Economics for Professionals - Assignment Example

Economics for Professionals Word Count: 1793 (a) Explain in detail ‘hard Brexit fears’ [Not exceeding 300 words] – (20 Marks) “Hard Brexit fears” are based on the approach that the UK takes after it formally exits the European Union. The manner in which the UK treats the EU after the formal exit may be soft or hard, depending on the approach that the country takes in relation to immigration and customs issues (Allen 2016). The hard option is defined by the following things. The first one is that the UK will have to exit the EU single market. Secondly, under the hard Brexit approach, the UK will have full control over its borders and implement strict immigration controls. Thirdly, the UK will have to give up access to the EU customs union if it settles for the hard Brexit approach. “Hard Brexit fears” are concerns that experts have raised regarding the consequences of the UK settling for a hard Brexit. In the first place, experts have warned that if the UK goes for hard Brexit, it should be prepared for a period of political and economic uncertainty (Roberts 2017). The uncertainty will arise from the fact that it will take a long time (years) for the hard Brexit option to be formalised (Sims 2017). Another issue of concern arises from the manner in which the UK will relate with the EU countries. After the hard Brexit, the UK will have to make fresh negotiations with the EU, which will remain as a trading block whereas the UK will be a single country. It is widely feared that in the absence of trading deals, the economic growth prospects of the UK may remain low (Roberts 2017). Low economic prospects may be fuelled by a fall in the value of the sterling pound in relation to the US dollar as well as the euro. (292 words) (b) Using Demand and Supply model of exchange rate determination briefly explain how AUD is determined in the forex market, and what factors influence its fluctuations. – (20 Marks) The essence of the demand and supply model of the exchange rate is that the demand and supply of the currency of any country are determined by the interaction of the demand and supply of the currency on the foreign exchange market. In relation to the question, the exchange rate of the AUD is determined by the interaction of the demand and supply of the AUD on the foreign exchange market. In general, the law of demand states that if other factors remain constant, if the price of a commodity is high, the demand for the commodity decreases (Sivagnanam & Srinivasan 2010, p. 40). On the other hand, if the price of a commodity falls, the demand for the commodity increases. Similarly, the law of supply states that if the price of a commodity is high, the supply of the commodity increases (Sivagnanam & Srinivasan 2010, p. 80). On the other hand, a fall in the price of a commodity triggers a fall in the supply of the commodity, according to the law of supply. When applied to the determination of the exchange rate of a currency (in this case the AUD), the demand model implies that when the exchange rate of the currency is high, less of the currency will be demanded and vice versa. Also, the supply model implies that when the exchange rate of a currency such as the AUD is high, more of the currency is supplied and vice versa. It is important to note that the demand and supply of any currency are tied to the demand for and supply of goods and services of particular countries using the currency (Pilbeam 2010, p. 265). Therefore, a rise in the demand for goods and services produced in Australia implies that the value (or exchange rate) of the AUD will rise, relative to other foreign currencies. Some of the factors that influence currency fluctuations include the following: prices of commodities, future prospects, political factors, tax rates and real interest rates (Marthinsen 2008, p. 491). Thus, a positive or negative change in any of these factors causes the exchange rate of the AUD to increase or decrease. Changes in the AUD exchange rate correspond to the value of the currency relative to others. For example, when the prices of Australian goods increase, it means that many people have confidence in Australian production. This leads to an increase in the exchange rate of the AUD or a rise in its value relative to others. (415 Words) (c) Using exchange rate data from Reserve Bank of Australia and graphs (monthly data of last three years) analyse the movement of AUD relative to that of the Pound. Is it in line with the ‘hard Brexit fears’ during this period? Are there any other factors contributing to this behaviour of the Australian dollar? – (25 Marks) The value of the Australia dollar relative to that of the sterling pound has been fluctuating over the 3-year period starting from 31st of January 2014 to 31st of January 2017 as shown in the data obtained from the Reserve Bank of Australia (RBA) (2017) covering the period under consideration. The graph below (figure 1) represents how the Australian dollar has been fluctuating relative to the sterling pound on a monthly basis for the three years from January 2014 to January 2017. Figure 1: Movement of the Australian dollar relative to the sterling pound (on a monthly basis) for the 3-year period from 31st January 2014 to 31st January 2017. Source: RBA (2017) The Australian dollar remained relatively stable against the sterling pound for the first nine months of 2014, that it is from January 2014 to September 2014. During this period, the value of the Australian dollar against the sterling pound remained at an average of 0.55. However, between October 2014 and December 2014, the value of the Australian dollar relative to the sterling pound was in constant fluctuation. The period between January 2015 and April 2015 was marked by a steady fall in the value of the Australian dollar relative to the sterling pound, reaching the 0.51 mark at the end of April 2015. The Australian dollar recovered slightly during the two months that followed (May and June 2017) before experiencing another steady fall between July and September 2017. By the end of September 2017, the value of the Australian dollar relative to the sterling pound was at the 0.46 mark. Between January 2016 and March 2016, the Australian dollar experienced a rebound, reaching the 0.57 mark at the end of March 2016. The currency then experienced a sharp but brief fall in April 2016 before started to rise steadily in May 2016. From May 2016 up to November 2016, the value of the Australian dollar relative to that of the sterling pound was on a steady rise, reaching a peak of 0.63 (the highest in the 3-year period under analysis) in October 2016. Yes, the movement of the Australian dollar relative to the sterling pound in this period is in line with the Brexit fears. The Brexit referendum was held on 23rd June 2017. At the time, the Australian dollar, relative to the sterling pound was slightly below the 0.5 mark. However, immediately after the referendum, the Australian dollar started gaining steadily against the sterling pound. This implies that the sterling pound was losing against the Australian dollar, thus confirming the concerns that experts had raised about the economic consequences of the UK voting to leave the EU. In general, the movement of the Australian dollar is affected by macro and micro factors (Taylor 2017). Macro factors include changes in global geopolitics, changes in the price of leading commodities such as oil and gold and changes in the level of risk at the global level. On the other hand, the rate of inflation, unemployment rate and consumer behaviour are some of the macro factors that affect the movement of the Australian dollar. (515 Words) (d) Assume that you are exporting alcoholic beverages to Britain. Explain the impact of sliding pounds on your income? What advantages do you think Australia will have in such a scenario? – (15 Marks) If I am exporting alcoholic beverages to Britain, then a sliding sterling pound will have serious and unpleasant consequences on my export-oriented business. A sliding pound means that the sterling pound is losing against the Australian dollar. In other words, it means that the Australian dollar is becoming stronger, relative to the sterling pound. Essentially, a stronger Australian dollar relative to the sterling pound will affect my business of exporting alcoholic beverages to Britain in various ways. Primarily, a strong Australian dollar means that I shall have to spend more here at home when incurring my expenses. Additionally, a strong Australian dollar will reduce the value of the revenue of my business derived from Britain. As the sterling pound loses its value, it means that I shall have to export more of my products to retain my revenue levels. Eventually, I shall be forced to cut down the prices of my alcoholic beverages, and lose part of my profits. A rising Australian dollar will be advantageous to Australia in various ways. In general, a rising dollar will reduce the overall rate of inflation of the Australian economy. Inflation is disadvantageous to the economy because it represents a steady rise in the prices of consumer goods. A rise in the prices of consumer goods affects the earning power and saving trends of households. However, a rising dollar rate checks on the overall rate of inflation of the economy. Moreover, a rising dollar insulates consumers because it increases their purchasing power. People are generally more worthy than before, thanks to the increasing value of their savings, savings and purchasing power. Lastly, a rising dollar will benefit importers. In particular, retailers who import their stock will find it easy to buy their goods from external markets and resell them in the Australian market. (300 words) (e) What action could the RBA take in order to maintain the exchange rate at 0.65 Pounds, and what side effects might this action have on the Australian economy? Do you think that such actions would be effective? – (20 Marks) For the RBA to maintain the exchange rate at 0.65 Pounds, it has to rely on monetary policy. In practice, the bank uses monetary policy to influence the rate of exchange in the country because Australia uses floating interest rate. Also, at 0.65, which is a relatively high rate of exchange for the dollar relative to the sterling pound, the RBA will be facing the task of ensuring that the high rate of interest does not disrupt macroeconomic factors in the country. Therefore, the RBA will have to develop and implement monetary policies that will cushion the economy against the adverse effects of having a relatively strong dollar. Maintaining the exchange rate at 0.65 pounds may have a number of side effects on the Australian economy. For example, it will affect the sustainability of local businesses that rely on the export market as well as those that compete with importers for the local market. Back in 2011, the Chamber of Commerce and Industry Queensland (CCIQ) (2011, p. 2) advocated for the implementation of policies that would reduce the exchange rates. At the time, the Australian dollar had appreciated in value against the US dollar. The argument of the advocacy group was that the relatively strong Australian dollar was having adverse effects on local businesses that relied on exporting their goods and services (CCIQ 2011, p. 3). Therefore, if the RBA attempts to maintain the rate of exchange at 0.65 Pounds, this action will have a ripple effect on the following macroeconomic factors of the Australian economy: the stability of the Australian dollar, full employment and the welfare of the general population. (271 Words) References Allen, K 2016, ‘Pound continues to fall against dollar amid hard Brexit fears,’ The Guardian, 11 October 2016. Chamber of Commerce and Industry Queensland (CCIQ) 2011, “Impact of the high Australian dollar on Queensland businesses,” viewed 24 February 2017, . Marthinsen, JE 2008, Managing in a global economy: demystifying international macroeconomics, Cengage Learning, Mason. Pilbeam, K 2010, Finance and financial markets, Palgrave Macmillan, London. RBA 2017, Historical data, viewed 23 February 2017, . Roberts, D 2017, ‘UK risks disorderly crash landing on Brexit, business leaders warn,’ The Guardian, 16 January, viewed 22 February 2017, . Sims, A 2017, ‘What is the difference between hard and soft Brexit? Everything you need to know,’ Independent, 3 October, viewed 22 February 2017, . Sivagnanam, KJ & Srinivasan, R 2010, Business Economics, Tata-McGraw Hill Education, New Delhi. Taylor, A 2017, ‘Which factor do you think affects the Aussie dollar the most?’ The Bull.com, 24 February, viewed 22 February 2017, . Read More