• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

How the exchange rate has been affected over the last 3 years

Extracts from this document...


Exchange Rates Matt Cantatore Contents Intro 2 How the exchange rate has been affected over the last 3 years 2 Imports and Exports 3 World Commodity Prices 4 Level of Economic Activity 5 Australia's Inflation Rate 6 Intro In the world economy, every single country has its own currency which is used as legal tender for all domestic transactions. One cannot purchase a good in one country, with the currency of another. This is to say, that if we as Australians wish to purchase a good or service in Britain, we must pay in Pound Sterling - the Australian Dollar (AUD) would not be accepted. Therefore, the need to devise a conversion policy between currencies has arisen - to date, this conversion rate is known as the exchange rate. An exchange rate merely expresses the purchasing power of one currency in relation to another (for example, 1 AUD is worth 0.66 USD). (Alcorn 2003) How the exchange rate has been affected over the last 3 years As already mentioned, an exchange rate measures the purchasing power of a domestic currency. But how would one determine the exchange rate of a currency? ...read more.


Consequently, this would lead to a rightward movement in the supply curve of Australian dollars, leading to a depreciation in the value of the currency. (CHASS) Since 2000, slow declines in Australia's exports against growths in imports have not been a very positive sign for the Australian dollar. Whilst it has not realistically, this has had the effect of decreasing the value of the Australian dollar. Record Current Account Deficits have also not boded well for the AUD, which has maintained its strength through other factors (discussed hereunder). Arguably, however, the Dollar's strength in spite of this suggests that it may have been even stronger with a more solid import/export foundation. (RBA 2003) World Commodity Prices World commodity prices are determined by the market conditions of demand and supply on a global level. For example, if nuclear war was to break out worldwide and global demand for gas masks increased, the world price for gas masks would increase too, relative to the increase in demand. Similarly, if world supply of a particular good increases, its world price would decrease. (Alcorn 2003) Contrary to what one might expect, fluctuations in world commodity prices can have great influence of the Australian exchange rate. ...read more.


As a result of a higher CPI and hence relatively high prices, demand for Australian exports will be reduced. This will, again, decrease demand for and the value of the AUD. Over and above this, higher domestic prices will force consumers to seek commodity substitutes, which will, in many cases, be imports. A double-whammy effect can therefore be noted, as not only will demand for Australian exports decrease, but foreign imports will increase as well. This has the effect of both lowering demand for the AUD whilst increase the supply of it - not a very positive situation. (Alcorn's Notes 2003) Unfortunately, the situation mentioned above is the very grim situation facing Australian economists even to this day. At present point, Australian interest rates sit well above their trading partners, at around 4.75%. Other major countries around the world have the following, comparatively lower interest rates: United Kingdom 3.75% Canada 3.25% European Union 2.5% United States 1.25% Clearly, Australia's high interest rate leaves something to be desired in comparison to these other first world interest rates. One can hardly expect Australia to be competitive with America with an interest rate almost 4 times as large as it. This is, without a doubt, the most weakening factor of the Australian economy, and is the greatest threat to its exchange rate at present. (RBA 2003) ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. What might cause an appreciation of a floating exchange rate? Discuss whether an appreciation ...

    appreciates if there is a fall in the supply of that currency. This fall in supply could be caused by a number of reasons. A fall in the goods imported into the UK. domestic consumers and firms sell sterling to finance their purchase of imports or when they go overseas on holiday.

  2. Split Votes: A Nation Divided on the Marijuana/Drug Legalization Debate

    He points out that this does not necessarily mean automatic, unrestricted legalization. "[I]n accordance with our federal system many states continued to outlaw or severely restrict the sale of liquor" (DLCHR 1). Using history as a guide may be the most logical solution.

  1. The Study of Japan's Recessions and Booms: An Analysis of Japan's GDP for the ...

    Net increases in any of the above variables will cause outward shifts of the IS curve drawn in Figure 2. In IS-LM analysis, GDP (y) also depends on money market variables which include the money supply (M), the Price Level (P), the transactions demand for money (my), the speculative demand for money (mr), and the interest rate (r).

  2. The Australian Mobile Communication Industry.

    to Telstra, two new operators to build and operate digital GSM mobile networks. These companies were Optus and Vodafone. In the second stage of the government's deregulatory drive in the year of 1997, they licensed the right to operate mobile services to three additional companies: Hutchison, AAPT and One.tel.

  1. How has the Brazilian economy been affected by the decline in wrld coffee prices?

    You wouldn't necessarily be wrong; many people have become substantially well-off through land ownership, and the average living condition has improved, but only a little. The reasoning behind this is that the Brazilian growers and exporters only receive 10% of the profit, compared to shippers and roasters who get 25%

  2. How have some of the recent changes to this years budget 2002 affected various ...

    Have these changes affected you at all? 7. The budget has opened up many new advantages to limited companies ,if you are a sole trader or partnership, to make the most of these advantages have you considered becoming a limited company?

  1. Liberalization: where it has lead us and where it is headed

    that are under-funded on the assumption that private industry will be picking up the slack. In 1996, it appeared as if the UF was becoming aware of this situation, and some critics of the Congress rallied around it, hoping for change.

  2. Explain why banks sometimes seek to merge with with

    Even if merger activity is unable to climb up to its previous levels, mergers have influenced banking to some extent. One important effect of the recent merger wave has been an increase in the role of large banking organizations(figure 3).

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work