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Economic Indicators Essay, Research Paper

Economics Assignment

Section A

Question 1

i) THE AUSTRALIAN DOLLAR – It is an economic indicator because the value of the Australian dollar determines how it is performing on a global basis. Most currencies around the world are floated; many financial organisations (eg RBA) have foreign exchange operations and trade (buy/sell) currencies. These organisations trade currencies to make a profit. So generally a nations profile (how it is performing on an economic basis) is determined on foreign exchange agents who buy and sell currencies. This is because by buying/selling a nations currency, it can add/delete pressure on aggregate demand and aggregate supply on a nations currency. This in effect, will determine the exchange rate, the price can either increase/decrease. The AUD mainly effects the value on imports and exports.

ii) My advice would be given the current situation of the low value of the $AUD, I would in my opinion try to increase the value of the dollar back to a more competitive level against other foreign currencies (eg $US). This is because it will attract more currency investors to invest in the AUD. For this to occur the RBA must get into the market and start to buy the $AUD which hopefully will bring the value of the dollar up, since it will create a domino effect of other investors purchasing the AUD, thus resulting in an increase in demand.

Another method that could be used to increase the AUD is to increase interest rates. This is because international interest rates eg US interest rates remain 0.25 per cent higher than the local rate of 6.25 per cent, making Australian assets less attractive. By increasing interest rates, it will attract overseas investors, as they will get a greater return in money invested. The problem by increasing interest rates is that it will slow down domestic markets.

Another alternative method would be to just to wait and see. By waiting, theoretically the dollar will eventually increase in value. This is because as the dollar is diving and becoming more inexpensive for the overseas market. This will attract investors to take a risk and buy $AUD, This in theory will cause a global trend and should through the price mechanism (demand/supply), the value of the dollar should increase.

i) INFLATION Inflation is used to measure the increase in the price of products. Inflation is an important indicator because it affects the domestic market. It affects the purchasing power of income earned eg if someone who had $10 and spent $5 on a cupcake everyday. And for instance one day the price of the cupcake went from $5 to $6, the person then has to pay more money. This will increase the person s level of spending and decrease their level of disposable income. So therefore inflation will reduce the purchasing power of money.

ii) My advice given the current economic situation is to try to decrease inflation. Inflation is caused by factors such as levels of aggregate demand. So by increasing interest rates, this in effect will decrease the level of demand, and should in theory reduce the level of inflation. The problem with increasing interest rates is that it will have more than one effect on the economy. For instance, by increasing (I), we should in theory see an increase in savings (as people get a greater return) and a decrease in investments (it now costs more to borrow), from this we will probably see a slowdown in domestic markets. Also there is a benefit by increasing (I) for the Australian economy on a more global basis, it will attract more foreign investors to invest in the Australian economy, this in effect should raise the value of the low $AUD.

i) TRADE Trade is an important economic indicator because it deals with the level of imports and exports. This balance of imports and exports (balance of trade) can effect domestic markets. For example, exports have grown about 30% since last year, so it is experiencing boom conditions. With the Olympic games it as helped Australia have its first surplus in three years. The games boosted exports by $1.4 billion, pushing the trade balance of a $677 million surplus compared with a deficit of $1.3 billion in August. The low value of the AUD also affected the increase in exports, as importers see the advantages by importing from Australia. This indicates that Australian economic growth is being boosted by export growth. This is because exports contribute to growth in GDP.

ii) Australia has had trade deficits in the past 3 years so its trade sectors aren t doing to well in this sector. This is because the balance of trade is imports are greater than exports. I predict that Australia will be exporting more in the coming months than recorded in the previous months because of the low Australian dollar, this is because importers from overseas will see that goods from Australia will become cheaper due to the fall in the AUD. Even with the fall in the AUD, I believe we will still be seeing trade deficits in the coming months, but we should be seeing this deficit decreasing as the level of exports is increasing and level of imports is decreasing. Level of Imports will decrease because it is now more expensive to import goods from overseas markets.

2. By examining the range of indicators it shows that the current state of the Australian economy is growing strongly. By monitoring the AUD it shows that the falling dollar has increased exports by about 30%. Australia is on an export bonanza. It is believed that Export volumes will grow by 9 per cent. The industries that will benefit from this include mining, basic metal manufacturers, the tourist industry, agriculture and food manufacturing and other machinery manufacturers.

Since exports are an injection into the economy, this in theory is contributing to the strong economic growth. But also at the same time

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