Economic Indicators Essay, Research Paper

Economics Assignment

Section A

Question 1

i) THE AUSTRALIAN DOLLAR – It is an economic indicator because the value of the Australian dollar determines how it is performing on a global basis. Most currencies around the world are floated; many financial organisations (eg RBA) have foreign exchange operations and trade (buy/sell) currencies. These organisations trade currencies to make a profit. So generally a nations profile (how it is performing on an economic basis) is determined on foreign exchange agents who buy and sell currencies. This is because by buying/selling a nations currency, it can add/delete pressure on aggregate demand and aggregate supply on a nations currency. This in effect, will determine the exchange rate, the price can either increase/decrease. The AUD mainly effects the value on imports and exports.

ii) My advice would be given the current situation of the low value of the $AUD, I would in my opinion try to increase the value of the dollar back to a more competitive level against other foreign currencies (eg $US). This is because it will attract more currency investors to invest in the AUD. For this to occur the RBA must get into the market and start to buy the $AUD which hopefully will bring the value of the dollar up, since it will create a domino effect of other investors purchasing the AUD, thus resulting in an increase in demand.

Another method that could be used to increase the AUD is to increase interest rates. This is because international interest rates eg US interest rates remain 0.25 per cent higher than the local rate of 6.25 per cent, making Australian assets less attractive. By increasing interest rates, it will attract overseas investors, as they will get a greater return in money invested. The problem by increasing interest rates is that it will slow down domestic markets.

Another alternative method would be to just to wait and see. By waiting, theoretically the dollar will eventually increase in value. This is because as the dollar is diving and becoming more inexpensive for the overseas market. This will attract investors to take a risk and buy $AUD, This in theory will cause a global trend and should through the price mechanism (demand/supply), the value of the dollar should increase.

i) INFLATION Inflation is used to measure the increase in the price of products. Inflation is an important indicator because it affects the domestic market. It affects the purchasing power of income earned eg if someone who had $10 and spent $5 on a cupcake everyday. And for instance one day the price of the cupcake went from $5 to $6, the person then has to pay more money. This will increase the person s level of spending and decrease their level of disposable income. So therefore inflation will reduce the purchasing power of money.

ii) My advice given the current economic situation is to try to decrease inflation. Inflation is caused by factors such as levels of aggregate demand. So by increasing interest rates, this in effect will decrease the level of demand, and should in theory reduce the level of inflation. The problem with increasing interest rates is that it will have more than one effect on the economy. For instance, by increasing (I), we should in theory see an increase in savings (as people get a greater return) and a decrease in investments (it now costs more to borrow), from this we will probably see a slowdown in domestic markets. Also there is a benefit by increasing (I) for the Australian economy on a more global basis, it will attract more foreign investors to invest in the Australian economy, this in effect should raise the value of the low $AUD.

i) TRADE Trade is an important economic indicator because it deals with the level of imports and exports. This balance of imports and exports (balance of trade) can effect domestic markets. For example, exports have grown about 30% since last year, so it is experiencing boom conditions. With the Olympic games it as helped Australia have its first surplus in three years. The games boosted exports by $1.4 billion, pushing the trade balance of a $677 million surplus compared with a deficit of $1.3 billion in August. The low value of the AUD also affected the increase in exports, as importers see the advantages by importing from Australia. This indicates that Australian economic growth is being boosted by export growth. This is because exports contribute to growth in GDP.

ii) Australia has had trade deficits in the past 3 years so its trade sectors aren t doing to well in this sector. This is because the balance of trade is imports are greater than exports. I predict that Australia will be exporting more in the coming months than recorded in the previous months because of the low Australian dollar, this is because importers from overseas will see that goods from Australia will become cheaper due to the fall in the AUD. Even with the fall in the AUD, I believe we will still be seeing trade deficits in the coming months, but we should be seeing this deficit decreasing as the level of exports is increasing and level of imports is decreasing. Level of Imports will decrease because it is now more expensive to import goods from overseas markets.

2. By examining the range of indicators it shows that the current state of the Australian economy is growing strongly. By monitoring the AUD it shows that the falling dollar has increased exports by about 30%. Australia is on an export bonanza. It is believed that Export volumes will grow by 9 per cent. The industries that will benefit from this include mining, basic metal manufacturers, the tourist industry, agriculture and food manufacturing and other machinery manufacturers.

Since exports are an injection into the economy, this in theory is contributing to the strong economic growth. But also at the same time domestic demand will slow down. This is because consumer spending is slowing in response to higher interest rates, inflation, petrol and import prices. Private demand slowing down can cause a decrease in housing and business construction, which reduces employment opportunities. Only strong government spending will prevent the growth of domestic demand falling. They can stop domestic demand from falling by getting into the market by providing better infrastructure eg building new highways, new hospitals. This will provide more employment opportunities and should result in an increase in domestic demand (people now have more disposable income).

Section B

Article 1

RBA Engineers Surge In Dollar

i) This article is about the Reserve Banks efforts trying to step into the foreign exchange market to push the Australian dollar s value on the foreign exchange. This article is very significant because the value of the AUD allows Australia to establish its position on a global basis.

It is not known how much local currency the RBA purchased but it is estimated at around $700 million. At around 4.30 PM the dollar surged from US51.91c to a high of US53.40c. The RBA s strategy was to buy the Australian currency to increase demand, and in effect increase the value of the Australian dollar. The RBA s strategy failed as the dollar finished locally at US52.93c.

ii) Theory suggests that if the Australian dollar continues to tumble, it will have many effects on the Australian economy. The value of the Australian dollar mainly effects imports and exports (trade). With exports, the depreciating dollar has increased exports. This is because, for example:

Lets assume the $AUD1 = $US0.50, The Australian exporter exports 1000 candy bars. For each $AUD1 given, the exchange rate immediately above the US importer only has to pay $US500 which converts to $AUD1000. The US importer sees the advantages by importing from Australia; this will create a chain reaction of more US importers importing from Australia. Hence the depreciating Australian dollar has increased exports.

If exports continue to increase due to the low AUD, then it will increase Gross Domestic Production (economic growth). This is because total demand (aggregate demand) has increased due to the increase in exports and since demand increases, supply would also have to increase to meet up with demand, thus we would see an increase in the total production in Australia.

Economic growth in theory will then increase the productivity capacity of Australia, thereby allowing more wants to be satisfied. A growing economy increases employment opportunities, and increases business innovation. All these factors put together shows clear sign that Australia is Winding up . We must remember though, this is all in theory. No one knows for sure if this will happen.

Article 2

Mitsubishi blames low $A for loss Nov 14

i) This article is about multi national company Mitsubishi Motors Australia, the article details how Mitsubishi could face a loss of about $105 million this calendar year because of exchange rate problems despite improving domestic sales. Mitsubishi Have been receiving less profits due to changing the local currency from $AUD to YEN. The expected loss has caused speculation about the future of Mitsubishi’s Adelaide car plants, its now caused reports that the car maker’s Japanese parent is considering pulling out of Australia. This article is very significant because Mitsubishi plants directly employ about 3,100 workers, if the plant was to close it will raise the unemployment rate, The losses they ve suffered are unlikely to inspire Mitsubishi from Japan to invest more into Australia, which could result in an economic downturn.

ii) Theory suggests that if Mitsubishi was to close down their Adelaide plant it will cause a change in economic conditions. This is because by closing down the Adelaide plant you are in effect directly sacking workers. This will then cause a domino effect of other employees indirectly getting sacked. For Example by closing down the Adelaide plant you are getting rid of your relationship with your suppliers eg Tyres, engines etc. The suppliers will then sack their employees because the productivity needed has now decreased. This domino effect should increase the level of unemployment and also decrease the level of GDP. With an increase in unemployment we should see a decrease in aggregate demand because people now have less disposable income. If people are then spending less, this means there is less capital floating around the economy, businesses might get forced to lower their prices due to the fall in demand, which will lower their profits and less likely to inspire businesses to invest more. Businesses might even consider sacking their employees and decrease their productivity due to the decrease in demand. Thus we should see a decrease in GDP, and in effect slowdown domestic markets.

The importance of a higher economic growth rate is essential to improve the basic living of the population and provide a greater variety of choices. Basic benefits of a higher economic growth rate may include better health care and a better infrastructure. This is why something must be done to overcome the slowing down of domestic markets. It is in my opinion of extreme importance that the Mitsubishi plant in Adelaide stay up and running to avoid the slowdown of domestic markets, for this to happen the government must intervene into the market and try to keep the Adelaide plant from shutting down. They can do this by investing in the business, decrease tax taken from the business and they can try to raise the value of the $AUD as this is the main problem causing Mitsubishi to lose profits. Maybe by doing this, the Adelaide plant might remain open.