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 by the global market, increasing industry competitiveness. The trade weighted index (Australia’s currency compared to Australia’s main trading partners’ currencies) has increased towards 70 for the first time since the mid 1980’s. This is a key figure for an economies exchange rate as it calculates the currency against the main trading partners which actually affect the exporting and importing rate and because it removes the volatility found on individual exchange rate quotations. Interest servicing costs have decreased over the years which should mean a reduction in the CAD. This however, has not been occurring as the CAD has hit the dreaded 7% of GDP figure in recent quarters. The valuation effect has meant foreign debt is decreasing because of our currencies appreciation and because cheap imports have pushed the supply curve to the left, thus decreasing interest rates, yet with interest rates rising consecutively ten times to 7.25% this is not the case. Obviously there is more than meets the eye of an appreciating dollar.
The appreciating dollar has meant the volume of exports have decreased, which has then lead to an increase in the mid-term CAD as balance of goods and services decreases on the current account....