Question

Macroeconomic

.- Use the foreign exchange model to explain the impact of an increase in US interest rates on the Australian dollar?

- Use the per worker production function to explain why additional capital per worker cannot be a source of long run economic growth in an economy

Answer 1

Q1: Use the foreign exchange model to explain the impact of an increase in US interest rates on the Australian dollar?
Ans: Foreign exchange turnover in Australia is currently around A$160 billion in a day. According to a recent global survey of foreign exchange Australian market is the eighth largest in the world, although the two largest – the United Kingdom(UK) and the United States(US) – are much larger than the remainder. About half of the turnover in the Australian foreign exchange market is against the Australian dollar. The remaining half is largely made up of the trade-in major currencies against the US dollar, although trade in less traditional currencies has continued to expand it.

Australian Foreign Exchange Turnover Daily average A$b All currencies Other Australian dollar LOOOOOOOOOOOOOOOOOOOOOOO 1994 1999 2004 2009 2014 2019 Source: RBA

Between 2000 and 2007, turnover in the Australian and global markets grow rapidly, supported by the increased cross-border investment and trade flows. Foreign exchange turnover fell in both Australia and other major markets, driven initially by a decline in foreign exchanges ((FX)) swaps turnover, which was in turn related to reduced cross-border investment activity. Subsequently, the collapse in international trade in late 2008 also saw turnover in the spot market fall sharply. While between 2009 and early 2011, foreign exchange turnover in the Australian market is to be recovered in line with global markets, More recently, foreign exchange turnover in Australia has remained relatively stable.
Traditional market segment, other ‘non-traditional’ foreign exchange derivatives such as options and currency swaps are also traded in the Australian market. The Australian market process around A$5 billion of transactions in these non-traditional products every day, covering a wide variety of products, variety ranging from very simple to more complex design. Foreign exchange derivatives, including both traditional and non-traditional products, are an important tool for many Australian companies with foreign currency exposure because they can be used to protect provide protection against adverse exchange rate movement.

As well as trading in Australia, there is a considerable turnover of the Australian dollar in another market. Global trade in the Australian dollar averaged around US$350 billion per day in April 2016 making it the fifth most traded currency in the world, and the AUD or USD the fourth most traded currency pairs. The size of the market indicates that the exchange rates are being to be determined in liquids, active and competitive marketplaces.

Australian Foreign Exchange Turnover Daily average, all currencies, by instrument IASb FX swaps Spot Non-traditional* * Outright forwards LLLLLLL L LLLLLLLLLLLLL 1994 1999 2004 2009 2014 2019 * Non-traditional instruments include currency swaps and options Source: RBA

Q2: Use the per-worker production function to explain why additional capital per worker cannot be a source of long-run economic growth in an economy?
Ans: Sustained long-term economic growth comes from the increases in worker productivity, how efficient is your nation with its time and workers? Labor productivity is the value that each employed person creates per unit of our input. There is the easiest way to comprehend labor productivity is to imagine the Canadian worker who can make 10 loaves of slices of bread in an hour versus U.S. workers who at the same hour can make only two loaves of bread. This fictional example, Canadians are more productive. Being more productive essentially means you can do more in the same amount of time.
What determines how productive workers are? The 1st factor is to be determinant of labor productivity is human capital. Human capital is the accumulated knowledge from education and experience, skills, and expertise that the average worker an economy possesses. Typically the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity.
The 2nd factor that determines labor productivity is technological change. Technological change is a combination of invention, advances in knowledge and innovation, which is putting that advance to use in new products or services. For example, the transistor was invented is in 1947. It allowed us to miniaturize the footprint of electronic devices and use less power than the tube technology that comes before it. The innovations since then have produced smaller and better transistors that are ubiquitous in the products as varied as smart-phones, computers, etc. The development of the transistor has allowed workers to be anywhere with smaller devices. These devices can be used to communicate with other workers or people or persons, measure product quality or do any other task in less much time, improving worker productivity.
The 3rd factor that determines labor productivity is in economies of scale. Recall that economies of scale are the cost advantages that industries obtain due to the size. Consider again the case of the fictional Canadian worker is who could produce 10 loaves of bread in an hour. If this difference in productivity was due only to the economy of scale, it could be that workers had access to a large industrial-size oven while the U.S. worker was using a standard residential size oven.