Macro-Economic Implications of the News - Assignment Example

The article highlights the adverse effect of a strong Australian Dollar on the Australian wine industry. It enlists factors such as unfavorable exchange rates and the global economic downturn as the reasons for the plight of the wine industry. This article has been chosen because it has a link with the Balance of Payments and Exchange Rates theory. This theory focuses on the trade aspect between countries and then determines the value of one currency in relation to the other. An analysis shall be made on the description of present challenges faced by the wine industry in the context of unfavorable exchange rates. An attempt shall also be made to predict the course of events in the immediate future.

The key economic argument that is presented in the article is that of the Balance of Payments and Exchange Rate Determination. Balance of payments is the sum of the current account and capital account. The current account measures the exchange of real goods and services as well as transfer payments – things consumed in the current period. The capital account measures stocks, bonds, and capital abroad. An exchange rate is the amount of currency you would pay to receive a given amount of another. Inflexible exchange rate regimes like Australia, exchange rates are determined by global supply and demand for currencies. The figure below shows the determination of the floating exchange rates in relation to British Pounds

The article gives its perspective on challenges faced by the wine industry. It tells that global financial uncertainty and volatility have led to the current strengthening of the Australian dollar. This has led to an increase in export prices and hence a decline in wine sales. The highlight of this article is the reduction in total sales by around $14.4 million. The reason is attributed to unfavorable exchange rates. But the article provides conflicting data when it says that sales in the U.K. increased despite the strengthening of the Australian dollar against the British Pound.

The arguments presented in the article are based on facts. Throughout the world, there is economic uncertainty. This includes the countries to which Australian wine is exported such as the U.K. and U.S. Australia has a very low debt-to-GDP ratio and a strong fiscal position. These factors increase the demand for the dollar as shown by the figure below

As it can be seen, with an increase in demand there is an increase in the value of the dollar. But there is an argument which can be presented here is that there is an increase in sales in the U.K. despite the strong dollar. The reason can be attributed to the quality of Australian wine, excellent marketing, and the unwillingness of U.K. consumers to change their drinking habits.