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Macroeconomic - Essay Example

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Macroeconomic Contents Introduction 3 Question a 3 Question b 4 Question c 6 Conclusion 8 References 9 Bibliography 10 Introduction High terms of trade are the characteristics of the current economy of Australia. It can be witnessed that the terms of trade has fallen in the recent months yet the rate has been historically high and volatile…
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Macroeconomic
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Macroeconomic

Download file to see previous pages... The volatility in the expenditures made by the consumers can be explained by the volatility in the terms of trade. The economy of Australia can be characterized by less volatile terms of trade after the period of 1980s. It can be judged that economic growth shares close association with terms of trade. An economy moving along the growth curve is expected to witness terms of trade while the economy under the growth curve will face the declining terms of trade line. Question a The global prices of the exports as well as the imports and the goods basket offered to the consumers are the two prime components that make up the terms of trade. Australia can be treated to be the country that has the potential to affect the world prices of the goods. The terms of trade can also get influenced by the geographic boundary of an economy. Coal is abundant in the country and therefore Australia engages itself in coal export (Department of Foreign Affairs and Trade, 2011). A rise in the prices of coal relatively to the prices of the other ICT goods will shed the effect in rising the terms of trade. The exchange rate of the economy and the terms of trade are closely associated. The nominal exchange rate got reduced being the resultant of financial crisis of 1990s. The influences with the geographical boundaries can play a part in volatility of import prices but the prices of the exports are influenced only by changes in world prices of the goods. In the short time period the fall of imports are steeper than the price of exports. The unstable growth in productivity in the sectors of tradable or non tradable goods played a part in boosting the exchange rate. The phase after the 1980s led to rapid productivity growth in the sectors of finance as well as insurance. The inflows of capital paved the way for strengthening of the U.S. dollar and this can be accounted to be the second factor. In the short run the exchange rate remained lower than the market rate. The economic growth remained at more or less at relatively stable state as the volatility in terms of trade played a major role. The less volatility in the terms of trade also contributed in keeping the rate of inflation at a lower level. In the initial phases of the new millennium the terms of trade began to rise. Over the last decade and a half Australia shifted from exporting price impulsive properties towards exports of goods whose price can be anticipated. Australia now engages itself in exporting the rural goods. It offers a wide variety of goods for export and experts are of the opinion that the export of the rural goods is an effective strategy for the country as exports of such goods can be assumed to capture a proportion of foreign market (Australian Government Productivity Commission, 2012). Therefore foreign capital will plight in into the country. The exports of the rural goods have taken the steep rising curve over the course of time and the exports of the goods comprises of vegetables and dairy products. Question b The terms of trade is influenced by the factors that are summarized below. The fluctuation in the levels of demand on the global platform The shocks in the market of commodities Globalization shock The fluctuations in the levels of demand on the global arena and the shocks on the commodity markets plays their part in raising the prices of the ...Download file to see next pagesRead More
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