Download SND D1 USD Quantity .70 .68 Q Q1

Student 2: High Merit
Student has processed, presented and extrapolated data.
Report
Graph 1: The trade-weighted index (TWI) measures the value of the NZ dollar in terms of a weighted
average of the currencies of our major trading partners. The weightings are based on the relative share of
each country in our overseas trade transactions. They are also weighted against the size of each country’s
GDP. Our Annual Percentage change in exports is the increase or change in the value of goods and
services we export, to the overseas market based on a yearly period. The TWI trend line (March 2004 to
March 2009) shows that the TWI is decreasing; therefore it reflects that we are experiencing a decline in
our exchange and may be in a recession period. In relation to the TWI our annual percentage change in
exports is gradually increasing over the same time period, this reflects growth in our economy as our
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exports value is increasing therefore we can assume that growth is happening in the economy as the
annual export values increase, because exports make up part of aggregate demand, AD = C+I+G+(X-M).
NZ/USD Foreign Exchange Market Model
Graph 2: The Official Cash Rate (OCR) is the interest rate set
USD
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by the RBNZ to meet the inflation target specified in the Policy
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Target Agreement, which states inflation has to be between 1Z
.70
3% on average over the medium term. The OCR influences the
price of borrowing money in NZ and allows the RBNZ to
.68
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influence the level of economic activity and inflation. The OCR
directly influences the market interest rates. As market interest
D1 Q
rates increase people spend less on goods and services. This is
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Q
Quantity
because their savings get a higher rate of interest so there is
more incentive to save rather than spend; and conversely, people with mortgages and loans may
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experience higher interest payments. This reduces pressure on prices rising and inflation pressure is
reduced. The trend line shows the OCR decreasing over this time period, lower interest rates causes the
NZD to depreciate, as foreign investors demand less NZD. When demand for the NZD decreases, this
results in a depreciation of the dollar from USD 0.70 to USD 0.68, as seen in the FOREX market model.
The TWI will decrease as well, which is shown between March 2004 and June 2009.
Graph 3 shows the relationship between the annual percentage change in the inflation rate and export
growth between March 2004 and June 2009. Inflation is defined as a general price rise, or an increase in
the CPI. Export growth and inflation have an inverse relationship briefly between June 2004 and June G
2005, when inflation increased the other decreased. But after Sept 2005 the relationship becomes a
positive one as the lines move in a similar upwards and downwards direction. After Sept 2005 to Sept 2008
the OCR was very high and this helps explain why export growth was falling between Sept 2006 and Sept
2007, because the higher market interest rate attracts foreign investors and this increases demand for the
NZD so it appreciates as seen in Graph 2 when the TWI also increases. This makes it harder for exporters
as NZ exports become less competitive and decreases the growth in exports. From Dec 2008 to June 2009
both the inflation rate and export growth rate fell due to the global recession. But the trend lines show that
both inflation and export growth have increased steadily over time and so overall monetary policy is helping
exporting firms to remain price competitive in the world market, but increasing the OCR does have a
negative impact on export growth in the short term.
1. www.rbnz.govt.nz/monpol/statements/sep09.pdf