1. Study the extract below and answer the questions that follow.
Boom or bust
(1)The freely floating Australian dollar has been appreciating, creating winners and losers. Australian tourists overseas are getting bargain hotel rooms while some local exporters are suffering huge falls in demand. The appreciation of the Australian dollar gives a good reason to foreign students not to study in Australia. But as the Australian dollar continues to gain strength it seems that the economy is coping with the appreciating currency better than many economists expected.
(2)Australia’s exports are dominated by minerals, energy and agricultural products, and all are enjoying record prices. Continued strong demand means that the exporters of these products have not needed to look for other markets. For example, coal and iron ore prices have more than doubled in the last two years, these commodity prices rising even more quickly than the appreciating currency.
(3)The Australian dollar is only one factor affecting exporters, and at the moment the strong economic growth of the Asian economies is adding to the increasing demand for Australian commodities.
(4)However, not everyone in Australia is happy. Service industries have not enjoyed an increase in the price of their output, nor have they enjoyed booming foreign demand. The problems with the appreciating Australian dollar are most evident in the fact that fewer students and tourists are coming to Australia. Manufacturers have a similar problem and are suffering from the results of the rising Australian dollar and increased domestic interest rates.
(5)The higher Australian dollar has provided many indirect benefits. By making imported resources cheaper, it has reduced the inflationary pressures which were caused by the economic boom that gave consumers greater spending power. As a result, it allowed the Australian government to slow down the interest rate increases which it was imposing in order to tackle inflation.
(a) (i) Define the term appreciation indicated in bold in the text (paragraph (1)).
(ii) Define the term interest rate indicated in bold in the text (paragraph (5)).
(b) Using an appropriate diagram, explain how the “increasing demand for Australian commodities” (paragraph (3)) is likely to affect the value of the Australian dollar.
(c) Using an AD/AS diagram, explain how the higher Australian dollar reduced inflationary pressure in the Australian economy (paragraph (5)).
(d) Using information from the text/data and your knowledge of economics,evaluate the possible effects of the appreciating Australian dollar on the Australian economy.
2. Study the extract and data below and answer the questions that follow.
Price of Chinese exports set to soar
(1)In December 2009, a Chinese trade official declared that China will continue to increase its share of world exports. While China’s share of world trade fell in 2009 due to the world economic downturn, the share of other major exporters fell by even more. As a result China overtook Germany to become the world’s largest exporter. Over the last 10 years China’s exports grew by an average of 23 %, more than twice as quickly as world trade. If this growth continues China could claim 25 % of world trade by 2020.
(2)Chinese producers have become used to producing cheap goods and Chinese and overseas consumers have become used to buying these goods. The production of electronic toys and textiles in China is now suffering from increased production costs. Wages, raw materials and other manufacturing costs in China are rising, forcing up prices for producers and consumers.
(3)Inflation in China is also being affected by a huge increase in Chinese domestic demand as Chinese incomes increase. Chinese toy factories are being forced to give large wage increases to their workers who prefer to work in Japanese-owned electronics factories. Working conditions in a toy factory can be unpleasant and many workers leave resulting in labour shortages. It now takes longer to produce and deliver toys.
(4)These changes in the Chinese economy are beginning to have effects on other economies. Importers are warning of sharp price increases and stock shortages as Chinese factories struggle to meet demand. Prices have risen by 10 % in the last eight months. Having built its reputation on low price manufactured goods, China now faces the problem of inflation and its effect on the export of these goods.
(5)China has also been criticized for maintaining a low and managed exchange rate to gain a competitive advantage and protect its domestic industry and employment and maintain a current account surplus. China’s trading partners are becoming concerned and some are suggesting a need for protectionist measures in order to counteract the Chinese exchange rate policy.
(a) (i) Define the term inflation indicated in bold in the text (paragraph (3)).
(ii) List three components of the current account of the balance of payments.
(b) Using an AD/AS diagram, explain how an increase in domestic wages might affect the output of the Chinese economy.
(c) Explain how inflation in China might affect its current account balance.
(d) Using information from the text/data and your own knowledge of economics,evaluate the possible effects on the Chinese economy of increased trade protection imposed by its trading partners.
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