Mandy101 said:
Wouldn't an improvement be positive?
No, not according to the remainder of my post. Read the rest.
Mandy101 said:
Rising export prices means more money is coming INTO Australia, as exporters exchange their foreign funds from sales into Australian dollars to meet expense requirements here.
The BGS would be improved, as there would be a larger balance on exports (more money flowing in from sales overseas) which is a credit
Yeah... just relax for a sec and think about it
Ask yourself what has happened. The answer should be, export prices are now higher relative to import prices. That considered, what you have written above would hold if, and only if, export and import
volumes remain constant (and, therefore, the BOGS should improve, since Aust would end up receiving more, relative to its trading partners, for the same quantity of output). This, however, is not the case. You will agree, I am sure, that participants in global market transactions (i.e. consumers and producers, both domestic and foreign) exert pressure on prices and quantities of goods and services produced through the forces of supply and demand.
If you can picture the demand-supply equilibrium, you will note that if the price of a good or service (or, in our case, imports in general) declines, then the demand for that good or service will rise, and, hence, more of that good or service will be produced (and, of course, consumed) in order to satisfy that demand. You should see that this could well mean greater revenue for our foreign neighbour, even though the price of their product has fallen and they are receiving less per unit of output. (In other words, it could have a negative impact on the BOGS, and therefore the CAD in its totality).
Conversely, if the price of our exports happens to experience a relative increase (as would be the case in the event of a TOT improvement), then the demand for our exports would contrict and, thereby, cause supply and, therefore, revenue for our local producers to decrease (Unless the good or service in question was so highly price inelastic as to leave revenue unaltered, or even heightened, but this would describe an extreme cirumstance, and would certainly not justify the generalisation in citation that you have provided above). Put differently, a relative rise in export prices may not necessarily be accompanied by a matching rise in revenue, and, therefore, an improvement to the TOT could well have a negative impact on the BOGS and, of course, the CAD in totality.
Mandy101 said:
Rising export prices means more money is coming INTO Australia, as exporters exchange their foreign funds from sales into Australian dollars to meet expense requirements here
What are you talking about? This topic has nothing to do with exchange rates and/or how currencies are converted. Although the TOT may well respond to movements in the exchange rate, this has no relevance to the TOT, itself, nor to the question asked in this thread. The TOT is merely a measure of the
price indices of imports versus exports. Since the TOT is calculated in units of $A only, whether or not purchasing funds are denominated in $A is not an issue if asked only to discuss the
effect of, not the impacts on, a change in the TOT.
Also, on a point of interest, make sure to exercise more caution in your verb usage during any economic exchange. Words and phrases such as "means", and "exporters exchange" imply an air of certainty unbefitting this course. Replacing these words with "could mean", or "exporters may exchange" would be much more suitable, and would much better uphold the reality that economics is a subjective discipline, open to differing interpretations, multifarious possibilties, providential thought and prediction.
On some of the other posts in this thread, to assuage any shakiness or uncertainty, read my post again. What I wrote initially is absolutely correct and this thread could safely have been closed out with that response alone, since it answers the question in as great depth as is required.
Hope this helps out
