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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 25-3 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 25-4 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 25-5 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 25-6 Advantages of Capital Inflow • Provides scarce funds to our economy • Creates jobs and new skills • Helps building of technology • Can generate exports Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-7 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 Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-8 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 Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-9 Level of Foreign Investment in Australia • The level of foreign investment in Australia as at 31 December 2003 was A$978.1 billion. Leading investor countries were: Netherlands Singapore 3% 3% Hong Kong 5% New Zealand 3% United States 43% Japan 6% United Kingdom 37% • Source: ABS, International Investment Position, Australia: Supplementary Country Statistics, cat. no. 5352.0, July 2004. Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-10 Australian Investment Abroad • ‘Exporting Australian jobs?’ • Suitable for labour-intensive activities • Overcoming the natural barrier of high transport costs • Required by overseas artificial trade barriers • Benefits of globalisation for the company • Better company profit prospects Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 25-11 Australian Investment Abroad by Destination, A$ 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