Terms of trade abbreviated as TOT is defined as the value of exports of a country relative to the value of its imports. It is determined or calculated by dividing the exports value by the imports value and then multiplying the result by 100…
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On the other hand, a TOT value greater than 100% implies that the country is accumulating capital or more money is coming into the country from the exports. If the TOT of a country improves (rise above 100), it means that for each export unit sold it can be able to buy more units of the imported goods. Therefore, a rise or increase in the TOT creates a benefit in terms of the number of goods required to be exported in order to purchase a particular amount of imports. Improving TOT can also contain a valuable effect on the domestic cost-push inflation because an improvement shows falling import prices relative to the prices of exports. However, a country can undergo suffering in terms of the falling export volumes and a deterioration payments balance. Contrary to the indications of an increasing TOT, a deteriorating TOT (decreasing below 100) shows that a country needs to export increased amount of goods in order to buy a particular quantity of imports.1 Australian TOT Between the year 1998- 1999 and the year 2008 to 2009, the TOT of Australia have undergone or went through an unprecedented rice of 75% indicating the alterations in both the composition and prices of traded services and goods. The prices of exports grew by 86% whereas that of imports grew by 9%. The increase or rise in the prices of exports was driven by the rise in metal ores and coal while the decrease in prices of most manufactured goods assisted in keeping the import prices down.2 In the year 2011, the TOT peaked rising to a level of 105% above the preciously prevailing values from the year 2002. This particular boom in TOT was attributed largely to the staggering high prices that the foreign buyers were paying for commodities such as iron, gas, and coal. Holding down of the import prices by the recorded high Australian dollar also boosted the TOT. In the month of December 2011 to march 2012 a decline of 9.8% was reported in the TOT. From this time, a free fall has been there in the Australian TOT a situation that economists argue is beginning to get serious. The data available for the period of June quarter on the Australian dollar and the prices of commodities suggests that the TOT decreased by another 7% bringing the total TOT decline in three consecutive quarters to approximately 16%. The TOT absolute level is still high on any particular long run assessment but the decline does not suggest that the country is at the low point of the cycle. The fall in the TOT presents a huge downside risk to the economy of Australia.3 The TOT and the TWER (trade weighted exchange rate), for the actual year 1998 to 2012 and also the indicative for the year 2012 to 2017 are displayed in the figure below. Sources: the exchange rate was retrieved from the Statistical Bulletin of the Reserve Bank of Australia while the TOT (terms of trade) was retrieved from the ABS Table 1 Cat. no. 5206.0 The Mundell-Fleming model is regarded as an open economy IS-LM version with inclusion of capital flows as a vital constituent of the model. The model is developed for the assessment of macroeconomic policy in a little open economy regarded as a price taker in import and export markets. The economy of Australia is definitely a small and open economy thus the application of this model to analyse the macroeconomic policy. In the last decade the imports and exports of services and goods of Australia were averaged at 37.3% of the GDP. The ISLM – BP model requires the capital mobility in order for the capital flows role to be activated. From the year 1980s both the capital outflows and inflows have
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(Australian TOT(Terms of Trade) Essay Example | Topics and Well Written Essays - 1250 Words)
“Australian TOT(Terms of Trade) Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/macro-microeconomics/1466207-ypwhile-the-budget-factored-in-a-decline-in.
In year 2009, a leading forecaster anticipated that the economy of Australia would dip with regards to performance. One of the reasons why this forecaster expected such is because there was very slow growth in a closely related economy of China. According to Access Economists, an Australian research company, the prospects for the mining-oriented economy were that the performance of the economy would really become dismal.
Australia registered an annual growth of 3.2% in the GDP till the second quarter of 2010 (The Australian Bureau of Statistics, 2010) which is unlike other developed economies that have displayed either slower growth or negative growth. This rate of growth equalled the thirty year average for the Australian economy and was greater than the forward estimates for economic growth predicted in 2009 (Australian Government, 2010).
These have three questions in this essay Contents Question a 3 Question b 4 Question c 7 Conclusion 8 References 9 Bibliography 10 Question a The current characteristics of the Australian economy are governed by high terms of trade. It can be accounted that the rate has taken the falling curve recently but it cannot be ignored that the rate has remained historically high.
Australia: Terms of Trade. Discuss the reasons for the main movements in Australia’s terms of trade over the last decade The terms of trade mean the quantity of imports, which are buyable via sale of a quantity of exports that is fixed. Improvements in a country’s TOT are positive for the country since it can buy more for a given export level.
World Bank) with the anticipated growth of the Chinese economy projected to hover around 9.5% for the present year, 2008. Owing to several factors both within and outside of the Chinese market, the consumption patterns within China proper have recorded significant changes.
Odean (1998) suggests that securities individual investors sell subsequently outperform those they buy. Moreover the amount of trading cost is higher by overconfident investors, thus leading to a decline in net realization.
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