 6 The effect of a government budget deficit on investment

63 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia International debt relief for poor countries.  Debt reduction and forgiveness programs are currently operating in a large number of countries in Africa. MAKING THE CONNECTION 19.3

64 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Monetary policy in an open economy.  Monetary policy has a greater impact on aggregate demand in an open economy than in a closed economy.  Example: Expansionary monetary policy: interest rates are reduced.  Domestically, lower interest rates tend to increase investment and consumption spending.  In an open economy, lower interest rates also tend to lead to an exchange rate depreciation, which increases net exports, increasing aggregate demand. LEARNING OBJECTIVE 7 Monetary policy and fiscal policy in an open economy

65 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Fiscal policy in an open economy.  Fiscal policy has a smaller impact on aggregate demand in an open economy than in a closed economy.  Example: Expansionary fiscal policy: increases in government purchases and/or tax cuts.  To fund expansionary policy more government bonds will be sold, putting upward pressure on interest rates.  Higher interest rates may lead to an exchange rate appreciation, reducing net exports, reducing the rate of increase of aggregate demand. LEARNING OBJECTIVE 7 Monetary policy and fiscal policy in an open economy

66 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Exchange rates between the Australian dollar and other currencies can be found in the nation’s newspapers and heard on television. Currency values can be found even more easily on the internet. Go to the link below and find the current value of the Australian dollar against the US dollar, the Euro and the Japanese yen. http://www.xe.com Note: This is just one of may sites on the internet where exchange rates can be found. Get Thinking!

67 An Inside Look Figure 1: Foreign portfolio investment in Australia and Australian portfolio investment abroad both increased significantly in 2006 and 2007. Source: Australian Bureau of Statistics (2007), Balance of Payments and international Investment Position, Australia, Cat. No. 5302.0, Time Series Workbook. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

68 An Inside Look Figure 2: Direct foreign investment in Australia and Australian direct investment abroad both increased in 2006 and 2007. Source: Australian Bureau of Statistics (2007), Balance of Payments and international Investment Position, Australia, Cat. No. 5302.0, Time Series Workbook. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia

69 Key Terms  Balance of payments  Balance of trade in goods and services  Capital account  Closed economy  Currency appreciation  Currency depreciation  Current account  Exchange rate system  Financial account  Fixed exchange rate system  Floating currency  Gross national income  Managed float exchange rate system  Net foreign investment  Net foreign debt  Nominal exchange rate  Open economy  Pegging  Purchasing power parity  Quota  Real exchange rate  Saving and investment equation  Speculators  Tariff

70 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q1. Nearly all economies of the world are: a. Open economies. b. Closed economies. c. Closed economies about to become open in today’s global economy. d. Open to trade but closed to investment and finance interactions with other economies. Check Your Knowledge

71 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q1. Nearly all economies of the world are: a. Open economies. b. Closed economies. c. Closed economies about to become open in today’s global economy. d. Open to trade but closed to investment and finance interactions with other economies. Check Your Knowledge

72 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q2. Which of the following are sources of foreign demand for Australian dollars: a. Foreign firms and consumers who want to buy goods and services produced in Australia. b. Foreign firms and consumers who want to invest in Australia. c. Currency traders who believe that the value of the dollar in the future will be greater than its value today. d. All of the above. Check Your Knowledge

73 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q2. Which of the following are sources of foreign demand for Australian dollars: a. Foreign firms and consumers who want to buy goods and services produced in Australia. b. Foreign firms and consumers who want to invest in Australia. c. Currency traders who believe that the value of the dollar in the future will be greater than its value today. d. All of the above. Check Your Knowledge

74 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q3. When will the demand curve for Australian dollar shift to the right? a. When incomes in Japan fall. b. When interest rates in Australia fall. c. When speculators decide that the value of the Australian dollar will rise relative to the value of the yen. d. All of the above. Check Your Knowledge

75 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q3. When will the demand curve for Australian dollar shift to the right? a. When incomes in Japan fall. b. When interest rates in Australia fall. c. When speculators decide that the value of the Australian dollar will rise relative to the value of the yen. d. All of the above. Check Your Knowledge

76 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q4. Which of the following happens in a managed float exchange rate system? a. Countries agree to keep the value of their currencies constant. b. Countries agree on how exchange rates should be determined. c. Countries occasionally intervene to buy and sell their currency or other currencies to affect exchange rates. d. Countries allow the currency’s exchange rate to be determined by supply and demand. Check Your Knowledge

77 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q4. Which of the following happens in a managed float exchange rate system? a. Countries agree to keep the value of their currencies constant. b. Countries agree on how exchange rates should be determined. c. Countries occasionally intervene to buy and sell their currency or other currencies to affect exchange rates. d. Countries allow the currency’s exchange rate to be determined by supply and demand. Check Your Knowledge

78 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q5. Among the important aspects of the exchange rate system today is that: a. Many countries allow their currencies to float against other currencies. b. Many countries in Western Europe have adopted a single currency, the Euro. c. Some developing countries have attempted to keep their currency’s exchange rate fixed against a major currency such as the US dollar. d. All of the above. Check Your Knowledge

79 Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia Q5. Among the important aspects of the exchange rate system today is that: a. Many countries allow their currencies to float against other currencies. b. Many countries in Western Europe have adopted a single currency, the Euro. c. Some developing countries have attempted to keep their currency’s exchange rate fixed against a major currency such as the US dollar. d. All of the above. Check Your Knowledge


Download ppt "PowerPoint to accompany Chapter 19 Macroeconomics in an Open Economy."

Similar presentations


Ads by Google