Economic Theory
Has the answer applied the correct economic theory to analysing and addressing the case study questions? Why or why not? 2. Is there a better way to address the question using economic theory and/or other considerations? If so, briefly, what is it COMMENT THAT I NEED TO REPLY TOO Based on the article provided, there are three factors that have caused the recent appreciation in the AUD against the USD: · Weak economic data in the US · Iron ore’s price rally · Reduced chance of rate cuts from the RBA From the further research it can be concluded that the key driver of the recent appreciation is the mining boom (iron ore being 1/5 of the total export) and the dramatic rise in terms or trade. Additional factor is Australia’s relatively strong economic performance that plays an important role in interest rate levels and the Australia’s standing point as a low risk country (Reserve Bank of Australia 2015). When measuring the exchange rate, the value of the AUD is normally reported as a nominal bilateral rate, which is the rate at which one unit of currency can be exchanged for another. Given that the USD is a global major currency, the AUD/USD cross rate receives the most attention. An alternative measure is an effective exchange rate, which is a trade-weighted average of bilateral exchange rates. Generally this provides a more informative measure of the value of the AUD, particularly when bilateral exchange rates exhibit diverging trends (McConnell, Brue & Flynn 2012, p. 176-229). Reference list: McConnell, CR, Brue & SL, Flynn, SM 2012, ‘Demand, Supply and Market Equilibrium’, Economics, 19th edn, McGraw-Hill Irwin, Boston, pp. 176-229. Reserve Bank of Australia 2015, Box A: The Effects of Changes in Iron Ore Prices, viewed 12 January 2016, <http://www.rba.gov.au/publications/smp/2015/feb/box-a.html>. EXAMPLE OF THE REPLY Hi Princy, you are correct in that in Australia, the value of the dollar has primarily been tied to commodities. The dollar achieving parity with the USD coincided with the mining boom. History has shown that when there has been a resources boom, and the price of Iron ore and coal have risen, so has the AUD. I also noted that the AUD had been at such high levels because of the doubling of the terms of trade between 2003 - 2011. Since the AUD was floated in 1983, instead of just being pegged to one currency, it was measured against a basket of currencies of trading partners (the Trade Weighted Index) and a USD bilateral exchange rate. So it isn't just buyers and sellers that affect the price of the dollar. The Government also uses monetary policy to influence the value of the dollar. For example, with the mining boom at an end, official interest rates were cut continuously. Their aim was for the AUD to drop to between USD0.70 and USD0.80, as this would assist exporters in becoming more competitive. It also boosts tourism as the dollar become cheaper for foreign tourists to buy. Australia needs alternative sources of growth to avoid a Recession. In the article, it was written that there were a number of reasons for the appreciation of the dollar in April 2015. A short recovery in the iron ore price, weaker than expected economic data in the US, and RBA signalling that they wouldn't be cutting interest rates for the moment. This meant for a short time that it appeared Australia was a better place to invest, pushing up the value of the currency. The Exchange Rate and the Reserve Bank's Role in the Foreign Exchange Market, viewed 13 January 2016
