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Urgent! About CAD (1 Viewer)
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Correct me if im wrong:
Firstly, as you know, unemployment and inflation are corelated. (ie. high unemployment=low inflation and vice versa).
In times of high infation, nominal interest rates are increased and depreciation of $A. Ie, for people who relying borrowed funds from overseas would be required to pay more interest and hence, this would occur on the CA (net income component..i think). Overall, there would be an increase in CAD
Possible reasons for increase CAD:
-where payments for imports exceeds the reciepts recieved from overseas for our australian exports
-same idea goes with services (tourism, phone calls, etc) When debit owed to foreign countries exceed credit
-(also, the above scenario..)
Firstly, as you know, unemployment and inflation are corelated. (ie. high unemployment=low inflation and vice versa).
In times of high infation, nominal interest rates are increased and depreciation of $A. Ie, for people who relying borrowed funds from overseas would be required to pay more interest and hence, this would occur on the CA (net income component..i think). Overall, there would be an increase in CAD
Possible reasons for increase CAD:
-where payments for imports exceeds the reciepts recieved from overseas for our australian exports
-same idea goes with services (tourism, phone calls, etc) When debit owed to foreign countries exceed credit
-(also, the above scenario..)
Firstly reasons that can cause the CAD to increase are-:
1) Changes in Australia's terms of trade- If these deteriorate then Australia must sell more exports in order to purchase the same amount of imports.
2) A fluctuating exchange rate- An increase in the value of the Australian dollar will encourage more imports and discourage exports.
3) The level of economic activity within Australia- When there is a high level of economic growth being experienced there will be high levels of consumption and investment. The increases in these areas spill over into the trade sector, resulting in an increase in imports.
4) The level of economic activity in Australia's trading partners- The level of exports will be influenced by the economic activity in the countries that buy Australia's exports. When I hear this I think of the demand for Australian commodities by China, in particular gas.
5) Increases in net foreign debt- when this increases, the interest payments on the debt increase. The interest payments are recorded in the current account and add to the deficit.
Practically, if you learn the structure of the Balance of Payments and the components of the CAD in particular, you'll pick up what can impact upon it.
Secondly, do unemployment and inflation affect the CAD?
Well if Australian inflation levels are higher than its trading partners, exports will be less competitive and imports more attractive.
Regarding unemployment, if labour, a scarce resource, is not being utilised fully, economic growth is not at its optimum. This therefore impacts upon our international competitiveness.
1) Changes in Australia's terms of trade- If these deteriorate then Australia must sell more exports in order to purchase the same amount of imports.
2) A fluctuating exchange rate- An increase in the value of the Australian dollar will encourage more imports and discourage exports.
3) The level of economic activity within Australia- When there is a high level of economic growth being experienced there will be high levels of consumption and investment. The increases in these areas spill over into the trade sector, resulting in an increase in imports.
4) The level of economic activity in Australia's trading partners- The level of exports will be influenced by the economic activity in the countries that buy Australia's exports. When I hear this I think of the demand for Australian commodities by China, in particular gas.
5) Increases in net foreign debt- when this increases, the interest payments on the debt increase. The interest payments are recorded in the current account and add to the deficit.
Practically, if you learn the structure of the Balance of Payments and the components of the CAD in particular, you'll pick up what can impact upon it.
Secondly, do unemployment and inflation affect the CAD?
Well if Australian inflation levels are higher than its trading partners, exports will be less competitive and imports more attractive.
Regarding unemployment, if labour, a scarce resource, is not being utilised fully, economic growth is not at its optimum. This therefore impacts upon our international competitiveness.
ToO LaZy ^*
n/a
since we're on the same topic, i'll just add my question here..
how do high interest rates reduce the CAD?
...ok, from what i've read from above, high interest rates slow growth down in the tradables sector, notably imports. BUT...i just had a thought...if we increase interest rates, wouldn't that ATTRACT MORE foreign investment because of higher interest payments?
how do high interest rates reduce the CAD?
...ok, from what i've read from above, high interest rates slow growth down in the tradables sector, notably imports. BUT...i just had a thought...if we increase interest rates, wouldn't that ATTRACT MORE foreign investment because of higher interest payments?
This is a question that I’ve been considering for a long time. It's actually quite detailed, well in my view. Practically the value of the exchange rate is, in part, determined by domestic interest rates. For example, if the USA increases its interest rates and Australia's interest rates remain unchanged, investors will get a better relative return by investing in the USA. This will result in reduced demand and an increase supply in the Australian dollar, causing the value of the local currency to depreciate against the American dollar. This would cause an increase in the CAD. If the opposite occurs, then a reduction in the CAD will occur. I don't know if I’m making sense here, however I’m still trying to grasp this concept. Practically it just comes down to the actions of investors and the type of returns they can attain.ToO LaZy ^* said:
ToO LaZy ^*
n/a
.yeah it makes sense..so in this case.. foreigners are speculating in currency movements rather than....long term/short term investments?...
hmm..it still confuse me though
hmm..it still confuse me though
Yeah that’s correct.ToO LaZy ^* said:.yeah it makes sense..so in this case.. foreigners are speculating in currency movements rather than....long term/short term investments?...
hmm..it still confuse me though
It's a pretty detailed idea. I've never really grasped it myself. There are just some topics in economics that are extremely hard to understand. Hopefully we won’t get a question in the trials or the hsc which are like that.
ToO LaZy ^*
n/a
let's just hope so.
ToO LaZy ^* said:
it does, while the impact of interest rate changes will slow down the economy reducing the CAD, the movement of savings into Australia becuase of higher interest rate differentals will move it back the other way, and just to confuse the matter the increase in savings will drive the dollar back up reducing the CAD.
however at the end of it all the RBA has calculated that an increase in interest rates will also increase the CAD as the impact of the influx of savings outweighs the other two, which is a reason why MP isn't used for external stability