Syllabus - topic two (1 Viewer)

[Littlelease]

I'm looking at the syllabus for topic two and i don't understand a few things..

1) links between key BOP catergories
2) CA as a % of GDP
3) Trade weight index


Help would be greatly appreciated

Also i read an article in the newspaper about how CAD doesn't really mean much b/c of inflation, growth rates, private sector and all this junk... how would i incoporate this ?

FOr anyone who wants to know about the article it was sydney morning herald 8/9 march 2003

 

[Minai]

1) What do u mean? plz b a bit more specific
2) Ill let some else answer that (ive forgotten the theory behind that)
3) Trade weighted index is basically the exchange rate that where, say Australia's trading partner's are weighted based on their importance to our economy (theres a better definition in the text book)

In regards to that CAD unimportance issue - its no longer a policy objective (that is, the achievement of external stability), because the AU economy is continuing with low inflation, and lower unemployment, while experiencing moderate economic growth - and of course, when there is growth, spending becomes higher and therefore contributing to a worsening CAD - however the government has acknowledged that we are essentially a 'capital importing' economy, where we encourage FDI and such, which contributes to growth - and by definition leads to a worse CAD - but its ok, because its sustainable right now

 

[Littlelease]

for 1) in the textr book it says : CA + C&F + net errors and omissions = 0 then it talks about supply of $A and demand of $A.. so S$A = D$A

Then something about how financial inflows will create debits (I don't understand) through Foerign capital inflow and foreign financial inflows and then it talks about debt trap......

 

[AGB]

In response to the links between bop categories.....supply of $A is determined by Payments for imports (M), Income/transfer debits (Y debits),Capital and financial outflow (K outflow) and demand is determined by Receipts for exports (X), Income/transfer credits (Y credits), Capital and financial inflow (K inflow)

Therefore, equilibrium occurs when:
Supply of $A = Demand for $A
M + Y debits + K outflow = X + Y debits + K inflow
M X + Y debits Y credits = K inflow K outflow
Balance on Current account = Balance on capital and financial account

 

[AGB]

for 2)...if the CAD reachers over 5% this is considered to be unsustainable since it represents a constraint to domestic economic growth. If the economy is growing at 4% and the CAD reaches 5%, then the economy cannot grow faster without spending more on imports (capital goods), which in turn will increase the goods deficit and the CAD. This occurred in 1989-90 (5.75%), 1994-95 (5.8%) and 1998-00 (5%). On all occasions, the RBA tightened monetary policy.

 

[AGB]

and for 3) - the trade weighted index (TWI) measures the movement of the Australian dollar against 23 other currencies of Australias major trading partners, which account for 92% of Australias aggregate trade. It is a more accurate and important measure of the $As performance over time than a simple bilateral measurement i.e. the $US

p.s. sorry bout posting three messages

 

[Littlelease]

Thanks.

 

[PG5]

Originally posted by AGB
and for 3) - the trade weighted index (TWI) measures the movement of the Australian dollar against 23 other currencies of Australias major trading partners, which account for 92% of Australias aggregate trade. It is a more accurate and important measure of the $As performance over time than a simple bilateral measurement i.e. the $US

i still dun quite understand TWI... could you please give examples?

 

[astron]

the trade weighted index is a basket of foreign currencies, with each currency WEIGHTED according to its significance to Australian trade.

The most important currency in the TWI is the yen, because of the amount of trade we do with them (I think it is 17% of the TWI) followed by the US dollar, etc.

That's basically it. Its an measurement index that compares the Australian dollar to movements in a number of currencies.

 

[PG5]

so.. if the yen was 4%, it's how much we trade with them compared to our aggregate trade with other countries?

ie. our trade with Japan is only 4% of our total trade with other countries?

 

[astron]

Basically yes. The percentage is an indication of the currencies important to Australian trade. Though I'm not sure that 4% trade directly correlates to 4% in the TWI.

Remember, the 4% trade takes into account ALL countries Australia trades with. The TWI only takes into account a small number (26 I think). Thus, the percentage in the TWI will be bigger.

 

[Bambul]

Some things to note about the TWI:

1. The AUD has been pretty steady against non-USD and Yen currencies since the late 80's (primarily Euro-currencies, Pound, Kiwi Dollar, etc) so the TWI has moved between 50-60 most of the past decade. This is much less volatile than the 50-90 or so that it has ranged compared to just the USD.

2. As a lot of Australia's trade is with China, Malaysia, Hong Kong, etc (which all have currencies pegged to the USD), the USD has in fact a larger effect on the TWI than the Yen. It accounts for about 30% of the TWI (from memory) because of this.

You wouldn't really need to know this, I just thought it might be of interest.