Economics Task 1

1. Explain the impacts of movements in the exchange rates on Australia’s Balance of Payments.
Word count requirement: 500 word

An exchange rate is price of the Australian Dollar in relation to another country’s currency,
which is usually of a major trading partner. Movements in exchange rates, have an impact
on the value of transactions between Australia and other countries, which are recorded in
the BOP. The balance of payments is the measure of all the transactions Australia has with
the world. Appreciations in the AUD may occur due to increases in Australian interest rates,
these movements in the AUD can see increases in the value of imports, as it more viable for
Australia to purchase larger quantities of imports with the same amount of AUD then
before. The value of exports is likely to diminish since foreign trading partners find it
infeasible to purchase Au’s exports, the rise in the value of imports and fall in the value of
exports, leads to worsening the BOGS column and reductions in the current account surplus.
Inbound financial flows would also be affected by the appreciation of the AUD, since it
would be less attractive for investors to purchase Australian financial assets, thus reducing
foreign direct and portfolio investment into Australia, which consequently, leads to reduced
economic growth. The increase in the exchange rate decreases service payments on debt
and improving the net primary income deficit under the current account, which can be
known as the “valuation effect.”

Depreciation of the AUD may be caused from a reduction in Australian interest rates, which
leads to increased demand for exports, due to foreign nations finding it profitable to buy
exports from Australia. Australia’s demand for imports will contract as the same quantity of
AUD will buy decreased volume of imports, discouraging imports. These effects will
positively impact the BOGS column and improving the current account surplus. The trade
weighted index is a measure of the value of the AUD against a group of foreign currencies.

Figure 1: Depicts the trends in TWI

 The depreciation of the AUD since 2018 can be seen in the graph combined with the
increased demand for metal and minerals exported to China, positioned Australia to have a
current account surplus of $35.8 billion, while supply chain complications in Brazil led to
Australia being a reliable exporter during 2019-20. The downward movement in the AUD can
also mean that servicing payments on debt are increased which worsens the net primary
Income under the current account. Foreign investment may increase since it is beneficial to
buy Au’s assets at a relatively cheaper price, which stimulates economic growth. The value
of imports has decreased from $320 billion in 2018-19 to $312 in 2019-20, which may be
caused by the depreciation of AUD.

2. Outline the benefits of ONE multilateral and ONE bilateral free trade agreement Australia
has entered into recently. Word count requirement: 500 words

Bilateral trade agreements are those made between two countries in the interests of
promoting trade and investment. The 2 nations involved might eliminate or reduce
tariffs and other trade barriers. The main benefits of these free trade agreements are
to expand exports markets for both countries. The Australia-Hong Kong Free Trade
Agreement began on 17 January 2020. Hong Kong is an important trading partner for
Australia, in 2018-19 it was the tenth most important for merchandise exports ($8
billion). It was also the 5th largest source of foreign investment with holding on
Australian assets valued at $118.8 billion at the end of 2018. Hong Kong doesn’t
currently apply tariffs to Australian exports. Australia exports around $386 million
worth of telecommunication equipment and parts, the elimination of tariffs means that
Australian telecommunication exporters are able to gain access to a larger market,
while remaining competitive with domestic producers. Since Hong Kong imports 95%
of its beverage and food products, it is a substantial market for agriculture exporters.
These free Trade agreements promote nations to utilise their comparative
advantages. Comparative advantage is enabled when countries have liberal trade
agreements, which encourage each nation to produce goods and services that have
the least opportunity cost for them. Then these nations can exchange their goods
and services, which results in both nations using their resources effectively. This
agreement also fosters joint technological innovation and research, CSIRO and Hong
Kong productivity council signed an agreement to preserve privacy in data sharing
analytics and more.

Multilateral agreements are usually between many countries, which promote free or
preferential trade agreements. The benefits of these include some of the bilateral
agreements but are usually on a larger scale. The Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP) is a free trade agreement (FTA)
between Australia, Canada, Japan, Mexico, New Zealand, and Singapore. The
agreement will eliminate more than 98% of tariffs in the free trade area. There will be
reductions in Japan’s tariffs on beef exported by Australia, which was worth $2 billion
in 2017. There would be elimination of all tariffs on sheep meat, cotton, wool,
seafood and more. Since smaller countries would not be able to compete with larger
nations who are more likely to negotiate better agreements, a multilateral agreement
levels the playing field for all the members involved in them, this would be especially
beneficial for developing economies. All countries would gain access to much larger
markets, which increases trade for all the countries involved. Australia exports
around 12 billion worth of agriculture to the CPTPP, which makes up 23% of total
agriculture exports in 2017. This would enable farmers to produce more, which would
 stimulate economic growth in the agriculture industry. Australia benefits from
increased investment as well, in 2017 13% of inbound financial flows was from
CPTPP countries.

3. Analyse the implications of Australia’s recent free trade policies for individuals, firms and
governments. Word count requirement: 750 words (4point positive and 2 point negative)

Free trade policies have been essential to Australia’s economic growth, due to its relatively
small population and abundance of minerals and metals. In the fifty years from 1963-64 to
d2013-14, Australia’s exports of goods and services grew from $3.2 billion to $331.2 billion
in value terms, representing an annual average growth of 10.5%.

Figure 2: Goods and services exports 1963-1990

Figure 3: Goods and services exports 1990-2014

In reference to figures 2 and 3, the liberalisation of the Australian economy during the 1980s
till 2014 has been concurrent with the exponential growth in trade. During the 1980s and
90s, Australia began floating the Australian dollar, tariffs on all products were cut by 25%,
which opened the possibility for foreign nations to trade with Australia.

Firms are forced to be competitive with international firms, which have larger economies of
scale. Productivity Commission research shows that reducing tariffs spurs innovation and
productivity growth through increased competitive pressure. It would encourage firms to
manage their resources more efficiently, as those who fail to do so will be eradicated,
shifting resources to sectors where Australia has a competitive advantage. Free trade polices
spelled disaster for the Australian car manufacturing sector, since manufacturing is labour
intensive, higher minimum wages in Australia made it unviable for cars to be produced
locally. Holden closed its Australian manufacturing operations in October 2017 after 69 years
of production. The minimum wage in Thailand equates to less than $2 an hour, in contrast
the minimum wage in Australia is $20.33, which is 1016.3 % higher. Firms can gain access to
lower inputs, which encourage the establishment of business in Australia, stimulating
economic growth. The Productivity Commission in 2020 estimated that abolishing tariffs on
intermediate production inputs would reduce input costs by around $2 billion per year.
These reductions in costs of capital, enable agriculture companies to increase their profit
margins on sales.

Through free trade policies individuals can gain access to a variety cutting edge products at
lower prices. Oligopolies would face competition from foreign business, which force them to
innovate new products benefiting the consumer. Free trade policies have also increased the
value of minerals and metals exported from Australia, which increase the demand for labour
in the mining sector, which may result in higher wages for Australians. It can be seen in
figure 6.5 that the implementation of free
trade policies, would result in a decrease
in price from Pt to Pw and the quantity of
goods on the market from Q2 to Q1.
Implications on individuals are not entirely
positive, industries which are not
competitive will cease to exist, resulting in
high structural unemployment rates. Due
to the end of the car manufacturing
industry, 40,000 workers lost their jobs.
These workers found it extremely difficult
to transfer their skills to other jobs. Rises
in unemployment level would lead to lower standard of living and lower levels of disposable
incomes, reducing aggregate demand and slowing economic growth.

Governments eliminating tariffs on majority of imports would result in decreased revenue

not only from tariffs, but lower levels of tax revenue from manufacturing sectors which have
ceased. This might cause the country to rely on imports, which leads to worsening the BOGS
column. During the early 20th century tariffs were the largest source of revenue for the
government. Increased levels of trade also promote economic growth, which can be seen in
the results of trade liberalisation policy between 1986 and 2016 had increased GDP by 5.4%.
The implementation of such policies may result in increased government spending, for
example, the Government established a $155 million Growth Fund to support the transition
away from the automotive industry after it was announced that domestic car production
would end in 2017. It may have to provide Australians with unemployment benefits in the
short term, while they seek employment in different industries. Governments are also faced
with political consequences of reducing protection, since this policy is unpopular with the
majority of the community and the benefits take longer to witness. Meanwhile governments
might lose votes by implementing free trade policies, which explains why some governments
around the world are reluctant to do so.