Can someone please help me with this syllabus dot point? (Topic 2) (1 Viewer)

[Equilibrium1]

This syllabus dot point comes under 'Students learn to':

"Analyse the impact of changes in the components of the balance of payments on the value of the Australian dollar".

This dot point confuses me because I always thought it was the other way around. That is, changes in the $AUD affect the BOP. For example, a high $AUD leads to a rise in the purchase of imports which increases the debits that are recorded in the Current Account etc...

Can someone please help me clear things up?
Thanks heaps
=)

 

[deswa1]

I'll give you one example and then maybe you can do the rest.

Suppose Australia's exports increase dramatically, whilst imports don't increase as fast (as is the case in the current mining boom). This will lead to a smaller deficit/bigger surplus on the BOGS. But at the same time the extra demand for exports will contribute to demand for AUD, leading to an appreciation.

 

[Equilibrium1]

I'll give you one example and then maybe you can do the rest.

Suppose Australia's exports increase dramatically, whilst imports don't increase as fast (as is the case in the current mining boom). This will lead to a smaller deficit/bigger surplus on the BOGS. But at the same time the extra demand for exports will contribute to demand for AUD, leading to an appreciation.

Thanks so much for your help *repped*

Can these also be possible answers?

- More foreign investments in Australia increases debits in Capital and Financial Account. This also increases the demand for the $AUD, thus an appreciation.
- An improvement in the Terms of Trade (as seen in the mining boom) and an increase in global commodity prices causes a smaller deficit/surplus in the BOGS and also an appreciation.
- Australia's lack of international competitiveness in non-primary industries increases imports which worsens the BOGS. This, at the same time, increases the supply of $AUD, thus a depreciation.

Etc...

Thanks heaps
=)

 

[deswa1]

Thanks so much for your help *repped*

Can these also be possible answers?

- More foreign investments in Australia increases debits in Capital and Financial Account. This also increases the demand for the $AUD, thus an appreciation.
- An improvement in the Terms of Trade (as seen in the mining boom) and an increase in global commodity prices causes a smaller deficit/surplus in the BOGS and also an appreciation.
- Australia's lack of international competitiveness in non-primary industries increases imports which worsens the BOGS. This, at the same time, increases the supply of $AUD, thus a depreciation.

Etc...

Thanks heaps
=)

More foreign investment is a credit on the capital and financial, not a debit. Your points are right though

 

[Equilibrium1]

More foreign investment is a credit on the capital and financial, not a debit. Your points are right though

oops sorry, my bad... I was typing too fast haha

Thanks so much for your help!
I really hope you state rank in one of your subjects!
=D

 

[gnrlies]

This syllabus dot point comes under 'Students learn to':

"Analyse the impact of changes in the components of the balance of payments on the value of the Australian dollar".

This dot point confuses me because I always thought it was the other way around. That is, changes in the $AUD affect the BOP. For example, a high $AUD leads to a rise in the purchase of imports which increases the debits that are recorded in the Current Account etc...

Can someone please help me clear things up?
Thanks heaps
=)

A more generalised response would be that the $AUD is essentially a kind of price. As with the regular supply / demand setup, you can have different causes of a change of price.

Supply and demand shifts will impact on prices as we know. For example the mining boom is a demand shift leading to an appreciation. But also, we can simply say that the demand curve suggests that the demand for Australian exports will decrease as the $AUD appreciates.

In economics the language of 'endogenous' and 'exogenous' changes are quite useful in explaining the points further. Endogenous changes are those that are embodied or explained by determinants within the model. For example demand changing due to $AUD changes. Exogenous changes are those that are not explained by the model, for example supply or demand shocks such as the mining boom.

All of the examples you have provided are exogenous changes. I.e. they are not the result in the change of the $AUD but rather other factors. Your first example, about how the $AUD can affect the BOP, would be an example of an endogenous change.

Both are at play simultaneously.