Is anyone good at HSC Economics? can you explain this to me? (1 Viewer)

[sghguos]

The following example demonstrates how a change in the current account can influence the exchange rate and the capital and financial acount. If the value of imports increased, while exports remained unchanged, this would result in a deterioration in the current account deficit (CAD). It would also cause an increase in the supply of $ A (importers will be selling more $A in order to buy foreign currency), resulting in a depreciation of the currency.


Firstly if the "value" (price) of imports increased, while exports remained unchanged why the hell would that lead to a deterioration in the CAD. Think about it, Australians would not want to buy imports since there more expensive and want to rely on Australia exports right?? and obviously this not lead to a worsened CAD.

Alright, lets assume that the above is the case.

If exports are cheap and imports are high, why the hek would the foreign people want to sell $A and go for an "EXPENSIVE" imports?

Can anyone explain this I really dont get it.

 

[sghguos]

someone answer...

 

[deswa1]

Imports increase in value=Australian's are spending more on imports (this doesn't have to be an increase in price- it could be volume or price or both as long as the net amount that Australia's spend on imports has increased).

More money spent on imports=more debits on Current Account=bigger CAD assuming exports (credits) are unchanged

Australian's are spending more on imports. Importers want to be paid in their own currency. Therefore to buy imports, Australian's need to sell AUD and buy the relevant currency -> supply of AUD goes up

I think you need to revise this area of the course and really try to understand what is going on. Does my explanation make sense?

 

[Hot potato]

what deswa is saying is correct, but I understand your problem. I think you're thinking about the effects more in the long run rather than short term.

Firstly if the value of imports increased while exports remained the same then in the short term Australia is going to need to pay more for these imports, this involves changing Australian dollars into foreign currency which increases supply of AUD resulting in depreciation, also by paying more for imports there are more debits from the current account resulting in a worse CAD. In the long run however consumers will eventually change their consumption patterns to adjust to the increased price of imports by demanding and importing less, thereby reducing debits from the current account and reducing the current account deficit. This effect can be seen in the J curve

 

[MasonT]

I think everyone needs to keep in mind two things:
1) The example does not outline that the value of imports would exceed imports (It notes deteroriation in CAD and NOT terms of trade!)
2) Note also that it is assumed that the higher the value of wealth of individuals in an economy, more money will be spent on imports (Higher income = higher consumption, thus higher import spending due to other countries having a comparative advantage)

The CAD will worsen and deteriorate because as import costs rise, more money will be going out of the country. Over a long period of time (through microeconomic reforms), the structure of the economy would change to allocate more domestic production as domestic firms would be more competitive, but also keep in mind that a lot of those funds could also be from foreign sources, thus still worsening the CAD

 

[tarod]

Firstly if the "value" (price) of imports increased, while exports remained unchanged why the hell would that lead to a deterioration in the CAD. Think about it, Australians would not want to buy imports since there more expensive and want to rely on Australia exports right?? and obviously this not lead to a worsened CAD.

This is true in the longer term. When thinking about exchange rates, always think of a "J-curve" effect. In the short term, Australians will have to bear the cost of higher import prices while domestic substitutes can be found ==> worsens the CAD. In the longer term, the increased value of imports may in fact be beneficial to CAD as domestic import-competing industries rise.

Hope that helps