Micro + CAD (1 Viewer)

[rara]

“Overall, microeconomic reform is not likely to have significant effect on the CAD.” Comment.

What do you think?

 

[ToO LaZy ^*]

i disagree. :uhhuh:

 

[jesshika]

i too disagree

 

[Rorix]

*thumbs up for providing good reasons*

id say that there's been not much effect, and i cite the last 20 years as evidence

basically because MER would both tend to increase and decrease the CAD, imo

 

[username]

I disagree. The cad is a structural problem, and MER focusses on structural reform. Things such as trade reform have reduced the prices of imports therefore decreasing the size of the defecit on the goods balance on the current account etc.

 

[Rorix]

only if the demand for imports is price inelastic

not to mention that MER will tend to encourage increased investment in the Australian economy due to stronger eeconomic performance, higher corporate profits etc.


again, i cite 1980-2004 as evidence.

 

[mushroom_head]

but micro reform increases our international competitiveness. When domestic goods are cheaper then demand for imports will be reduced which eases the CAD.

therefore i disagree too!

 

[i-color]

Yeah micro reform has definitely had very big impacts on the CAD.

If you remember back to your BOP topic, one of the main reasons for our continuous CAD was our reliance on agricultural exports causing our BOGS to fluctuate (since agricultural prices fluctuate excessively).

Micro reform has been trying to solve this structural problem of reliance on ag products, and moving our economy away from STMs to ETMs, thereby negating the influence of fluctuating ag prices on our BOGs and thus CAD.

Also another structural problem of our CAD is our low national savings, which micro reform has aimed to solve. Increase in national savings will decrease reliance on foreign debt, which is another factor that causes high CAD (as interest payments on this debt is recorded in current account via Net incomes component)

So i'd say it's had significant impacts.....but this depends on the effectiveness of microreform etc.....it aims to solve underlying problems of CAD but whether it does or not is deabatable

 

[aditya]

but noone thinks the cad is a major issue, noone meaning noone that has any real power to do anythign about it... if this was the case then interests wouldn't be sooo low...

and really, they cant do anything about it... if they raise interests rates... then australians become dead set POOR, and raising interest rates leads to contractionary effects on the economy, slowing it down - which would lead to further problems for investors and those with jobs of cyclical nature... further destroying their on personal BOP....

so really... increasing savings is not an option... it just wont be possible - the onyl way is to improve productivity and use reform to improve our international competitiveness... hence improving our terms of trades (did i use TOT properly here? is this statement incorrect? i-color? lol - im confused with TOT, could you please explain it) and our BOGS..... EXPORT MORE!!!

other than reform, labour all that crap, other than that you only have one option left.... and that is to globalise!!! trade agreements and what not... just mroe anre more and mroe...

 

[aditya]

"Things such as trade reform have reduced the prices of imports therefore decreasing the
size of the defecit on the goods balance on the current account etc."


lol some major confusion here... either on my behalf or on the compsers

 

[i-color]

haha there are many, many ways to increase national savings other than increasing interest rates and by national savings, we don't mean just household savings, we mean everyone's savings in the whole economy. One way that the govt has tried to increase national savings is by decreasing their own PSUD, so that they do not "crowd out" financial sector to borrow overseas. But many of these ways are way beyond your course right now, so I won't mention them to confuse you guys

But yeah, structural change definitely has had impacts on CAD, because our CAD is pretty much a structural problem which needs to be solved by micro reform.

 

[ToO LaZy ^*]

just a question on gov borrowing...what's the difference between public sector borrowing and private sector borrowing?

 

[i-color]

Well basically public sector borrowing is just borrowing by the govt to finance their budget deficits, which is why since the Howard govt have been budgeting for small surpluses in past years, the public debt has reduced to very low levels.

Private sector borrowing is borrowing by financial sector and households etc...

 

[miffytoki]

Microeconomic reform will take a long time to take effect on the CAD if it even does have an effect. Australia's biggest problem is structural and relates to the net income deficit on the current account (u know what i mean so i won't explain it) and in order to address that we'll have to increase national savings. However the CAD isn't even a problem as long as it remains sustainable. This debt as reflected in the Capital Account's surplus, is also needed to fund investment. Australia's CAD will prolly always be in deficit as it would take a large amount of capital to repay it all. However fluctuations in the CAD are mainly caused by the Balance on Goods and Services (BOGS) and this is the area where Microeconomic reform may alter.

Therefore the only change that comes to mind that might occur on the CAD, is that Microeconomic Reform's National Competition Policy (i think it was 1995? not sure) would force firms to compete against each other and therefore lead to greater productivity and quality in goods. This may increase Australia's international competitiveness and may hence be reflected in the Balance of Goods and Services.

Another thought...the tax reform might have an effect on the CAD as company tax decreased in Australia. This might encourage increased FDI which is reflected on the capital and financial account and may contribute to a larger CAD in the future in terms of profits, dividends and the remitence of royalties overseas on the net income component on the current account