Question

Explain the effects of the AUD appreciation on: (1) Exports of Australian goods, the price level of imported goods in Australia and tourism to Australia; (2) Revenues of Australian financial institutions with South-east Asian trading subsidiaries in Japan (which earn profit in Yen). Explain based on imported goods and tourism. Then financial instituitions and the yen. Specific answers.

Answer 1

Answer 1 :-

Exports of Australian goods :-

Effect - Exports reduces

Cause - A higher Australian dollar can make exports more expensive and can drive overseas buyers to import from other countries with a lower exchange rate thereby reducing the exports .

Price level of imported goods :-

Effect - Price level of imported goods reduces .

Cause - When a currency appreciates or strengthens in relation to other countries , import gets cheaper . This means Australian dollar would buy more of another foreign currency thereby decreasing the price level of imported goods and increasing the quantity of imports.

Tourism in Australia :-

Effect - Tourism in Australia will reduce

Cause -If the Australian dollar rises , this will lower the value of currency of another country . Thus tourists will have to pay more of their currency to buy goods and spend in Australia . This will discourage them to travel to Australia and go to a relatively cheaper destination .

Answer 2 :-

Revenues of subsidiaries in Japan earning profit in Yen :-

Effect - Revenues of the subsidiary will decline

Cause - Let us consider that exchange rate of 1 AUS = 71.97 ¥

Now after Australian dollar appreciation the new exchange rate of 1 AUS = 75¥

The firm earns a profit of 1000¥ per year . Now before appreciation the profits earned by Australia institution was ( 1000/71.97)=AUS 13.89

Whereas , with the new exchange rate the Australian institutions earn ( 1000/75)= 13.33 AUS .

Thereby we can understand that when the profits in ¥ are converted to dollars they are reduced due to currency appreciation.