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Economic topic 2 note Topic 2: Australia place in the global economy Australia’ trade and �nancial �ows The Australian economy ranks 14th in the world- placing it in the middle ranks of advanced economies Australia was ranked 8th in the world in terms of quality of lif e...
Economic topic 2 note Topic 2: Australia place in the global economy Australia’ trade and �nancial �ows The Australian economy ranks 14th in the world- placing it in the middle ranks of advanced economies Australia was ranked 8th in the world in terms of quality of lif e Australia is the 2nd wealthiest na�on in terms of median wealt h per adult a�er Swizerland Australia is ranked 12th on the Global Talent Compe��veness Inde x Trade in Australia’s trade pa�ers - Trade is the transfer of ownership of goods and services from one person or en�ty to another - Trade balance: Australia’s trade balance is the di�erence between what we expo rt and import. (value of gns import – value of gns export) Direc�on of trade - Two-way trade: Asia con�nues to dominate Ausrtralia’s two-way trade �ows with 6 5.2% of the market (2019-2020). China remains our major partner. Changing direc�on of trade - In the 1950s, the Unuted Kingdom was Australia’s major trading pa rtner - Australia turned to North-East Asian and ASEAN countries- Japan became Australia’s leading merchandise export des�na�on due to rapid growth and demand f or produc�on inputs such as minerals - With the Japanese economy shriking in the 1980s, Australia turned t o other na�ons. In the early 2000s exports to China increased drama�cally, making China Australia’s major trading partner since 2007 The changing composi�on of Australia’s trade- exports -Primary industries have always been the main focus of Australian exports as Australia has a compara�ve adantage in these resources. - Rural commodi�es such as Wool and Wheat dominated Australian expor ts. - Australia has con�nued to rely on its primary exports while impor �ng large quali�es of capital goods and manufactured goods - The global commodi�es boom has impacted on the composi�on of t rade. - Australia’s exports of services to the world have grown from $44 billion in 2006 to $71 billion in 2016 (up by 62%) Bene�ts of trade to Australia - Create stronger �es with our trading partners - Encourage investnment - Result in cheaper products for Australian ci�zens, improve quality of life - Can enhance the compe��veness Economic response to COVID-19 - The government stepped up to support businesses to manage the economic i mpacts of COVID-19 through JobKeeper, the Export Market Development Grants (EMDG ) program, the Interna�onal Freight Assistance Mechanism ( IFAM) - An extra $49.8 million was injected into the EMDG program in the 2019-20 �nacial year, suppor�ng exporters and tourism businesses to market their products and services around the world Trends in Australia’s �nancial �ows - The rapid growth of �nancial �ows in Australia is due to: 1. Interna�onal capital markets opened up 2. In 1970s, exchange rates around the world were �oated and r estric�ons on the movement of capital across na�onal boarders were removed, openi ng up the interna�onal capital market 3. The advancement of techonology and communica�on which made it easier to shi� �nance between countries - Prior to the deregula�on (sự bãi bỏ quy định) of the �nancial se ctor, most �nancial �ows came into Australia in the form of direct investment (est ablishment of a new company), because it brought the bene�ts of job crea�on and techno logy transfer - Porfolio investment : short-term specula�ve movement of income for loans or to buy a small propor�on for a company (shares < 10%) Bene�ts/drawbacks of foreign investment (đầu tư nước n goài) Bene�ts: - Helps Australia reach its economic poten�al by providing capita l to �nance new industries and enhance exis�ng industries, boos�ng infractructure, produc�vity , and employment opportuni�es in the process - Encourages compe��on and increase innova�on by bringing new technologi es and services to the Australian market Drawbacks: - Loss of ownership of domes�c assets - Por�olio investment sees great vola�lity-không ổn định (exchang e rate vola�lity can hurt economy) Free trade and protec�on Current situa�on - Althought the momentum (sức đẩy tới) towards free trade has haltered (tạ/nặng nề) in recent years, Australia remains a vocal advocate (người bi ện hộ) for free trade Free trade and protec�on - Barriers to trade have a signi�cant e�ect on the economy - Mining and energy industries now account for more tha n half of Australia’s export earnings The government’s main aims in reducing protec�on ar e to: - Forces domes�c industries to become interna�onally compe��ve by exposi ng (vạch trần) them to foreign compe��on - Focus on Australia’s compara�ve advantage - Allow Australia to bene�t from greater integra�on with the global economy by giving consumers and businesses access to goods and services available on g lobal markets at the lowest possible price Reduc�on in protec�on - Over the past 30 years the average (import-weighted) tar i� rate applied in Australia has fallen from over 7% to less than 1%. - Individual tari�s have declined from a maximum of nearly 90% dow n to a maximum of 5%. - Despite the maximum, most tari� lines are duty free. In 2016 , 79% of all imports (by value) to Australia a�racted no tari�. Almost half of all product categories were tari� free for all countries and least developed countries enjoy tari � free access on all goods Why these policies in reducing protec�on? - Increased specialisa�on and economies of scale, leading to lower cost structure and greater e�ciency - Decreased prices for consumers and businesses - More sustainable long term employment - Increase GDP through exports as business seek new markets Australia-United States (AUSFTA) - The Australia-United States Free Trade Agreement of 2005, provided signi�cant tari� reduc�on in a number of goods (i.e. agrculture, manufacturing) - Since the AUSFTA agreement, Australia’s US beef qu ota has gradually risen from about 350,000 tons to 423,214 tons last year - US is Australia’s third-largest trading partner, with around 11% of Australia’s two- way trade China-Australia Free Trade Agreement (CHSFTA) - Total trade was worth $160 billion in 2014 - 96% of Australia’s exports to China will be tari� free - Chinese investment in Australia reached $65 billion by the end 2017 - It is es�mated that the agreement will creates 178,000 jobs from 2016 to 2035 AANZFTA (ASEAN- Australia- New Zealand Free Trade A greement) - AANZFTA is Australia’s �rst mul�lateral agreement - Covers 20% of AUS trade area of over 650 million peopl e - Tari�s on vegetables will be eliminated in Malaysia and Viet nam, and in other countries they will reduced to less than 5% Implica�ons of Australia’s policies for individuals, �rms and governments Posi�ves impacts of reduc�on in protec�on - Reduced prices and lessened in�a�onary (lạm phát) pressures in the eco nomy - Encouraged �rms to become more compe��ve - Redistributed income away from gov - Australia’s trade liberalisa�on policy between 1986 and 201 6 increase GDP by 5.4%, increased na�onal income by 5.1%, increased exports by 28.5%, incr eased imports by 28.6%, increased real wages by 7.4% and prices dropped by 3.4 % Nega�ve impacts - Short run- uncompe��ve industries - Between 1997-97 and 2010-11, 144m in assistance was allocated to structural regional adjustment funds The end of the car industry in Australia (1949-2017) - Australian car manufacturing industry closed in 2017 Implica�ons for Australia of protec�onist policies of o ther countries and trading blocs Implica�ons for Australia as a result of other inter na�onal protec�onist polices - When foreign economies place tari�s on Australian goods and ser vices, Australian exports become less compe��ve and struggle to penetrate (thâm nhập) foreign markets - When other economies subsides their exports, they raise the supply and re duce the price of those goods on global market, reducing the income fo r producers in Australia selling the same products - Australia’s free trade agreement with China helped li� Austral ia’s wine exports to China to $1.1 billion by 2019-20. - However, in 2020 China imposed puni�ve tari�s on wine, causing ma jor damage to the Australian wine industry Trump and protec�onism crea�on of trade war - US previous president Donald Trump has shaken the founda�ons of global trade, slapping (mạnh mẽ) steep (giốc đứng, cao) tari�s on billions of dollars’ worth of goods from the EU, Canada, Mexico and China - In 2020, the US has slapped tari�s on US$550 billi on worth of Chinese products. China, inturn, has sent tari�s on US$185 billion wo rth of US goods - Resump’s $12 billion aid program is an a�empt to compensate ( đền bù) farmers for income lost from foreign tari�s imposed (áp đặt) on US goods in response to tari� imposed domes�cally- this will hurt Australian producers Australia’s balance of payments (BOP) The balance of payments - Is the record of the transac�ons between Australia and the rest o f the world during a given period of �me - It shows the trade and �nancial �ows in and out of the Australian economy Current account 1. Net goods: recorded a surplus of $76.0 billion in 2020-21 2. Net services: recorded a $13.1 billion service export in 2020-21 3. Balance on goods and services (BOGs): net goods + net servic es = BOGs; in 2020-21 BOGs was a surplus of 89.0bn 4. Net primary income 5. Net secondary income: money transfer 6. Balance on the current account Current account surplus - Australia tends to consistently have a de�cit, however in 2016 -17 AU was in a surplus ($12.2b), demonstra�ng export growth - In 2009-10 the BOGs eas -13.4bn, whilst in 2010-11 it was 1 3.7bn; shows the cyclical nature on the BOGs Current account de�cit (CAD) - Due to Australia’s low level of savings, foreign investment i s high, hence, interest, dividends going back overseas is also high Links between key BOP categories - Current account + capital and �nancial account = 0 - De�cit/decrease on the current account => surplus/increase on capital and �ancial account Financial in�ows can create debits on the primary i ncome category of the current account in two ways: Trends in Australia’s BOP Since the 1980s to 2010s, the CAD has moved in a range of 3 to 6 of GDP, averaging 4.1% in the 1990s and 4.9% in the 2000s and 2.5% during the 2010s. the impr ovement in the current account during the 2010s hadd made it a lesser concern for policymakers than in the past. The balance of payments 1. Cylical factors: are those which vary with the level of economy ac�vity (i .e. demand on commodi�es, Australia’s term of trade and the value of excha nge rate) 2. Structural factors : are those which are underlying (cơ bản) or persistent (dai dẵng) in�uences on the balance of payment (i.e. the structure of Austral ia’s export base, the interna�onal compe��veness of Australia’s exports and the level of na�onal savings) Balance of goodsw and services (BOGS) - Consumer goods are extremely vola�le (dễ thay đổi) - Imports => de�cits in BOGS - Exports => surplus - In 2020-21 BOGS recording a surplus of $89 billion. 2 rea sons: 1. The sustained higher prices for bulk commodi�es ( iron ore, metallurgical coal and thermal coal ) 2. The weaker spending on imports, re�ec�ng the closure of the inte rna�onal border during the COVID-19 pandamic and the fact that Australians we re not permi�ed to travel overseas Factors a�ec�ng the size of the BOGS in the current account de�cit- CYCLICAL 1. The exchange rate: apprecia�on lower Australia’s interna�onal compe��veness, decreasing demand of exports. Increase imports -> deteriorate (gi ảm giá trị) BOGS 2. Terms of trade (ToT): shows rela�onship between exports and imports, higher ToT -> weakened interna�onal compe��veness 3. Domes�c economic growth : when Australian economy grows fater than the world economy, import demand grow faster than export demand => BOGS go into de�cit, higher CAD, lower ToT 4. Interna�onal business cycle: a slowdown in global econimic growth + weaker growth in Australia’s market trading partnets = reduce growth in demand f or AUS exports => worsening BOGS Factors a�ec�ng the size of the BOGS in the current account de�cit- STRUCTURAL 1. AUS export base: narrow export base => compata�ve advantage lies in low value- added products 2. Interna�onal compe�veness: AUS lacks interna�onal compe��veness in manufacturing = import more expensive high value-added products (co nsumer goods + capital goods) Factors a�ec�ng the size of the PRIMARY INCOME in the CAD- CYCLICAL 1. Exchange rates + interest rates 2. Domes�c + global business Factors a�ec�ng the size of the PRIMARY INCOME in the CAD- STRUCTURAL 1. Savings & investment gap 2. Onset of savings: due to COVID-19 people tend to save more Interna�onal compe��veness - Australia’s ability to compete with other contries in interna�onal markets Terms of trade ToT - When ToT is greater than 100%, the country is accumula�ng more capital from exports than it is spending on imports - Exports/imports x 100 = ToT index - ToT con�nued to remain high in 2020-21 mainly due to the hi gher iron ore and other commodity prices Interna�onal borrowing - Foreign equity: the total value of Australian assets, owned by foreign resident a - Foreign liabili�es: Australi’a total �nancial obliga�ons to foreign residents (fo reign debt + foreign equity) - Net foreign debt: total amount of money Australia borrow from foreign reside nts – level of oustanding loans borrow by overseas residents ($1,186,356m in 2020-21) - Net foreign equity : value of Australian assets owned by foreign residents – val ue of foreign assets in Australian ownership ($301,233m in 2020-21) - Net foreign liabili�es: Australia’s �nancial obliga�ons to the rest of the world – the rest of the world’s �nancial obliga�ons to Aus ($885,123m in 2020-21) Advantages : - Good for individuals and business => access to the cheapest credit - O�ers more sources of money for business Disadvantages : - Rise in interest rate - Fall in export => rise the debt servicing costs - Deprecia�on in currency => increase the value of debt - May reduce Australia’s AAA credit ra�ng - Can lead to a debt trap Foreign investment - When investors in one country buy assets in another country (FDI or por�olio) - Upturn in the domes�c business cycle = higher equity servicing costs ( worsens the net primary income de�cit) Advantages : - Helps to s�mulate (kích thích) and expand the economy - Improve individual businesses and the en�re economy by spreading new techno logy and ideas - Improves the standard of living Disadvantages : - Dividends/pro�ts must be paid to the owners of �nancials assets - Worsen the Primary Income Account => increase CAD The consequences of HIGH CAD E�ects of a HIGH CAD - Floa�ng exchange rates - Growth of foreign liabili�es - Increased servicing costs - Loss of interna�onal investor con�dence Exchange rates - Is simply the price of Australia’s currency in terms of anot her country’s currency (occur in foreign exchange market- FOREX) - Exchange rate movement have a signi�cant impact on i nterna�onal compe��veness, trade �ows, investment decisions, in �a�on,… The AUD in the global economy - AUD is the ��h most traded currency in the world a�er US dollar, European euro, Japanese yen and Bri�sh pound - AUS is used in 6.8% of all currency trades in FOREX market FOREX market - The AUD is demanded by buyers of our exports, by foreign investor s in Austrlia - Increase in demand => a rise in its value => apprecia�on of the $A - The exchange rate of the $A for another currency will in�uenc e the interna�onal compe��veness of Australian products Foreign exchange Exchange rates can be quoted in 2 ways: 1. The indirect method - the number of units of foreign currency needed to purchase one unit of domestuc currency e.g. US$0.75 = A$1.00 2. The direct method - e.g. A$1.33 = US$1.00 (RBA-Reserve banks of Australia use this method in AUS) Rela�ve exchange rates can be measured in 2 ways: 1. Bilateral or cross rates : measures the value of a unit of domes�c currency rela�ve to another currency, usually that of a major trading partner 2. The trade weighted index (TWI): measure the AUD’s movements against a basket of courrencies, in�uenced by. The top 19 countries that Australia trades with Demand & supply of the AUD Demand for AUD is a�ected by a variety of factors 1. Size of �nancial �ows (level of Australian interest rates rela�ve to overseas interest rates; investment opportuni�es) 2. Expacta�ons 3. The demand for Australian exports 4. Changes in commodity prices and the ToT 5. Level of interna�onal compe��veness 6. Changes in global economic condi�ons 7. Taste and preferences Supply for the AUD is a�ected by a variety of factors 1. The level of �nancial �ows 2. Specula�on (sự suy đoán) 3. The exchange rate 4. Compe��veness 5. Taste and preference Exchange rates Current account in�uences on the demand for Austral ia’s exports and improts include: - Rela�ve in�a�on rate di�eren�als - Term of trade - Rela�ve rate of domes�c and world economic growth Capital and �nancial account in�uences on the deman d for Australian and foreign assets include: - Interest rate di�eren�als - Exchange rate expecta�ons Australia’s �oa�ng/�exible exchange rate system - In December 1983 Australia switched from a managed � exible exchange rate to a �oa�ng exchange rate system - Exchange rate was now determined by the free plat of market forces and not gov interven�on Advantages - No gov interven�on required - Suits the globalisa�on process - Shows the real market value (TWI) - Determines interna�onal compe��veness - Correc�on of balance of payments de�cits Disadvantages : - More dependent on other countries - More vola�le (dễ bay/lỗ) - May cause overshoo�ng Fixed exchange rate - If the RBA wants to appreciate the AUS => sell foreign exc hange and buy AUD and opposite - Hence, in order to intervene in the FOREX market index a �xe d exchange rate system, the gov would need forign reserves of foreign currency or gold Advantages - Certainty: with a �xed exchange rate, �rms will always know the exchange => trade and investment less risky Disadvantages - Not compa�ble with globalisa�on and interna�onal compe��veness - Exhaust foreign exchange reserves - Policy con�icts - Specula�on The managed exchange rate - Similar to a �xed exchange rate as the currency is pegged ( chốt, �xed) or adjusted daily to a varia�ons in a major trading partnet’s currency - The central bank sets the exchange rate daily, keeping it withi n a target band or zone of interven�on Advantages - Fluctua�ons are smoothened - Increased stability - Reduces specula�on Disadvantages - Fluatua�ons not eliminated (loại bỏ) - Implica�ons for central bank policy - Uncertainty regarding central bank objec�ves Reserve bank interven�on Although Australia relies primarily on market forces to determine the e xchange rate, the Reserve Bank of Australia (RBA) some�mes plays a role in in �uencing the value of the currency. While the RBA cannot change the value of the $A is t he long term, it is able to smooth out swings in the $A rela�ng to short term factors. The RBA can achieve this in two ways: 1. Dirtying the �oat - To curb (kiềm chế) a rapid deprecia�on of currency the RBA will buy $AUD, pu�ng upwards pressure on the exchange rate (2008; RBA bought $3.3 billion $AUD => modarate deprecia�on and support FOREX market) - For the RBA to prevent (ngăn ngừa) rapid apprecia�on it would sell $AUD (2009; sell $3.4 billion as the currency recovered) - Limited by the size of its foreign currency holdings 2. Monetary policy - An indriect way to in�uence the exchange rate; rarely used - To curb a rapid deprecia�on; increase the demand for $AUD by raising inte rest rates - Higher interest rates => a�ract more foreign savings => covered into $AUD => increase demand for $AUD => upward pressure in the exchange rat e - Limi�ed �me The e�ects of apprecia�on Nega�ve Posi�ve Exports become more expensive Increased purchasing power Imports will be less expensive Reduce the pirce for oversea assets Higher import spending The e�ects of deprecia�on (opposite) Nega�ve Posi�ve Reduced purchasing power Exports become cheaper Raise the price of overseas assets Imports will be more expe nsive The J Curve e�ect - There are two phases when a currency declines in value. The e�ect this has on the balance of goods and services (BOGS) is known as the J Curve In phase Y, gns we have already ordered will cost us more to buy them => BOGS will worsen, as well the CAD In phase Z, as new contracts are wri�en people will want to buy more of our exports as they are now rela�vely cheaper => improve BOGS Prac�ce ques�on 1. Why Australia now in a current account surplus? - The current account surplus was driven by a $8.1 billion increase in the BOGS surplus. Exports of goods and services rose $9.7 billion (8%), w hile imports of goods and services rose $1.6 billion (2%). The net primary incom e de�cit rose by $7.7 billion to $14.3 billion in the September quarter 2021. Austr alia's September quarter record current account surplus was driven by strong prices for exports o f coal and other mineral fuels as well as greater volumes of agricultur al exports. Import volumes fell this quarter as global supply chain pressures began to be felt in Australia. These falls were par�ally o�set by rises in imports of processed industrial supplies, which saw large increases in imports of COVID-19 vaccine s as the na�onal roll-out gathered pace.
