Conversations in Economics Central Yr12 Getting Ready for Task 7 Exchange Rates

Preparing for the Year 12 Exchange Rate Assessment Good afternoon and welcome to Conversations in Economic Central. Speaker 2 Good afternoon. Hello. Speaker 1 DJ, how are we? I'm hoping I'm going to cheer you up. Yeah. Speaker 2 Well, right. Speaker 1 Yeah, now the podcast today, DJ is task 7. Speaker 2 It is. Speaker 1 Exchange rate Exchange rate year 12. It is. It's the biggie. It's the last of the year. It's very. Speaker 2 Exciting. Speaker 1 Actually, it is actually exciting, you're right. Speaker 2 Because realized 4 weeks tomorrow we will be doing our exam. Speaker 1 Well, we really. Speaker 2 Good Lord. Speaker 1 I'll have had a birthday by then. Speaker 2 Holy moly. Speaker 1 Yes, yes, I'll be 78. Speaker 2 Well. Speaker 1 Let's I'll be 78. Marking the exam was DJ. Well, there you go. Yeah, yeah, yeah, yeah, it is exactly right now. So we're going to talk about exchange rates now. First of all, though, what type of assessment are we doing? Speaker 2 It is an extended response. Speaker 1 Extended response. Excellent. OK, so we're going to have a choice. They're going to have to pick a question. And what's the biggest pitfall with exchange rates that can be an mitigated disaster? Speaker 2 If you're talking about an appreciation and the question is about depreciation, right? So whether it's causes or effects, you've got to get it right. Speaker 1 Yes, you have, because it is literally a disaster. Speaker 2 Well, we've had it. Yes, we have. Yeah, we had that one a couple of years ago. It was a nightmare it. Speaker 1 Was because we don't have follow on marks. Speaker 2 DJ, there's nothing you literally, if you're if you're telling me that a appreciation is going to grow the economy, you're talking rubbish. You're. Speaker 1 Talking rubbish because ABCDEFG because an appreciation becomes contractionary and a depreciation is expansionary. So every student should be writing ABCDE on the top of there. Speaker 2 Can you do that again for us, please? Speaker 1 Appreciation becomes contractionary ABC and a depreciation. The next letter from D is E, so it is expansionary. Speaker 2 Well, you've cheered me up because I'm laughing, because that's just so ridiculous. Speaker 1 Excuse me, dear Jay, if people put ABCDE on their paper, they cannot make a. Speaker 2 Mistake. There you go, everyone. That's a good hint, yes. Speaker 1 It is now let's get to these. Speaker 2 Can I just mention before we go on, yes. Speaker 1 My singing skills. Speaker 2 No, no, no, no, no, no, no. It's a segue, but I just felt like I've only said this about 50 times. Speaker 1 Only the. Speaker 2 50 but our assessment is next Thursday. Can I just mention that? Oh yes. Speaker 1 Actually, that is actually fair because it has been confusing. It's. Speaker 2 Yes, I'm I'm. Speaker 1 Confused so? Speaker 2 It's Thursday morning. Speaker 1 Morning, Yeah. And we will keep reminding people because in fairness that. Speaker 2 It's yeah, I've written on the board because. Speaker 1 Well, that's really. Speaker 2 Good. I've only said it three times to the same person, so to. Speaker 1 The same person, would you like to shout? Speaker 2 That person? No, no I don't. Speaker 1 All of they can read so they can see it on the wall now. Understanding Bilateral and Trade Weighted Exchange Rates So let's get to the exchange rate. So we've got a bilateral exchange rate and we've got a the trade way to do we do. Speaker 2 Have a trade rate. Speaker 1 Yes, now they're both floating. Exchange rate floating. Speaker 2 Exchange rate, well, it's the the value of our exchange rate is determined by the force of demand and supply on the foreign exchange market. We do not, our government doesn't interfere with that currency. We don't try to manipulate it. We just let the market. Speaker 1 Sort it out. Decide exactly now. So floating exchange rate now a bilateral exchange rate is what? Speaker 2 Well, it's just that standard way of looking at it between two countries. Speaker 1 How many? Speaker 2 How many Australian dollars? How much does 1 Australian dollar buy say US correct or yen or euro correct or GDP GPD Great British crown as well as trying to say not. Speaker 1 Great. Speaker 2 Is it? Yeah, Well. Speaker 1 Yeah, now the trade weight index that gives us a much more holistic. Speaker 2 View indeed. So it is a it is a bundle of currencies, yes, currently 1919 weighted according to their reports to our trade, right, so the Chinese renminbi. Speaker 1 Has the highest weighting. Speaker 2 Of about 20. Speaker 1 Cents. Well, though, the weighting has come down. Speaker 2 This it has they they weighted it drop yes, which is so they're at 27% and then is it US is next. Speaker 1 And then Japan. And then? Speaker 2 Euro. Speaker 1 Euro are followed by the South Korean. Speaker 2 Yeah, they, I'm just going to mention the euro. It's obviously not relevant. So much for the essay. But when you get to your exam and do multi choice, that's when they Chuck. Speaker 1 In they do Chuck the euro. Speaker 2 Because, you know, Europe is obviously when we measure our top trading partners, we don't measure Europe, no. Speaker 1 We don't. Speaker 2 Yes, we measure all their separate countries, but the euro as a whole, Europe as a whole, is the euro. Speaker 1 Which is in fact a peg to. Speaker 2 It is, is it? Yes, it is. Yeah. Peg to what? Speaker 1 Well, it's all the currencies. So it's it's actually not very good, no, because it means that so Germany like it because. Speaker 2 They, Yeah, yeah, they're, they, they're running a lot. Yes, we we've discussed that, right. Speaker 1 Alright, so so that's our two types and we've got to be able to explain it. Now we've also then got to be able to explain. Key Factors Influencing Exchange Rate Fluctuations We're going to make the link to Chris and Debbie in the bounce papers. Now this is essential. Speaker 2 Yeah. Well, because what we're, what we're talking about is demand and supply, the force demand supply on the foreign exchange market. So demand is the money that is coming into our country, which is Chris credits exactly credits, right. And so we're talking about the flows of money from exports, we're talking about income payments received by Australia and we're talking because foreign investment flows and on the other. Speaker 1 Side of those has to be exchanged into our currency, so they're demanding our dollars. Speaker 2 That's right. And then on the other side, the supply side is our debits because we are supplying when we make a payment for imports, correct or primary income or investment out foreign Australians investing abroad. Those are payments we make and therefore we are supplying Australian dollars, yes. Speaker 1 Because we're giving up our dollar, putting it back in because we need something else. Exactly. Yeah. So we've got to be able to draw the demand of supply model. Yes. Correctly labeled, yes. Yep. Speaker 2 You may have to do a few. Speaker 1 Of them you might have to you've got to be careful because you can, you know, make a pig. 0 Now there are five factors that affect the value of the said dollar. Yep. Shall we run? Speaker 2 Through those, let's run through those. So think of the flow, the ones that are really affecting the trade side of things and the ones affecting the investments. Speaker 1 Correct. Yes. Speaker 2 So trade inflation is 1. Speaker 1 Relative inflation. Speaker 2 Rates, which is actually if. Speaker 1 You had a factor. Speaker 2 I agree if it's a if it's one to choose, I wouldn't. Speaker 1 Choose it. Speaker 2 Because it's a hard because you gotta do. But yeah, I agree. Why is it a factor at the moment? Because Australia has had high inflation. Inflation figures are out today, by the way. Because it's not. We've gone down a little bit of not much, but not much. The leading Sorry, the underlying inflation hasn't changed. Speaker 1 Well, that's interesting because that's not changing at all, no. Speaker 2 We're stuck, which is concerning. So anyway with, with this high inflation that that is reducing our competitiveness. So we've seen over time you could argue exports will decline and imports will rise, yes. And therefore you, you could, you could draw it as a single shift, you could talk about exports following demand shift left or. Speaker 1 It's a double shift. Speaker 2 Yeah, exactly. You know, demand shifts left, supply shifts right and so we have a depreciation. Speaker 1 So there's that one. But you're right, there's that one. Speaker 2 It's a little bit complex, but you could do that. Then of course, we have our old friend the terms of trade, we're talking about that a lot or commodity prices, commodity prices either all. And so if the terms of trade go up, then we're assuming really commodity prices are going up. Yeah, correct. But but let's do the opposite because that's what has been happening, that the terms of trade has been falling, commodity prices are falling, which means less value of exports less. Speaker 1 Export credit less credits coming. Speaker 2 In for less demand for the dollar, yes and dollar depreciates and I'd only do that as a as affecting. Speaker 1 Exports, I mean. Speaker 2 I mean in terms of trade you could argue would affect imports. Speaker 1 As well, but I think. Speaker 2 You're gonna. I think you can keep it simple. Speaker 1 Yeah, I don't I. Speaker 2 Don't, yeah. And just do demand. Yeah. So there's that. And then of course, we have the changes that are affecting Australia's growth, global growth. So if you know global growth is strong, particularly our trade partners like China, we know they're going to defend more of our exports. Again, more demand appreciation in Australia's growth is interesting If Australia's growth is strong, there's a bit of center as paribus here if all we've. Speaker 1 Got to be, yeah. Speaker 2 If all we're talking about is imports, if Australia's going strong and we do import more, that's more supply and the dollar would depreciate, correct? But of course, in the real world, the next thing's going to have an impact because our old friendly cash rate, yeah, really, if Australia grows strong, we're gonna see some contractionary monetary policy. Speaker 1 Aren't we? Speaker 2 Like what we've had over the last year? Speaker 1 Indeed. Yeah, this. Speaker 2 Year 2026 we will see the cash rate rise, we'll see a higher interest rate differential. That is the difference between Australia's rates and the rest of the world. Someone did a bit of Googling, they were saying the Fed reserve rate is 3.6. Does that sound? Speaker 1 Right. That's about right. Yeah, that sounds. Speaker 2 About right, so we're 4.35. Speaker 1 Because we're high. Speaker 2 Yeah, we are. And so therefore, we are actually attracting more foreign investment in more capital inflows. So more demand for the dollar capital outflow and there's going to be less capital flow. So Australians are going to keep their money in Australia. Less capital outflow of course, and that's less supply. Speaker 1 Those flows DJ of capital inflow are four times greater than the flows of trade. Speaker 2 Yeah, absolutely. Speaker 1 Important to the value of our dollar. Speaker 2 Yes, but on, but it's much more powerful and and so if we were to get on, let me get back to that. The the thing. So we've got more demand, less supply of the dollar and the dollar will appreciate. So in the real world, we have had falling commodity prices, we've had a falling terms of trade we should expect to depreciate. Speaker 1 The dollar has gone up. Speaker 2 But because of the high, you know whose inflation is high and the cash rates going up, the dollar has appreciated and it's more powerful which. Speaker 1 Is very interesting, isn't it? Because actually, Michelle doesn't want it to. Oh, she does want it to appreciate. Because she wants she. Speaker 2 Does yeah, she wants to use demand. She. Speaker 1 Wants to get demand equal to supply. Speaker 2 Exactly. She's trying to take demand out of the. Speaker 1 She's trying to get that inflation out of the system, do you know? Speaker 2 Now there is a 6th one that I do teach which is a bit more nebulous, which is just financial international capital is right, OK, like other for other reasons other than just interest rates, right. So, and I talked a bit about like sovereign risk, yeah, like if our government, our government's currently jacking up taxes, they're changing regulations, all that sort of stuff that may ultimately long term effect foreign investment for this. Like it may, it may. Speaker 1 Put people off. Speaker 2 To exactly. Well, I mean we're seeing I think I talked to you about my neighbor who invests in mining. He's investing in mines in America. He's not investing in Australia like he's like, he says it's too risky, it takes too long here in Australia. So he's investing overseas and that's what and. Speaker 1 He'll be one of many. Speaker 2 DJ Yeah, I agree. You know, Gina Einhardt, she's finding opportunities overseas at the moment and that's what we'll see is that if the opportunities in Australia dry up, if we're seen as a risky place to invest, if our government is seen as a bit dodgy, then we'll see, you know, and we'll see a depreciation. Speaker 1 Because with the integration of world economies, it's very easy to live in money. Speaker 2 Yeah, exactly. Yeah, very easy. And so look, I mean the the ones that are topical and also easiest to talk about are why whether it's appreciation, depreciation, if it's what is affecting the dollar at the moment. I mean, obviously commodity prices, terms trade are falling and should see the dollar fall. But the interest rate, but the interest rate differentials the main line and you must be drawing that as a simultaneous shift. Speaker 1 Indeed. Otherwise it's yeah now. Speaker 2 Because we're trying to show why that is so powerful and. Speaker 1 Significant because it shifts both demand and supply. Macroeconomic Impact of an Appreciating Australian Dollar Now once we've done the causes of the change, yes, we're now going to do the impact. Speaker 2 Yes, the effect. Speaker 1 Now this is quite a nice formulaic answer. Speaker 2 Yeah, I, I, I think so. I mean, it does depend on what it's asking. If it's just saying the effect of then you go to town, it could be the effect on just the producers. We've seen that a couple of times. We've said you're just focusing on producers. It could be effect on consumers and producers, it could be effect on exporters and importers and where you really should be able to prepare for, of course, the effect on the macro economy because this is the nice crossover with Unit 4, correct. So if we're gonna, let's talk about appreciation because that's what's been happening, the dollars. Speaker 1 Appreciate. Then we could just say you gotta reverse it. Yep. So the dollar has been appreciating. So ABC. Speaker 2 Yes. So the an appreciation has a contractionary effect and you should really start. This is what I said to my student. That's your Yeah, I agree. Speaker 1 So that the marketers? Speaker 2 Say what? Minding yourself. Speaker 1 And it's. Then you can refer to. Speaker 2 It Yeah. Speaker 1 That's exactly the same thing, CJ there. Speaker 2 We are. There you go. Hallelujah. Yes. And we get criticized. Oh no, I saw everyone. And so the the exchange rate, the appreciation is contractionary and cause right. So I would start by talking about trade. Maybe if like if there's no no guidance of what you're talking about, you could do start by talking about trade, right. You're gonna talk about the fact that with a higher dollar, it means that our exports are going to start to fall. They are less competitive, right? What we're saying is that in foreign currencies it's going to cost more foreign currency to buy our exports and so we'll see export values decline for Australians now, imports are now cheaper. Speaker 1 So we actually want more of. Speaker 2 Them we're going to now we're going to travel we're going to buy things with you know and so imports are going to start to rise from it the volumes are rising, which means the values are rising yeah and so therefore net exports will start to decline weren't. Speaker 1 They and that is a component of AD, hence the contraction of. Speaker 2 The well done right and then you can talk about how AD would shift left or AE would shift down. You could draw the models even if it doesn't ask you to withdraw the. Speaker 1 Models because I think it's a useful way to. Speaker 2 And that that macro impact you're talking about how you know if AD is decreasing, you're going to see slower economic growth, you're going to see price level falling, unemployment might tick up. Now none of that is a bad thing in the sense that why is the dollar appreciated Because the economy was growing strong. Speaker 1 Yes, so it needed to so. Speaker 2 It needed. This is the shock absorber effect, right? So it's not, it's not necessarily a terrible thing that this is happening. That's not what you're saying. But you're saying it is contracting. That's the point. And you'll bring it back to full employment. Absolutely. If I was during the model, I'd start with AD to the right. Speaker 1 So you've got a positive output for an inflationary. Speaker 2 Gap and inflation's a key, key thing, right, Is what what we're trying to bring? We're trying to bring inflation down. Hello. Yeah, no worries. We'll just pause it.