External Balance - Part B

FOREX - foreign exchange

When the Australian dollar depreciates:
International competitiveness improves.
Better international trade competitiveness improves Australia’s trade balance.
Higher economic growth and employment.
Fall in Australian investment overseas.
Rise in foreign investment into Australia.
Higher rate of inflation.
Increased net foreign debt and worsening CAD.
Rise in domestic interest rates.

When the Australian dollar appreciates:
Australia’s level of foreign debt falls.
The rate of domestic inflation falls.
Loss of international competitiveness.
Decrease in foreign direct and portfolio investment into Australia.
Rise in Australian investment overseas.
Levels of employment, income, and economic growth fall.

Causes of imbalance:
High inflation and declining international competitiveness
trade deficit
The lowering of protective barriers to trade (tariffs and quotas)
saving – investment gap.
The income transfers
deteriorating state of the global economy.
depreciation of the Australian dollar
appreciation of the Australian dollar
drought
rapid economic growth

Effects of imbalance:
Foreign debt
Reduced credit rating
Loss of investor confidence
Putting country at Risk of not being able to pay
Policy Responses (government policies)