Exchange Rates
What happens to the Australian dollar when demand for AUD increases?
It appreciates.
Which economist is associated with the theory of absolute advantage?
Adam Smith.
Name the four factors of production.
Land, Labour, Capital and Enterprise.
What are the three accounts in the Balance of Payments?
Current Account, Capital Account and Financial Account.
What is meant by internal stability?
Sustainable economic growth, low inflation and low unemployment.
Australia's interest rates rise relative to other countries. What is the likely effect on the AUD?
Appreciation due to increased foreign capital inflow.
Which economist developed comparative advantage?
David Ricardo.
What is meant by a factor endowment?
The quantity and quality of resources a country possesses.
Exports of goods are recorded in which account?
Current Account
What is meant by external stability?
Maintaining sustainable international transactions and debt levels.
Australia's terms of trade significantly increase. What is the likely impact on the AUD?
Appreciation because export demand rises.
Absolute advantage exists when a country can produce a good using what?
Fewer resources or at a lower cost than another country.
Which factor endowment gives Australia an advantage in mining exports?
Abundant natural resources (land).
Foreign investment into Australia is recorded in which account?
Financial Account.
Which Balance of Payments account is most often used to assess external stability?
Current Account.
Explain why a fall in iron ore prices may cause the AUD to depreciate.
Lower export earnings reduce demand for AUD.
Even if one country is more efficient at producing every good, why should trade still occur?
Comparative advantage allows specialization according to lower opportunity cost.
Why does Germany have a comparative advantage in high-value manufacturing?
Highly skilled labour and advanced capital equipment.
Australia imports more than it exports. What is occurring on the trade balance?
A trade deficit.
Explain one risk to external stability from persistent Current Account Deficits.
Increasing foreign debt and dependence on overseas capital.
The AUD falls from US$0.75 to US$0.65. Identify two possible causes.
Any two:
Australia can produce 10 tonnes of wheat or 5 tonnes of steel. Japan can produce 6 tonnes of wheat or 6 tonnes of steel. Which country has a comparative advantage in wheat?
Australia (opportunity cost of wheat is lower).
Explain how factor endowments influence patterns of international trade.
Countries tend to export goods that intensively use their abundant factors and import goods requiring scarce factors.
If Australia records a Current Account Deficit, what generally occurs in the Financial Account?
A Financial Account Surplus to finance the deficit.
Australia experiences:
Predict the likely movement of the AUD and explain how this may affect Australia's external stability.
The AUD would likely depreciate because export earnings and foreign capital inflows fall. Depreciation may improve export competitiveness and help reduce the Current Account Deficit, potentially improving external stability over time.