Unit 1
Unit 2
Measurement and Performance
Every night on the evening news, you can see a quick statement about how much the Australian dollar is worth in terms of other currencies. These values change every day; it is a relatively volatile measure. The changes which occur are significant for the way in which our domestic economy runs.
There are two broad ways in which the value of the Australian dollar can be assessed:- The Exchange Rate: This is when the value of the dollar is expressed in terms of one other currency. For example, if we say that one Australian dollar is equal to eighty cents from the United States, this is the US/Australia exchange rate. It might be written like this: AUD$1 = USD$0.80.
- The Trade Weighted Index: While it is interesting to look at the exchange rate when you are dealing with only one country (for example, when you plan to travel to that country), from a macroeconomic perspective we are more interested in an overall picture of how the value of the dollar is changing. We can find this information by looking at the Trade Weighted Index (TWI). The TWI is a measure of the Australian dollar against all of our trading partners. The impact of a change in the exchange rate against one currency is weighted so that the percentage of our trade conducted with that country is taken into account.
The graph below shows changes in the value of the Australian dollar in both trade weighted terms and against the US dollar.
The value of the dollar is determined by supply and demand. If demand for the dollar on the foreign exchange market is high, then it will appreciate. On the other hand, when the supply of Australian dollars is high, we can expect it to depreciate. Factors which can affect the value of the dollar include:
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Factors which create demand for the AUD |
Factors which create a supply of the AUD |
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People overseas buying our exports |
When Australians buy imports |
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When there is foreign investment in Australian firms |
Australian companies that choose to invest some of their money overseas |
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When tourists travel to |
When Australians travel overseas |
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Permanent migration to |
Permanent migration out of |
Before we move on, it is also worth taking the time to consider this question: Is it better for us when the Australian dollar is “high” or “low”? To answer this, we need to look at the way in which a change in the value of the dollar will affect the Australian economy.
The value of the dollar will affect both aggregate demand and aggregate supply. When the value of the dollar depreciates, this will make it easier for our exporters to find buyers for their products. This could result in higher incomes for them. It will also make it easier for tourists who would like to travel to Australia, and therefore people who offer services to tourists (including hotels, tourist attractions, restaurants and so on) will all benefit.
On the other hand, when the dollar has depreciated it will be more difficult to import goods and services from overseas. We use imported products when we are making things in Australia, and so these costs will be passed on to all consumers. It follows that we can expect to see inflation in Australia during this period. In addition, Australians who would like to travel overseas will find it more difficult to do so, and it will also be more difficult to repay our international debt. Clearly, these groups would prefer to see the dollar appreciate.
As a result, there is no definite goal for the value of the dollar. We would like to see our exporters find a market for their products, but we also need to ensure that we do not create inflation in the domestic economy. Australia has a floating exchange rate. This means that, for the most part, the value of the dollar is determined by the forces of supply and demand on the foreign exchange market.
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