Appreciating Australian Economy
Appreciating Australian Dollar Essay
Discuss the impacts on the Australian economy of a sustained appreciation of the $A
The Australian economy can fluctuate due to many factors, but exchange rates in particular can have great influences on the economy. Over the last two decades the dollar has been appreciating at a sustainable rate, because demand of the $A is increasing and supply of $A is decreasing, which has seen such effects as a worsening of the CAD, reduction in GDP along with a few positive impacts.
An appreciating dollar has meant consumers have obtained more purchasing power as foreign imports have flooded the Australian market. Through increased purchasing power consumers can choose from a larger variety of goods offered …show more content…
Because imports have been cheaper import substitution has decreased which again has increased the CAD from 3.9% of GDP in 1980 to 7% of GDP in 2008. If imports were more expensive this would in fact improve the CAD. In the short term, however, there is import rigidity which would worsen the CAD as demands for imports are inelastic. After the initial increase of the CAD export growth and increased substitutions should improve the CAD in the long term (this is known as the ‘J-curve affect’). Foreign investment has also been impacted as the appreciating dollar may mean investing in Australia is too expensive for foreign investors (however if the Australian dollar continues to appreciate investors may gain confidence through this). This will occur because foreign investors first need to convert their money into Australian dollars before investing in Australia, and if exchanging the money is too expensive they may opt for a nation with a cheaper currency to invest their money into. Value of foreign income earned on investments abroad will mean net income credits would decrease on the current account which is again emphasised on the increasing CAD. Although there is the valuation effect of foreign debt decreasing there is also the valuation effect where the values of foreign assets decrease because as the Australian currency increases our assets compared to foreign currencies are more valuable. This then further degrades the CAD through the substantial net income account. Economic activity and domestic employment will decrease due to an appreciating dollar. Import growth and capital outflow will serve to decrease economic growth because money is being invested in foreign countries instead of Australia. Employment will also be effected as import industries will have access to a
Discuss the impacts on the Australian economy of a sustained appreciation of the $A
The Australian economy can fluctuate due to many factors, but exchange rates in particular can have great influences on the economy. Over the last two decades the dollar has been appreciating at a sustainable rate, because demand of the $A is increasing and supply of $A is decreasing, which has seen such effects as a worsening of the CAD, reduction in GDP along with a few positive impacts.
An appreciating dollar has meant consumers have obtained more purchasing power as foreign imports have flooded the Australian market. Through increased purchasing power consumers can choose from a larger variety of goods offered …show more content…
Because imports have been cheaper import substitution has decreased which again has increased the CAD from 3.9% of GDP in 1980 to 7% of GDP in 2008. If imports were more expensive this would in fact improve the CAD. In the short term, however, there is import rigidity which would worsen the CAD as demands for imports are inelastic. After the initial increase of the CAD export growth and increased substitutions should improve the CAD in the long term (this is known as the ‘J-curve affect’). Foreign investment has also been impacted as the appreciating dollar may mean investing in Australia is too expensive for foreign investors (however if the Australian dollar continues to appreciate investors may gain confidence through this). This will occur because foreign investors first need to convert their money into Australian dollars before investing in Australia, and if exchanging the money is too expensive they may opt for a nation with a cheaper currency to invest their money into. Value of foreign income earned on investments abroad will mean net income credits would decrease on the current account which is again emphasised on the increasing CAD. Although there is the valuation effect of foreign debt decreasing there is also the valuation effect where the values of foreign assets decrease because as the Australian currency increases our assets compared to foreign currencies are more valuable. This then further degrades the CAD through the substantial net income account. Economic activity and domestic employment will decrease due to an appreciating dollar. Import growth and capital outflow will serve to decrease economic growth because money is being invested in foreign countries instead of Australia. Employment will also be effected as import industries will have access to a