Download Chapter 25 - McGraw Hill Higher Education

Chapter 25
External policy
External
policy
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
Lecture Plan
• External policy and external balance
• Objectives of external policy
• The current account and economic policy
• The capital and financial account and economic
policy
• The exchange rate and economic policy
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
25-2
External Policy
• One of the major instruments used by governments
for promoting stabilisation and economic growth
• External balance = a level and pattern of
transactions with the rest of the world consistent
with the welfare and growth of the Australian
economy
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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External Balance Versus Domestic
Balance
• The government is attempting to achieve some
degree of balance between total payments to nonresidents and total receipts by residents
(companies, individuals, government)
• Since the float, fluctuations in the balance of
payments have been transferred to the exchange
rate
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Objectives of External Policy
• A competitive export sector
• A steady capital inflow
• A reasonably stable exchange rate
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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The Current Account and Economic
Policy
The trade balance is affected by three groups of
policies:
• Export promotion
• Industry assistance and structural adjustment
• Support to international competitiveness of
manufacturers
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Advantages of Capital Inflow
• Provides scarce funds to our economy
• Creates jobs and new skills
• Helps building of technology
• Can generate exports
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Disadvantages of Capital Inflow
• Burden of foreign debt
• Increased degree of foreign ownership
• Discourages local research and development
• Foreign investment tends to de-industrialise
Australia
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Government Influence on Net Capital
Inflows
• Direct controls over private capital flows
–
Removal of capital flows restrictions after 1983
• Indirect measures to encourage capital inflow
–
–
High domestic interest rates
A depreciating exchange rate
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Level of Foreign Investment in Australia
• The level of foreign investment in Australia as at 31 December
2003 was A$978.1 billion. Leading investor countries were:
Netherlands
Singapore 3%
3%
Hong Kong
5%
New Zealand
3%
United States
43%
Japan 6%
United
Kingdom
37%
• Source: ABS, International Investment Position, Australia: Supplementary Country
Statistics, cat. no. 5352.0, July 2004.
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Australian Investment Abroad
• ‘Exporting Australian jobs?’
• Suitable for labour-intensive activities
• Overcoming the natural barrier of high transport
costs
• Required by overseas artificial trade barriers
• Benefits of globalisation for the company
• Better company profit prospects
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Australian Investment Abroad by
Destination, A$ Billion, %, Dec. 2003
211.0
USA
82.6
United Kingdom
New Zealand
Japan
Netherlands
37.1
21.9
12.7
Hong Kong
11.9
11.7
France
11.4
Singapore
Source: ABS, International Investment Position, Australia: Supplementary Country Statistics, cat.
no. 5352.0, July 2004
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
25-12
The Exchange Rate and Economic
Policy
• The exchange rate policy is undertaken by the
government through the Reserve Bank
• After the floating of the A$ the exchange rate is set
by the demand for and supply of A$s
• The government allows intervention by the Reserve
Bank only to smooth out A$ fluctuations
• A floating dollar allows more government control
over money supply
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
25-13