1
Q
What is international trade?
A
The exchange of goods and services across national boundaries. It involves multiple currencies, special risks, and is dominated by transnational corporations (TNCs).
2
Q
What are the four main features of international trade?
A
- Involves more than one currency (USD, EUR, GBP, JPY etc.) 2. Entails special risks (currency movements, commodity prices, interest rate changes, policy changes) 3. Dominated by TNCs with immense global influence 4. Affected by the international business cycle, technology and economic policy (e.g. GFC 2008, US/China trade war 2018, Covid-19 2020, Australia-China trade tensions 2020/21, high inflation 2022–24)
3
Q
Why does Australia trade internationally?
A
Australia relies on international trade due to: demand for its primary commodities (minerals and agricultural products); services exports like tourism and education; need to acquire new technology and goods not manufactured domestically due to its relatively small population.
4
Q
How does Australia fit in the global economy?
A
Australia is a small open economy constituting only 2% of Gross World Product (GWP). Exports make up more than one-quarter of what Australia produces, and imports equal about one-quarter of GDP. Australia has minimal influence on the global economy, but global events have a significant impact on Australia.
5
Q
What is meant by Australia being a ‘small open economy’?
A
Its domestic policies and output have minimal effect on global prices or trends, but Australia is highly sensitive to changes in global economic conditions, commodity prices, interest rates, and trade flows.
6
Q
What was Australia’s ‘dual economy’ before the 1980s reforms?
A
One part — resources and agriculture — was closely integrated with the global economy; the other larger part of the economy was inward-looking and sheltered from international competition and efficiency pressures.
7
Q
When and how did Australia become more globalised?
A
Primarily in the 1980s: floating of the AUD (1983), deregulation of the financial system and interest rates (1983), entry of foreign banks, reduction in tariffs/subsidies/quotas (1980s–2000s), participation in APEC and the Bogor Declaration (1994), and signing of bilateral FTAs with the USA, ASEAN, Korea, Japan, China and Indonesia in the 2000s.
8
Q
What happened to imports and exports as a share of GDP following globalisation?
A
Rose from around 25% of GDP in the 1970s to around 45% before the 2008 Global Financial Crisis.
9
Q
What is the major trend in the direction of Australia’s trade since the 1960s?
A
Shift away from British and European markets (triggered by the UK joining the EEC in 1973) toward Asian and Pacific markets. China has become Australia’s largest trading partner since 2007.
10
Q
Why did Australia shift away from the UK as a trade partner?
A
When the UK joined the European Economic Community (EEC) in 1973, it was required to impose the same trade barriers on Australia as on all non-member countries. Australia consequently lost the bulk of its traditional agricultural export markets in the UK.
11
Q
What is the A-UK FTA?
A
The Australia-UK Free Trade Agreement — removes tariffs on over 99% of Australian goods exported to the UK. In effect since 2023. The UK’s departure from the EU (Brexit, 2020) also facilitated this.
12
Q
What percentage of Australia’s exports went to Asian countries in 2023-24?
A
80.4%: China 36.6%, Japan 14.1%, ASEAN 11.9%, Korea 7.2%, India 4.4%, Taiwan 3.5%, Hong Kong 2.7%.
13
Q
What is the breakdown of exports by major region in 2023-24?
A
Northeast Asia 64.1% (China, Japan, Korea, Taiwan, Hong Kong); ASEAN 11.9%; India 4.4%; EU 4%; USA 3.1%; others 12.5%.
14
Q
What happened to China’s export share between 2020/21 and 2023/24?
A
It fell from 39.9% in 2020/21 to 29.2% in 2022/23 due to Chinese trade sanctions on Australian goods, but recovered to 36.6% in 2023/24 after sanctions were lifted.
15
Q
What is the breakdown of Australia’s imports by source in 2023-24?
A
Northeast Asia 40.3%; ASEAN 18.6%; EU 14.8%; USA 11.3%; India 2.3%; other 12.7%. China is the most important single country for imports at 25.3%.
16
Q
What are the key ASEAN trade statistics?
A
Australia’s two-way investment with ASEAN was worth $307 billion in 2022. Two-way trade was $178 billion in 2022, accounting for 15% of Australia’s trade — greater than trade with Japan or the USA.
17
Q
What is the SEAIFF?
A
The Southeast Asia Investment Financing Facility — a $2 billion facility managed by Export Finance Australia to provide loans, guarantees, equity and insurance for projects boosting Australian trade and investment in Southeast Asia, particularly in clean energy transition and infrastructure.
18
Q
What was the total value of Australia’s exports of goods in 2024-25?
A
$513,025 million — a fall of 4.3% from 2023/24, largely due to lower mining exports (from $371,250m to $329,541m) as China’s growth slowed.
19
Q
What was the value of rural exports in 2024-25?
A
$73,089 million (14.2% of total goods exports), supported by favourable seasonal conditions.
20
Q
What was the value of service exports in 2024-25?
A
$132,524 million — an increase of 117% since 2021-22, driven by the post-COVID recovery and resumption of international travel.
21
Q
What is the composition of Australia’s exports in 2024-25?
A
Mining 51.1%, Services 20.5%, Manufacturing 17.1%, Rural 11.3%.
22
Q
What was the total value of Australia’s imports of goods in 2024-25?
A
-$457,233 million, consisting of consumption, capital and intermediate goods.
23
Q
What is the composition of Australia’s imports in 2023-24?
A
Intermediate goods 30.9%, Services 27.6%, Consumption goods 23.4% (food, beverages, clothing, footwear, cars), Capital goods 18.1% (machinery, industrial/transport equipment, computers).
24
Q
What has happened to service imports since the COVID-19 pandemic?
A
Imports of services rose sharply from -$72,423m in 2021/22 to -$171,719m in 2024-25 (a 137% increase) as Australians resumed overseas travel following the global reopening of borders.
25
What was the goods balance surplus in 2024-25?
$55,788 million — exports ($513,025m) exceeded imports (-$457,233m).
26
What was the total value of exports of goods and services in 2024-25?
$645,545 million: goods $513,021m and services $132,524m.
27
What do service exports comprise?
Freight, transport, travel, tourism, education, communications, finance, business and insurance.
28
What was the net services deficit in 2024-25?
-$39,195 million — services imports exceeded services exports. This grew by 240.1% between 2021/22 and 2024/25.
29
Why has Australia's export value been relatively volatile over time?
Heavy reliance on commodity exports (approximately two-thirds of exports are primary commodities). Commodity prices fluctuate far more than prices for manufactures or services, causing large swings in total export value.
30
What is trade intensity and what has happened to it since the 1980s?
Trade intensity = the ratio of exports and imports to GDP. It has risen from 12% of GDP in the mid-1980s to 22% of GDP by 2024-25, reflecting Australia's growing integration with global markets.
31
What event triggered the growth of international financial flows globally?
The collapse of the Bretton Woods System of fixed exchange rates — exchange rates globally were floated and restrictions on movement of financial capital across borders were removed. This established international capital markets and dramatically increased capital mobility.
32
What are the key trends in Australia's financial flows?
Investment flows increased exponentially after financial deregulation and the AUD float in 1983. Portfolio investment has grown faster than FDI. Australian investment overseas grew 8.2% on average between 2018–2023. Overall level of portfolio investment is significantly higher than direct investment.
33
What were the values of foreign investment in Australia vs Australian investment overseas in 2024?
Foreign investment in Australia: $5.0 trillion. Australian investment overseas: $4.4 trillion. Australia remains a net capital importer.
34
What has been the long-run trend in foreign investment into Australia?
Rose from $325,980 million in 1991-92 to $5,036,720 million by 2024-25 — a massive increase reflecting globalisation, deregulation, and Australia's resource-rich investment opportunities.
35
What has happened to Australian investment overseas?
Grew from -$107,940 million in 1990-91 to -$4,362,025 million in 2024-25. Growth driven by rising offshore interests of major companies (BHP-Billiton, Rio Tinto, AMP, Amcor) and Australian banks (CBA, Westpac, NAB, ANZ).
36
What are the four types of foreign investment in Australia (ABS categories)?
1. Direct investment — holding 10%+ of shares/voting stock 2. Portfolio investment — equity securities (shares) and debt securities (bonds) 3. Other foreign investment — trade credits, loans, currency and deposits 4. Financial derivatives — currency swaps, options and other derivative products
37
What are the five types of Australian investment overseas (ABS categories)?
1. Direct Australian investment overseas (10%+ ownership) 2. Portfolio investment in foreign equity and debt securities 3. Other investment — trade credits, loans, currency and deposits 4. Financial derivatives — currency swaps, options 5. Reserve assets — foreign financial assets controlled by the RBA
38
Who are the main sources of foreign investment into Australia?
The United States and United Kingdom are the biggest investors, followed by Belgium, Japan and Hong Kong. China is Australia's 10th largest foreign investor with 1.9% of total. Since 2008 there were more than 3,000 foreign affiliates of TNCs in Australia.
39
What is Australia's global ranking for direct inward foreign investment?
Australia attracts the 16th-highest amount of direct inward foreign investment in the world.
40
What are the main advantages of foreign investment in Australia?
1. Transfer of technology and management skills 2. Access to foreign exchange 3. Creation of employment opportunities and management training 4. Increased access to export markets
41
What are the main disadvantages of foreign investment in Australia?
1. Loss of ownership and control of resources 2. Cost of servicing overseas debt and equity borrowings (profit repatriation, interest payments) 3. Volatile nature of speculative portfolio capital flows, which impacts exchange rate volatility
42
What is the Foreign Investment Review Board (FIRB)?
A non-statutory body that advises the Australian Treasurer on foreign investment policy. It examines proposed foreign investments and makes recommendations on whether they align with the national interest. The Treasurer makes the final decision on approval. It operates under the Foreign Acquisitions and Takeovers Act 1975.
43
Give three examples of FIRB decisions.
1. 2001: FIRB rejected Shell's takeover bid for Woodside Petroleum (against national interest in the strategically significant resources sector). 2. 2009: FIRB approved Chinalco's bid for a stake in Rio Tinto, but the bid failed due to management/shareholder opposition. 3. 2018: Treasurer used FIRB powers to reject CK Infrastructure Group's $13 billion bid for APA Group — concerns about a single foreign company gaining monopoly over Australian pipelines.
44
What is the Balance of Payments?
A record of all financial transactions between Australian residents and the rest of the world. It is based on a double-entry system of credits and debits in three accounts: the Current Account, the Capital Account, and the Financial Account.
45
What is a credit in the Balance of Payments?
Money flowing INTO Australia — e.g. exports of goods/services (inflows) or foreign investment into Australia.
46
What is a debit in the Balance of Payments?
Money flowing OUT OF Australia — e.g. imports of goods/services or Australian investment overseas.
47
What is the formula for the Current Account Balance?
Net Goods (goods credits – goods debits) + Net Services (service credits – service debits) + Net Primary Income + Net Secondary Income = Current Account Balance
48
What is the formula for the Capital and Financial Account Balance?
Capital Account Balance + Financial Account Balance = CAFA Balance. If total credits exceed total debits = SURPLUS in CAFA. If total debits exceed total credits = DEFICIT in CAFA.
49
What is the overall Balance of Payments formula?
Current Account Balance + Capital and Financial Account Balance +/- Net Errors and Omissions = 0 (under a floating exchange rate)
50
What does the Current Account record?
All current (non-reversible) transactions: exports and imports of goods and services, Net Primary Income (income from financial investments), and Net Secondary Income (personal transfers and worker remittances). Once these transactions happen, they cannot be reversed.
51
What is the Balance on Goods and Services (BOGS)?
Net goods + Net services. It records the difference between what Australia receives for exports of goods and services and what it pays for imports. In 2024/25, BOGS recorded a surplus of $56.6 billion.
52
What is the Net Goods balance in 2024/25?
A surplus of $55.8 billion — exports of goods ($513,025m) exceeded imports of goods (-$457,233m).
53
What is the Net Services balance in 2024/25?
A deficit of $39.1 billion — imports of services (tourism, travel, education, insurance, transport, finance) exceeded service exports.
54
What is Net Primary Income (NPI)?
Credits minus debits of income received and paid to service direct, portfolio and other investment — dividends, interest and profits. It includes earnings on investments or returns on factors of production (rent, interest, profits, dividends). When foreigners invest in Australia, income flows overseas (debit). When Australians invest overseas, income flows back to Australia (credit). In 2024/25, NPI recorded a deficit of $72.6 billion.
55
What is Net Secondary Income (NSI)?
Government transfers (foreign aid), personal transfers of migrants (pensions), and workers' remittances. These are non-market transfers — products or financial resources provided without a specific good or service in return. Examples: insurance claim payouts, foreign workers in Australia sending money overseas, unconditional aid, pensions from foreign governments. In 2024/25, NSI recorded a deficit of $0.5 billion.
56
What was Australia's Current Account Deficit in 2024/25?
$56.6 billion (BOGS surplus of $56.6b minus NPI deficit of $72.6b minus NSI deficit of $0.5b = CAD).
57
When did Australia first record a Current Account Surplus in mid-2019?
In mid-2019 — the first CAS since 1975. Driven by a very large trade surplus from high prices for iron ore, LNG and coal, plus large increases in production of those commodities.
58
Why did Australia record a current account deficit in 2025?
Primarily due to: (1) falling export prices for iron ore and coal (lower terms of trade), (2) persistent net primary income deficit from payments to overseas investors, (3) relatively stable import demand. The fall in the goods trade surplus was the key driver.
59
What does the Capital Account record?
Credits and debits for: (1) capital transfers — mainly 'conditional' foreign aid grants tied to specific capital projects and debt forgiveness; (2) purchase and sale of non-produced, non-financial assets — intellectual property rights such as patents, copyrights, trademarks and franchises.
60
What is an example of a Capital Account transaction?
An Australian donation to build a bridge in the Solomon Islands (capital transfer). Or an Australian company buying the rights from a US company to operate a Subway outlet in Australia (intellectual property).
61
What does the Financial Account record?
Credits and debits for: (1) Direct investment (10%+ ownership), (2) Portfolio investment (shares, bonds, marketable securities, also foreign debt), (3) Financial derivatives (performance of assets, interest rates, exchange rates, indices), (4) Reserve assets (RBA gold, SDRs, foreign exchange), (5) Other investment (trade credits, loans, currency, deposits).
62
What were the five financial account components in 2024/25?
Direct investment: +$54.0 billion surplus; Portfolio investment: +$15.8 billion surplus (down from $46.7b in 2023/24); Financial derivatives: -$32.5 billion deficit; Reserve assets: +$2.9 billion surplus; Other investment: +$28.7 billion surplus. Total CAFA balance: $68.9 billion surplus.
63
What was the CAFA balance in 2024/25 and how does it relate to the CAD?
A $68.9 billion surplus in CAFA offset the Current Account Deficit — financing the CAD through foreign capital inflows. Under a floating exchange rate CA + CAFA + Net Errors & Omissions = 0.
64
What are Net Errors and Omissions?
Statistical errors and adjustments made by the ABS to ensure the CAFA surplus (or deficit) exactly offsets the CA deficit (or surplus). When added together under a floating exchange rate the two account balances must total zero.
65
Which countries record current account surpluses and which record deficits?
Japan, Germany and China record current account surpluses and offset these with CAFA deficits by lending capital overseas. Countries like Australia record CADs and borrow capital from these surplus countries.
66
What are the four cyclical factors affecting the BOGS?
1. Exchange rate 2. Terms of Trade 3. Australia's domestic economic growth rate 4. Global economic growth rate (international business cycle)
67
How does a depreciation in the AUD affect the BOGS?
A depreciation decreases the foreign currency price of Australia's exports, increasing their international competitiveness. It also increases the domestic price of imports (imported inflation), discouraging consumers from buying imports. Both effects improve the BOGS.
68
What are the Terms of Trade and how do they affect BOGS?
ToT = (Export Price Index / Import Price Index) × 100. An improvement (rising commodity prices) means the same volume of exports buys more imports — improves BOGS. A deterioration means export revenues fall relative to import costs — worsens BOGS.
69
How does domestic economic growth affect the BOGS?
An upturn in the domestic business cycle raises household disposable income → higher consumption → increased import spending (a large proportion of Australia's imports are consumer goods) → worsens BOGS. E.g. the commodities boom of the mid-to-late 2000s produced poor BOGS despite improving ToT because high incomes drove import spending.
70
How does global economic growth affect the BOGS?
Strong global growth increases demand for Australia's commodity exports, improving the BOGS. China's booming economy kept Australia buoyant through the GFC. Australia's economy is now more closely integrated with rapidly growing economies like China and India.
71
What two structural factors cause Australia's long-run BOGS deficit?
1. Narrow export base (concentrated in low-value-added primary commodities; imports are high-value manufactured goods) 2. Lack of international competitiveness in manufacturing — Australia must import value-added consumer and capital goods
72
Why does Australia's narrow export base pose a problem for the BOGS?
Approximately two-thirds of Australia's exports are primary commodities (low-value-added). Imports consist of high-value consumer and capital goods. This structural imbalance means import payments typically outstrip export revenues, keeping the BOGS in long-run deficit. Commodity prices are also highly volatile.
73
What does the 'Future Made in Australia' (2024) policy aim to do?
A government initiative backed by $22.7 billion over a decade to attract investment in renewable energy, critical minerals processing, advanced manufacturing, skills development, and supply chain security. Goal: position Australia as a leader in the global clean energy transition and reduce reliance on fossil fuel exports.
74
What critical minerals does Australia have?
Lithium, cobalt, manganese, rare earth elements, tungsten, vanadium, nickel, and high-purity alumina (HPA). Essential for clean energy technologies (solar panels, wind turbines, EV batteries) and important for national security.
75
What are the key BOGS trend milestones?
Fluctuates from small surpluses to deficits of ~2% GDP. 2014/15: deficit of 1.5% GDP. BOGS recorded surpluses since 2016/17. 2020/21: largest BOGS surplus in history at $89 billion (sustained commodity prices + reduced service imports from COVID travel restrictions). 2022/23: surplus of $124.4b. 2023/24: fell to $69.8b (high commodity prices but return of travel and international students).
76
Why is the NPI deficit the main structural cause of Australia's persistent CAD?
Australia's savings-investment gap means it relies heavily on foreign capital (debt and equity). This generates large and persistent outflows: interest payments on foreign debt + dividends/profits on foreign equity. These outflows consistently exceed Australia's earnings from its own overseas investments, producing a structural NPI deficit of 2–3% of GDP.
77
What was the NPI deficit as a share of GDP in key years (2013, 2020/21, 2023/24)?
2013: ~2.3% of GDP (post-GFC low interest rates + dampened sentiment + mining companies reinvesting profits). 2020/21: 0.9% of GDP. 2023/24: 3.6% of GDP (interest servicing costs more than doubled as rates rose globally).
78
What are the THREE cyclical factors affecting the NPI deficit?
1. Exchange rates (valuation effect) 2. Changes in interest rates (domestic and global) 3. Domestic business cycle (impact on equity/dividend outflows)
79
How does the exchange rate affect the NPI deficit?
An appreciation lowers the AUD value of foreign-currency-denominated debt, reducing Australia's debt servicing costs and improving the NPI deficit. A depreciation raises the AUD value of debt, increasing interest repayments and worsening the NPI deficit. However, impact is limited because: much foreign debt is 'hedged' (exchange rate fixed in the loan agreement) and a large part of Australia's foreign debt is denominated in Australian dollars.
80
How do interest rate changes affect the NPI deficit?
Global and domestic interest rates determine the servicing costs of foreign debt. Low global rates (2010–2015) reduced Australia's interest repayments. When interest rates rose sharply (2022–2024), the cost of servicing debt more than doubled in two years to $38 billion net.
81
How does the domestic business cycle affect the NPI deficit?
Strong domestic growth increases corporate profits → more dividends paid to shareholders → since approximately 40% of the Australian share market is foreign-owned, significant dividend outflows occur → worsens NPI deficit. Example: before the 2012 commodity price fall, record mining profits caused large dividend outflows since about 75% of the Australian mining industry is foreign owned.
82
What is the main structural factor behind the NPI deficit?
The savings-investment gap. Australia is a relatively small economy with historically low national savings and high investment requirements (especially in the capital-intensive mining sector). It funds this gap through international borrowing (increasing foreign debt) and selling ownership of Australian assets (increasing foreign equity). These generate ongoing servicing costs as debits on the NPI account.
83
What is the current state of Australian household savings?
The household savings ratio fell to a 17-year low of 0.6% of household income in 2024 due to rising interest rates and cost-of-living pressures. This is down from high levels during COVID-19 (2019/20) when lockdowns and border closures drastically reduced spending.
84
How can the government increase national savings?
1. Increase the compulsory superannuation rate (currently 11.5%, rising to 12% on 1 July 2025) 2. Remove tax incentives that encourage debt; add tax incentives for savings 3. Reduce budget deficits and achieve public sector surpluses through fiscal consolidation
85
What is an exchange rate?
The price of one currency expressed in terms of another. Currency conversion occurs in the foreign exchange (FOREX) market where forces of supply and demand determine the price.
86
What are the two methods of quoting exchange rates?
Indirect method (Australia's preference): number of units of foreign currency needed to buy one unit of domestic currency e.g. US$0.70 = A$1.00. Direct method: number of units of domestic currency needed to buy one unit of foreign currency e.g. A$1.42 = US$1.00.
87
What is a bilateral (cross rate) exchange rate?
Measures the value of the $A relative to another specific currency — usually a major trading partner (e.g. $A vs $US, Japanese yen, Chinese Renminbi, Euro, UK pound). A rise in AUD value = appreciation; a fall = depreciation.
88
Give a real example of an appreciation and depreciation of the AUD.
Appreciation example: between 2019/20 and 2020/21, the $A rose from US$0.65 to US$0.77. Depreciation example: between 2013/14 and 2015/16, the $A fell from US$0.93 to US$0.79.
89
What is the Trade Weighted Index (TWI)?
Measures movements in the $A against a basket of currencies of Australia's major trading partners, weighted according to their importance in Australia's trade. It includes 18 currencies. Provides a broader measure of $A purchasing power than bilateral rates.
90
What are the key TWI weights as of January 2025?
Chinese renminbi has the largest weight at 29%. US dollar increased to 11% (now ranked 2nd). Japanese yen decreased to 10% (now ranked 3rd). Swiss franc was newly added. Weights are based on 2023/24 trade data and recalculated annually by the RBA.
91
What are the recent trends in the TWI?
The TWI is forecast to climb by 1.3% in 2024-25 to 62.5 index points. However it remains weaker than a decade ago. China's economic slowdown has suppressed further AUD increases. Between 2019/20 and 2020/21 the TWI and AUD/USD both trended up.
92
What is the key limitation of the TWI?
The TWI weights are based on volumes of trade, not the currency in which trade is invoiced. Approximately 90% of Australia's merchandise exports and more than half of imports are priced in US dollars — even when trading with Korea or Japan. Therefore the A$/US$ rate is far more significant than its TWI weight suggests.
93
Why is the AUD referred to as a 'commodity currency'?
Australia's major exports are iron ore, coal, LNG, and agricultural commodities. When global commodity prices surge, demand for Australian exports rises, increasing demand for AUD and appreciating its value. Traders and investors often use the AUD as a proxy for commodity market conditions.
94
What increases demand for the AUD (causing appreciation)?
1. Higher Australian interest rates relative to overseas rates — attract foreign savings 2. More investment opportunities in Australia — foreigners need AUD to invest 3. Expectations of future AUD appreciation — speculators buy AUD (self-fulfilling prophecy) 4. Increased demand for Australian exports (higher commodity prices, improved ToT) 5. Australia's lower inflation rate relative to trading partners — exports are cheaper and more competitive 6. Strong global economic growth — increases demand for Australia's commodity exports 7. Positive risk sentiment among investors
95
What increases supply of the AUD (causing depreciation)?
1. Higher level of financial flows out of Australia — Australians investing overseas sell AUD 2. Relatively lower Australian interest rates — makes investing overseas more attractive 3. More investment opportunities overseas 4. Higher domestic demand for imports — importers sell AUD to buy foreign currency 5. High domestic income/strong economic growth — increases import spending 6. Higher domestic inflation — makes imports relatively cheaper 7. Speculators expecting AUD to fall sell AUD 8. Changing consumer tastes toward imported goods
96
How do government policy measures influence the AUD?
In 2020, the RBA purchased bonds to boost liquidity and put downward pressure on interest rates — this increased the supply of AUD, estimated to result in a 1–2% depreciation in November 2020. In 2024, the RBA reduced its bond holdings by allowing bonds to mature naturally rather than selling them.
97
How do speculators affect the AUD?
Speculators buy/sell AUD based on predictions of future exchange rate movements. If they expect the AUD to appreciate they buy AUD (increases demand → self-fulfilling), and if they expect depreciation they sell AUD. This can create volatility, overshooting, bandwagon effects and speculative bubbles. Since Australia is a relatively small economy reliant on capital inflows, the AUD is more vulnerable to speculative attacks than most advanced economies.
98
How does a floating exchange rate act as an 'automatic stabiliser'?
A floating exchange rate naturally adjusts to economic shocks through market supply and demand — without requiring government intervention. A deteriorating CAD causes AUD depreciation (more AUD supplied) which improves export competitiveness and discourages imports — automatically correcting external imbalances. This insulates the economy from external shocks (e.g. GFC 2008/09; COVID-19 2020).
99
What were the key trends in the AUD from 2004 to 2024?
2004/05–2007/08 and 2009/10–2011/12: large appreciations due to global resources booms. 2008/09: depreciation due to GFC and falling commodity prices. 2011/12–2012/13: strong appreciation against $US, yen, euro, TWI. 2013/14–2019/20: depreciation as commodity prices fell, ToT weakened, RBA cut cash rate to 0.25% in 2020. 2020/21: appreciation due to rising commodity prices and improved ToT. 2023/24: depreciation due to weaker commodity prices.
100
What is a floating exchange rate system?
An exchange rate system where the value of a currency is determined by market forces of supply and demand in foreign exchange markets — with no government intervention (clean float) or with limited central bank intervention to reduce volatility (dirty float).
101
When did Australia adopt a floating exchange rate system?
December 10, 1983 — switching from a managed flexible peg. This is regarded as one of the most significant structural changes in Australian economic history because it opened Australia to global financial flows.
102
List the advantages of a floating exchange rate system (as applied to Australia).
1. More market-determined price reflecting current trends in economic growth, inflation and unemployment 2. Discourages destabilising speculation (a managed peg 1976–1983 led to excessive speculation) 3. BoP imbalances absorbed by exchange rate automatically (rising CAD → depreciation → improved competitiveness) 4. Provides insulation from external shocks (1997 Asian crisis, GFC, Covid-19, Russia/Ukraine war) 5. Consistent with floating systems used by major trading partners 6. Allows effective independent monetary policy (BoP doesn't affect money supply)
103
List the disadvantages of a floating exchange rate system.
1. Increased volatility over time due to changes in exchange rate expectations 2. Subject to sudden shifts in market sentiment causing currency to deviate from long-run equilibrium 3. Can lead to 'overshooting' or 'undershooting' — currency moves beyond expected level 4. 'Bandwagon effect' — speculators follow trends causing greater volatility 5. Speculative bubbles may develop if expectations become self-fulfilling
104
What is a fixed (pegged) exchange rate system?
A system where the value of a currency is officially set by the government or central bank, usually tied to another currency, a basket of currencies, or gold. The government maintains the fixed rate by buying or selling foreign currency in exchange for domestic currency.
105
What fixed exchange rate system did Australia use before 1983?
Australia operated under a fixed exchange rate system prior to 1976, then under a managed/flexible peg from 1976 to December 1983 before adopting a full float.
106
What are the advantages of a fixed exchange rate?
1. Stability and certainty for businesses engaged in international trade and investment 2. Reduced exchange rate risk — helps financial planning and minimises losses from currency fluctuations 3. Price stability — limits imported inflation 4. Attracts foreign investment through a stable currency environment
107
What are the disadvantages of a fixed exchange rate?
1. Loss of monetary policy autonomy — central bank may need to adjust interest rates to defend the peg rather than address domestic conditions (inflation, unemployment) 2. Vulnerability to speculative attacks — if perceived as unsustainable, can attract large-scale speculation leading to a currency crisis 3. Trade imbalances — if set at unrealistic level, can cause large surpluses or deficits 4. Limited adjustment to economic shocks — cannot automatically absorb external shocks 5. Risk of depleting foreign reserves trying to maintain the peg
108
Give a real-world example of a fixed exchange rate.
The Danish krone (DKK) is pegged to the euro at a central rate of 746.038 kroner per 100 euros, with a fluctuation band of +/- 2.25%.
109
What is a managed (flexible peg) exchange rate system?
A hybrid system that mixes elements of fixed and floating — the government sets a target or range for the exchange rate but adjusts it periodically. Australia used this from 1976 to 1983. China adopted a managed float in June 2010.
110
What was the Bretton Woods Agreement (1944)?
A 1944 summit in New Hampshire, USA where 730 delegates from 44 allied nations established a system of fixed currency exchange rates using the gold standard. It also created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, now the World Bank).
111
Why did the Bretton Woods system collapse?
Backing currency by the gold standard became unsustainable. In 1971, US President Nixon suspended the ability to convert the US dollar to gold. By 1973, nearly all major currencies had begun to float relative to one another and the entire system collapsed.
112
What was the significance of Bretton Woods despite its collapse?
Created the IMF and World Bank (both still vital to the global economy). Unified 44 nations to solve a global financial crisis. Strengthened the world economy and maximised international trade profit. Provided much-needed stability post-WWII.
113
What are the NEGATIVE effects of an AUD appreciation on Australia?
1. Australian exports more expensive on world markets → lower export income → worsens BOGS and CAD in medium term 2. Imports cheaper → increases import spending → worsens BOGS 3. Reduces financial inflows (more expensive for foreigners to invest) 4. Reduces AUD value of foreign income (worsens NPI) 5. Reduces AUD value of foreign assets — valuation effect 6. Reduces international competitiveness → may reduce employment in export sectors
114
What are the POSITIVE effects of an AUD appreciation on Australia?
1. Increased purchasing power for consumers (imports cheaper) 2. Reduces AUD value of foreign-currency-denominated debt → reduces debt servicing costs → improves NPI 3. Reduces imported inflation (cheaper imports → lower CPI) 4. May allow RBA to lower interest rates
115
What are the NEGATIVE effects of an AUD depreciation on Australia?
1. Reduced purchasing power for consumers (imports more expensive) 2. Increases AUD value of foreign-currency-denominated debt → higher debt servicing costs → worsens NPI (valuation effect) 3. Increases imported inflation → may pressure RBA to raise interest rates 4. Raises price of overseas assets for Australian investors
116
What are the POSITIVE effects of an AUD depreciation on Australia?
1. Australian exports cheaper on world markets → more competitive → improves BOGS and CAD (medium term) 2. Imports more expensive → discourages import spending → improves BOGS 3. Increased export revenue (injection) + lower import spending (reduced leakage) → boosts economic growth and employment 4. Increases AUD value of foreign income earned on Australian overseas investments → improves NPI 5. Increases AUD value of foreign assets (valuation effect) 6. Foreign investors find it cheaper to invest in Australia → increases financial inflows
117
How does depreciation affect Australia's foreign assets and liabilities?
The RBA Bulletin 2023 found that a depreciation of the $A may actually REDUCE rather than increase Australia's net foreign liabilities. This is because Australia's liabilities are largely denominated in Australian dollars, while its assets are largely denominated in foreign currencies. Therefore, a weaker AUD increases the AUD value of assets more than it increases liabilities — Australia is well protected from depreciation vulnerabilities despite its net foreign liability position.
118
Do economists prefer a higher or lower exchange rate?
Neither. Economists favour an exchange rate that reflects the true forces of supply and demand (from actual trade in goods, services and finance) — not one distorted by speculation. Speculative buying/selling exaggerates upward and downward cycles and increases volatility, which is harmful for economic stability.
119
How does the RBA intervene in the FOREX market?
The RBA intervenes by buying or selling AUD mainly against the US dollar (dirty float). These interventions generate demand or supply for AUD to influence its value. The RBA can operate in global markets in all time zones and mostly on the spot market.
120
What is the main objective of RBA FOREX intervention?
To tackle market failures — particularly during periods of major turbulence or unbalanced conditions in supply and demand. For example, during the GFC (beginning 2007), the RBA intervened to improve market liquidity and limit disruptive price adjustments.
121
What does it mean for foreign debt to be 'hedged'?
The lender and borrower agree to fix the exchange rate over the course of the loan to reduce the risk of large exchange rate fluctuations. This limits the valuation effect of exchange rate movements on debt servicing costs. Also, a large part of Australia's foreign debt is denominated in Australian dollars — further limiting exchange rate exposure.
122
How does risk sentiment affect the AUD?
When investors are more willing to take on risk (positive outlook on growth), demand for AUD tends to increase because Australia is seen as a commodity-rich, stable economy. When risk aversion increases (global uncertainty, recessions), the AUD tends to depreciate as investors move to 'safe haven' currencies like the USD.
123
What is the J-Curve effect?
The phenomenon where a country's trade balance initially WORSENS following a currency devaluation/depreciation, before gradually IMPROVING over time — creating a J-shaped curve. Initially, import and export volumes are fixed by existing contracts, so imports become more expensive in AUD. Over time (12–18 months), consumers and businesses adjust their buying patterns, exports increase (cheaper for foreigners), imports fall (more expensive domestically), and the trade balance improves.
124
What two factors influence the strength of the J-Curve effect?
1. Price elasticity of demand — how responsive consumers are to price changes (the more elastic, the stronger the long-run improvement) 2. Time lag — it takes time for consumers and businesses to adjust buying patterns to new exchange rates; the initial negative impact can last 12–18 months
125
How has Australia's trade policy changed over time?
Australia moved from being one of the most protectionist economies in the world (mid-20th century) to one of the least protectionist. From 1973 onwards, Australia gradually removed trade barriers. Today: ~90% of imported goods are tariff-free; average tariff level is ~0.5%; fewer subsidies than comparable economies like the EU and US; 19 active FTAs.
126
Describe the key phases of Australia's trade liberalisation (1983, 1980s–2000s, 1990s onwards).
1983: floating of the AUD and financial deregulation. 1980s–2000s: reduction of tariffs, subsidies, quotas and local content schemes. 1990s onwards: participation in WTO, APEC (Bogor Declaration 1994), and bilateral FTAs (USA, Singapore, Thailand, Korea, Japan, China, Indonesia, India).
127
Why did Australia originally use protectionist policies?
To protect domestic manufacturers who found it difficult to compete because of: relatively small domestic market, higher labour costs compared to Asian producers, and geographical remoteness. This led to import substitution policies.
128
What were the negative consequences of Australia's protectionist era?
1. Fostered inefficiency in domestic industries 2. Increased prices for consumers 3. Misallocated resources to uncompetitive industries 4. Reduced international competitiveness 5. Damaged trade performance (import substitution rather than export orientation) 6. Raised input costs for export industries 7. Reduced living standards in the long run
129
What protectionist measures does Australia still maintain (areas criticised by WTO)?
1. Taxes on luxury cars and restrictions on importing second-hand cars 2. Foreign investment restrictions (FIRB) 3. Prolific use of anti-dumping measures — Australia is one of the highest users globally, primarily to protect steel, aluminium and paper industries
130
How does reducing protection affect individuals?
Positive: access to more goods at lower prices and higher quality due to greater competition. Negative: structural and regional unemployment as previously protected industries close. Hardest hit: older workers in manufacturing regions (VIC, NSW) with limited transferable skills who face structural unemployment and may never find another stable job. Government responds with retraining programs and regional assistance packages.
131
How does reducing protection affect firms?
Positive (long-term): efficiency gains, innovation and productivity growth from competitive pressure, cheaper imported inputs, access to new export markets, spur investment in R&D and capital. Negative (short-term): import-competing firms face intense pressure and must restructure — through capital-labour substitution, outsourcing, or specialising in niche markets. Winners and losers in the short term.
132
How does reducing protection affect government finances?
Short-term: reduced tariff revenue; increased spending on unemployment benefits and retraining/structural adjustment programs. Long-term: reduced need for subsidies frees up government expenditure — net fiscal improvement.
133
What is the overall economic impact of removing protectionism?
Short-term: job losses, worsened trade performance, reduced living standards in affected sectors. Long-term: higher living standards, economic growth, resources shift to productive sectors, exports grow. Overall: long-term benefits outweigh short-term costs — gradual phase-out eases the transition. Resources reallocate from inefficient industries to more productive sectors.
134
What are Sunrise and Sunset industries?
Sunrise industries: emerging sectors with rapid growth and innovation (e.g. AI, clean energy, healthcare, tourism, digital services). Sunset industries: declining sectors disrupted by technology or changing consumer preferences (e.g. analogue film, paper printing, legacy manufacturing, fossil fuel production).
135
How does protectionism by other countries affect Australia?
1. Australian exports become less competitive in foreign markets 2. Foreign agricultural subsidies raise global supply and depress prices, squeezing Australian farmers 3. Overall reduction in Australian export income and GDP 4. Second-hand victim effect: when major trading partners face tariffs from third countries (e.g. US tariffs on China), those economies contract and reduce demand for Australian exports
136
Which Australian industries are most and least affected by foreign protectionism?
Most affected: Agriculture (EU, USA, Japan heavily subsidise their own farmers). Least affected: Mining/resources (most countries lack these resources and need them urgently). Services: heavily restricted by non-tariff barriers (distance, language, cultural preferences).
137
Why has global protectionism increased in recent years?
1. Greater global uncertainty post-COVID-19 2. US-China trade war and escalating geopolitical tensions 3. Disruption to global supply chains (e.g. Russia/Ukraine war) 4. Rise of economic nationalism and 'onshoring' policies 5. New rules from EU and Malaysia restricting market access for certain goods
138
What is 'tariff jumping' FDI?
When rising protectionism causes foreign companies to invest in production facilities INSIDE the protected market to avoid tariff barriers — rather than exporting to that market. A likely response to the current rise in protectionism globally.
139
What is the likely outlook for Australia's trade future?
Mining will remain Australia's most important industry for the foreseeable future. Rising global protectionism (especially US-China) creates significant uncertainty. Services exports (education, tourism, digital) will continue growing. Australia must diversify its export base and reduce over-dependence on China and on fossil fuel exports as global decarbonisation proceeds.
140
What is APEC and what are its key features?
Asia-Pacific Economic Cooperation — a non-binding economic forum of 21 Asia-Pacific economies including Australia, US, China, Japan, and ASEAN nations. Purpose: promote open trade, investment and economic integration across the region. Australia's trade with the region accounts for 75%+ of total trade. Limitations: non-binding agreements, progress requires consensus (slowed by US-China tensions), wide development disparities limit uniform implementation.
141
What is AANZFTA and its benefits for Australia?
ASEAN-Australia-New Zealand Free Trade Agreement. Covers 10 ASEAN nations + Australia + NZ. Eliminates tariffs on 96% of Australian exports to ASEAN. Facilitates investment in fast-growing SE Asian economies. Creates regional supply chain integration (e.g. Australia supplies raw materials → ASEAN processes → exports globally). Limitations: development disparities across ASEAN, enforcement is difficult, political/regulatory instability in some ASEAN states.
142
What is ChAFTA and why is it significant?
China-Australia Free Trade Agreement (in force 2015). Covers Australia's largest trading partner. Eliminates tariffs on 95% of Australian exports. Better access for agriculture (beef, dairy, wine), resources and services than major competitors (US, Canada, EU). Risks: over-reliance on one partner — demonstrated by China's 2020-22 punitive tariffs on wine, barley and coal during diplomatic tensions.
143
What is CERTA and why is it notable?
Closer Economic Relations Trade Agreement between Australia and New Zealand (1983). One of the world's most comprehensive FTAs — eliminates ALL tariffs and quotas (100% free trade). Allows free movement of goods, services and most labour. Mutual recognition of professional standards and integrated supply chains. Limitations: limited market size (both small economies); economic shocks in NZ can spill over into Australia; political disagreements occasionally arise.
144
What is Australia's trade relationship with India and its FTA?
India is a growing trading partner — 4.4% of Australia's exports in 2023-24. Australia and India signed an Interim Economic Cooperation and Trade Agreement (ECTA). India represents a major future growth opportunity as a rapidly growing economy with increasing demand for Australian commodities, education and agricultural products.
145
What is the emerging trend in global digital services trade?
The WTO estimates global exports of digitally delivered services reached USD4.3 trillion in 2023, accounting for more than half of total services exports. India, ASEAN, Middle East and North Africa are well-placed to benefit. Australia can participate through IT consulting, education, and financial services exports.
146
What are the key BoP statistics for 2024/25 to memorise?
Net Goods surplus: $55.8b | Net Services deficit: -$39.1b | BOGS surplus: $56.6b | NPI deficit: -$72.6b | NSI deficit: -$0.5b | CAD: -$56.6b | CAFA surplus (direct investment): +$54.0b | CAFA surplus (portfolio): +$15.8b | CAFA (financial derivatives): -$32.5b | CAFA (reserve assets): +$2.9b | CAFA (other): +$28.7b | TOTAL CAFA: +$68.9b
147
What are the key trade statistics for 2024-25?
Total goods exports: $513,025m | Total goods imports: -$457,233m | Service exports: $132,524m | Service imports: -$171,719m | Total exports (goods + services): $645,545m | Mining exports (64.3% of goods exports) | Rural exports (14.2% of goods) | Export composition: Mining 51.1%, Services 20.5%, Manufacturing 17.1%, Rural 11.3%
148
What are the key financial flow statistics to know?
Total foreign investment in Australia (2024): $5.0 trillion | Australian investment overseas: $4.4 trillion | Net foreign liabilities: Australia is a net borrower | Australian investment overseas grew 8.2% pa between 2018-2023 | Foreign investment in Australia rose from $325,980m (1991-92) to $5,036,720m (2024-25)
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