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B.O.P short answer question (1 Viewer)
- Thread starter Bobbo1
- Start date
floating exchange rate means that the value of our currency fluctuates - all other things being equal, when the $A appreciates, imports become relatively cheaper and exports become relatively more expensive overseas (less internationally competitive). since imports are cheaper, we import more...and since exports are more expensive overseas, we are able to export less...you can see here that our trade balance surplus decreases (or deficit increases) simply due to an appreciation in the $A (only made possible by a floating exchange rate). the opposite is true for a depreciation in the $A.
I hope this helps! goodluck!
I hope this helps! goodluck!
yes and also when considering the balance of payments you have to remember that there's not just the CAD, but the capital & financial account - so in this case, the impact of the exchange rate fluctuations would be that an appreciation would encourage greater capital inflow due to increased investor confidence, while a depreciation would stimulate capital outflow and so the financial surplus would be affected depending on whether the exchange rate appreciates or depreciates!
Wouldn't an appreciation of the Australian dollar discourage capital inflow because it is more expensive to invest (and vice-versa)
krnofdrg
Mq Law Student :)
An appreciation may lead to higher levels of capital outflow from Australia as domestic assets become more expensive (cost more for foreign investors to invest) and less attractive in comparison to foreign assets , decreasing FDI and portfolio.. However, financial inflows may continue if investors expect the currency to continue appreciating. vice versa
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