Originally posted by coroneos
I thought it may be more beneficial to others and each other if you guys posted your practice essays on here
Ok just finished revising the cores. Umm this question is from 2002 HSC, Question 27:
Analyse the impact of changes in the global economy on Australia's current account and net foreign debt
Since 1960, the global economy has undergone severe and rapid change through the process of globalisation. Globalisation is the breaking down of traditional barriers between nations, which involves the removal of physical, eoconomic and political barriers that traditionally hindered the trade of goods and services between nations. Australia's trade liberalisation strategies and government policies toward this however, has seen impacts on it's external stability, that is, Australia's current account deficit and net foriegn debt.
The process toward globalisation first began with the Whitlam government in 1974, when a 25% tariff cut across the board was announced. Several years later, in December 1983, Keating decided to float the exchange rate, allowing market forces to be the key factors in determining the value of the Australian dollar. This process of globalisation continued with Australia's involvement in a number of bi-lateral and multi-lateral free trade agreements. Australia's involvement in CERTA (closer economic relations) with New Zealand first began in 1983 with the trade of goods but later expanded to trade in services in 1988 causing trans-tasman trade to increase. The involvement with APEC (Asian Pacific economic co-operation) forces Australia to adopt a level of free trade by 2020. As a result, the CAR button program, which will remove protection in the PMV industry completley (once the most highly protected area) and will see tariff rates drop from 35% to 10% in 2005 and a 2% reduction in this tariff until 2015. Australia's second most highly protected area, the TFC industry will also undergo a similar process with quotas phased out completley, and a phased removal of tariffs.
This reduction in protection, and opening up of markets as well as the deregulation of financial flows has resulted in the current account affected detrimentally. The current account is a record of all transaction between Austalia and the rest of the world in transfer of income, goods, services and current transfers. Changes in the global economy, as in 1997-1998 Asian financial crisis has resulted in detrimental effects in Australia's current account. When major Asian trading partners such as Thailand fell into recession, they utilized a number of protection methods such as tariffs and quotas to protect their vulnerable domestic industries. As a result, Australia lost many of it's export markets, causing exports to decline. As export income declined, the balance of goods and services fell and this had a detrimental effect on the current account balance, causing it to fall. The implications of this lower current account balance meant investor confidence became undermined. This caused a fall in investment into Australia, leading to a fall employment. This fall would then result in the negative social cost of lower morale and self esteem in those indiviuals effected.
Similarly, the increased convergence and integration of economies due to the globalisation process resulted in Austrlaia being more prone to fluctuations in the world business cycle. During early 1990's, global and domestic downturns caused economic growth to fall to -0.34%. This caused the government to adopt a tight monetary policy, lower interest rates from 7% to 4.75% in 1993 and adopt an expansionary fiscal policy. The increase in economic growth that followed up until 1995 when growth peaked 4.53% resulted in huge levels of demand as cyclical unemployment approached 0% and the natural rate of unemployment was nearly reached. This increase in demand caused net foriegn debt to rise as a result of Australia's low level of savings (ranked 3rd lowest in savings among OECD nations). The low level of savings causes investors to look to overseas borrowing, which demands foriegn currency, and worsens net foriegn debt. This leads to undermined investor confidence and as a result, further unemployment and hinderence to economic growth. Rising foriegn debt will result in the CAD worsening as interest paid to service this debt is recorded in the net incomes section of the current account as a negative. The worsening cad, coupled with the foriegn debt immensley undermines investor confidence, as economists argue it is the result of an economy living beyond it's means.
While changes so far have been detrimental, there are positive implications of changes in the global economy. It is argued that a global economy will make countries more susceptible to any changes in the international business cycle. This is explained by Rostow's trickle down theory where countries experiencing high levels of growth will trickle down these levels of growth to other eocnomies. This comes as a result of countries that experience high levels of growth, usually have high levels of demand. If demand increases, their demand for imports increases, and for Australia, this will see the demand for exports rise, cuasing the CAD to be stabalised as the entry of exports is a positive in goods and services section of the current account. This will not only alleviate pressure on the CAD but will create demand in Australian domestic goods and services, leading to employment and more production. The increase of production is recorded as a positive percentage change in GDP so in effect, economic growth will also rise.
It is important to understnad that while trade liberalisation and deregulation of markets is pursued, it is done so at the expense of volatility. That is, volatility in the current account and foriegn debt. A country, more closley integrated to other countries, as Australia is, will see it more vulnerable to the changes of the global economy, more so affected in the Current account and foriegn debt levels.
The End
Well Its 2:30am already
And I am pretty tired. Sorry if there are typos or anything. I'll be up in the morning to check the accuracy of my statistics. Good night/morning.
