Download CCIWA Student Economic Forum Cartoon Scenarios August 2011

Question A – Exchange Rates
http://www.nicholsoncartoons.com.au/cartoon_6838.html
Examine the cartoon above and answer the following questions:
1. Which economic event is the article referring to?

This article is referring to the recent broad based appreciation of the
Australian dollar against many major currencies.
2. What is one of the key reasons for this change?

There are two main reasons for this shift in valuation. First, the
Australia-US interest rate differential is very large, meaning foreign
cash is entering the Australian economy which pushes up the demand
for AUD, thus raising the price. Secondly, Australia’s exportation of
commodities has gathered pace as developing nations emerge from
the global economic downturn, which has again increased the demand
for Australian dollars.
3. How does an appreciating currency impact the conduct of monetary
policy?

In a broad sense, an appreciation of a currency does some of the work
of monetary policy in containing inflation, as goods and services
sourced from overseas become cheaper which helps alleviate
domestic pressures. It also reduces costs for businesses who source
their inputs from overseas, which again flows through to lower
domestic prices.
Question B – Monetary Policy
http://www.inkcinct.com.au/web-pages/cartoons/past/2010/2010-784-consumer-demand-flattening-.gif
Examine the cartoon above and answer the following questions:
1. What action of the Reserve Bank of Australia is the article referring to?
What is it implying about said action?

The article is referring to the action taken by the RBA to raise the cash
rate in November 2010. The cartoon is implying that the interest rate
rise hit consumers hard, which was reinforced by data following the
event.
2. Under which broad economic circumstances will the RBA generally
raise the cash rate?

The RBA will generally raise the cash rate when inflationary pressures
begin to emerge in the economy. Generally speaking, this occurs at the
top of the business cycle. The aim of raising the cash rate is to lower
inflationary pressures to encourage real economic growth rather than
inflationary growth.
3. What are the implications of an increasing cash rate on business
investment? Explain.

An increasing cash rate will generally lead to a decrease in business
investment, as the incentives for businesses to undertake investments
falls. This is because the rate of return they can receive as a result of
investing their cash in banks increases, meaning some projects or
investments with lower rates of return will not be undertaken.
Question C – Fiscal Policy
The Australian’s post-budget 2011 front page.
Caption read: “THAT’S NOT A KNIFE, TREASURER”
http://iainhall.files.wordpress.com/2011/05/686173-11-05-10-wayne-andbill.jpg
Examine the cartoon above and answer the following questions:
1. Is the government’s current budget strategy an appropriate fiscal
position in the current economic environment? Why?

Yes, the government should be embarking on a program of fiscal
consolidation in order to make room for the significant private sector
investment pipeline in Australia. Government spending and deficits in
this environment can stoke inflationary pressures.
2. What are the impacts of government budget deficits on private
investment?

While government deficits and spending are necessary in weak
economic conditions, a long-term deficit can have a negative impact on
private investment. This is because the domestic pool of funds
available for investment can become “crowded out” – the government
captures more of these funds, reducing the amount available for private
investment and therefore increasing the interest rate charged.
3. What is the cartoon saying about the Government’s current fiscal
policy?

The cartoon makes reference to the Government’s pre-budget warning
of a ‘tough budget’ which would have some detrimental impacts on
some sectors of the economy. However, the cuts announced in the
budget were fairly minor, and the author is perhaps implying that more
could be done to move the fiscal position back into surplus.
Question D – Globalisation
http://www.worldsocialism.org/spgb/feb06/images/Free-trade%20cartoon.jpg
Examine the cartoon above and answer the following questions:
1. Is this cartoon pro- or anti-globalisation? Why?

This cartoon is anti-globalisation, as it is painting the picture that
globalisation has lead to corporations capturing all of the gains that
have been achieved as a result of this phenomenon. It is asserting that
the instruments of free trade, such as the WTO and NAFTA allow the
rich to exploit the poor.
2. Do you agree with the assertion in the cartoon that corporations are the
beneficiaries of globalisation and workers suffer? Explain your position.

Very much an opinion based response. Both angles can be justified; it
all comes down to the quality of the response. A sample response:
Globalisation has bought about many positives to all echelons of
society throughout the world. Workers in poorer nations have been
given the opportunity to earn an income beyond agriculture, trade flows
have increased substantially, incomes across all areas of the world
have increased as nations have been able to focus on exporting their
comparative advantages and importing cheaper goods etc.
Question E – International Trade
http://www.nicholsoncartoons.com.au/cartoon_6747.html
Examine the cartoon above and answer the following questions:
1. Explain the significance of international trade for the Australian
economy. What is the key message of this cartoon?

International trade is important as it allows Australia to increase its
output, employment and income. Trading with other countries allows
Australia to access goods and services that are not produced locally
(for example, machinery and equipment, elaborately transformed
manufactured goods) as well as goods that are not produced in
sufficient quantities (such as oil). International trade also provides
Australia with the opportunity to sell our goods and services in
international markets.

The key message of this cartoon is that Australia’s economic fortunes
in the short- to medium-term depend heavily on the performance of
China and their demand for our mineral exports.
2. How has Australia’s trade performance in recent years impacted upon
the current account deficit?

Due to the persistant demand for mineral exports from developing
nations, Australia’s balance on goods & services within the current
account has been in surplus for the past 12 months. This has largely
been driven by high commodity prices, while volumes have remained
fairly static. However, the nation’s overall current account balance
remains in deficit due to the income account.

Australia will almost always run current account deficits due to the
nature of the economy. Australia is a small, open, capital hungry
economy which is reliant on foreign investment for growth in the overall
capital stock. As a result, Australia pays more income to foreign entities
than it receives.
3. How important is Australia’s trade relationship with developing nations
such as China and India in the nation’s current growth?

Over the past decade, Australia’s trade relationship with developing
nations has been of the upmost importance to growth. Continuing
demand for mineral exports from these nations has lead to Australia
diverting from the path of most other developed nations of overconsumption and continued borrowing. The strength of the nation’s
economic resilience can be largely attributed to the continuing
exportation of minerals to our developing neighbours and no doubt
over the next 2-5 years this trend will continue.
Question F – Fiscal Policy & Implications
http://www.nicholsoncartoons.com.au/cartoon_6864.html
Examine the cartoon above and answer the following questions:
1. Which event is the above cartoon based on?

This cartoon is based around the Queensland flood crisis which hit the
nation in 2010-11.
2. Are the economic impacts of flooding best characterised as a supplyside or demand-side? Why?

While a natural disaster will generally hit both aggregate demand and
aggregate supply in the economy, it is best characterised as a supplyside shock. In the first instance, the Queensland floods caused a leftward shift in the aggregate supply curve for the Australian economy,
reducing output and raising prices. In real terms, the output impacts
were a reduction in coal exports, which prices for a number of
agricultural products such as bananas rose sharply.
3. Is it appropriate for the Government to respond to an event such as this
with expansionary fiscal policy? Explain.

In the first instance, the Government should not use fiscal policy to
respond to a supply-side shock such as this. This is because the
economy will respond once the shock passes, with the aggregate
supply curve shifting to the right back to its initial position. As a result,
any rightward shift in the aggregate demand curve will only result in
inflationary pressures.
Question G – Exchange Rate Policy
http://www.cartoonistgroup.com/store/add.php?iid=45269
Examine the cartoon above and answer the following questions:
1. Which continuing economic event is the above cartoon referring to?

The cartoon is referring to the exchange rate policy of the Chinese
government. They peg their currency (the Reminbi) at an artificially low
level in order to boost their exports.
2. What is the cartoon saying about China’s exchange rate policy?

This policy makes it very difficult for US exporters to penetrate the
Chinese market, as the price that Chinese consumers would be
required to pay is far too much relative to the value of the good and
also to the wages that they earn. It also means that Chinese-made
goods can flood into the US economy at unsustainably low prices. As a
result, the massive inflow of Chinese goods into the US economy
causes a multitude of complicated distortions in terms of the current
account and capital & financial account of both nations; which some
economists have said was a contributing factor in the global financial
crisis.
3. What are the implications for US and Chinese consumers should the
Chinese government allow it’s currency to float? The trade balance?

If the Chinese Reminbi was allowed to float to a market-clearing level
(which would be an appreciation relative to the USD), would mean that
Chinese exports would become relatively more expensive for US
consumers, leading to a decline in US imports. On the flip-side, US
exports would become relatively cheaper for Chinese consumers,
which would boost US exports. The US would be able to penetrate the
growing Chinese middle-class to sell its “luxury” goods, while the US
consumer would still benefit from Chinese goods that are still priced
lower than their domestic substitutes.

It is difficult to foresee what will happen to the trade balance between
the two nations; it would certainly remain as a surplus to China due to
the low factor prices they experience, however the gap could
conceivably narrow to a large degree as US exporters would sell high
margin, luxury goods to Chinese consumers.