While the Budget factored in a decline in Australia’s terms of trade, the fall in global commodity prices over recent months has been larger than anticipated.
a) Discuss the reasons for the main movements in Australia’s terms of trade over the last decade.
Define the terms of trade (see Dornbusch Ch 9).
Obtain data for the terms of trade 2002 to 2012 (ABS).
Explain how the terms of trade are obtained and calculated.
Plot the data you have obtained in a chart you have constructed.
Describe the movements over the ten year period. Use library research to access academic, official and media sources in order to find reasons for the movements in Australia’s terms of trade.
b) What could be the likely impact of a decline in the terms of trade on the Australian Economy?
Analyse the impact on the macroeconomic variables in Australia, making use of the Mundell-Fleming model, assisted by diagrams. (8 marks)
Explain and show in diagram(s) how a decline in the terms of trade could affect the ISLM -BP model.
What would be expected to happen to GDP, the labour market, prices, consumption, investment, the exchange rate,
balance of payments as a consequence? Compare this with the real data for Australia over the period of decline.
Discuss how consistent the real data are with the predictions of the ISLM – BP model, and the reasons why.
c) Discuss the implications for monetary and fiscal policy of the decline in the terms of trade.
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