National Economic Policy (macroeconomic) - Essay Example

The volatility in the spending of the consumers can be influenced by the volatility in terms of trade. After the middle of 1980s Australia has been subjected to less volatile terms of trade. The terms of trade is correlated with economic growth. The terms of trade rises when the economy is experiencing growth while the terms of trade takes the declining curve when there is no such progress in the economy. Question a The terms of trade consists of two prime components namely the world prices of the exports and imports and the goods variety that are offered to the consumers.

Australia has been regarded as the country that has the potential to affect the global pries of the goods. The recent developments within the geographic boundary of the country can influence the terms of trade. Australia is net exporter of coal and therefore the rise in the global prices of coal compared to with that of other ICT goods will impact to raise the terms of trade. The terms of trade shares close correlation with the prevailing exchange rates of the economy. The financial crisis in 1990s led to reduction of the nominal exchange rate.

The regional influences can play a part in volatility of the import prices while the prices of exports are influenced only by change in global prices. In short period of time the imports prices fall more rapidly than export prices. The unstable productivity growth in either in tradable or in non tradable commodities sector contributed in boosting the exchange rate. The sectors of finance and insurance and some other sectors experienced rapid productivity growth after the decade of 1980s. The second factor that can be accounted for is the strengthening of the U.S. dollar which was driven by the inflows of capital.

The exchange rate therefore remained lower than the fundamental levels in the short time span. The less volatility in terms of trade played a part in keeping the economic growth more or less at the stable state as well as contributed in maintaining the rate of inflation at lower levels. The terms of trade followed the upward rising curve after 2000 (Department of Foreign Affairs and Trade, 2011). Australia turned away from relative price impulsive properties towards more predictable exports of goods over the last fifteen years.

The country now involves itself in export of wider range of rural goods. Vegetables, dairy products constitute the other varieties of exports and exports of such commodities have risen in due course of time. Question b The factors that have the potential to influence the terms of trade are as follows: The global demand fluctuations The commodity market shock Globalization shock The first shock and the second shock play their part in driving the prices for exports while the third shock raises the total productivity of output and at the same time reduces the import prices.

The terms of trade line gets shifted as the exchange rate offer surplus to the external shocks. The demand shock will influence the inflation to rise up but the impact is expected to be felt only in the short period of time as the rates of interests are high enough and the real exchange rates appreciates. The IS and the LM curve forms the Mundell-Fleming model. The GDP of any economy is the sum of consumption, investment, government expenditure and net exports. The net exports are the difference between imports and exports.

The LM curve uses the following