Examining the Implications for an Economy of a Rising...

Assignment Titles 1. Examine the implications for an economy of a rising exchange rate FT 23 8 11 p16 Exchange rate kills Australian steel exports FT 7 9 11 p4 Bold move seen as high risk (Swiss max exchange rate)) FT 9 9 11 p32 Hong Kong faces dilemma over its peg to the dollar Financial Update 11/12 see Brazil, Australia, Switzerland and Japan Introduction Whilst popular opinion centres on the assumption that rising exchange rate has mostly positive effects on the economy, the impacts are both diverse and extensive. In the short run, a major implication is the improvement in the terms of trade as exports become more expensive and imports become relatively cheaper. This rise in the terms of trade leads a larger†¦show more content†¦A country is in internal balance when aggregate demand equals potential output. A country in external balance has a zero current account balance. Simultaneous internal and external balance is the long- run equilibrium of the economy. With sluggish wage and price adjustment, lower aggregate demand for domestic output equals potential output is internal balance restored. For a floating exchange rate, the total balance of payments is always zero. Saying that the current account is in balance then also implies financial account balance. Similarly, a higher real exchange rate (lower competitiveness) reduces export demand and raises import demand. The fall in net exports induces both a current account deficit and lower aggregate demand, leading to a domestic slump as shown in the bottom left hand quadrant. The figure shows other shocks that move the economy into other quadrants, causing departures from both internal and external balance. The long-run equilibrium real exchange rate In long-run equilibrium, both internal and external balance must fall. Domestic output Y is at potential output Y* and the current account is in balance. For countries with large foreign debts or foreign assets and thus large flows or interest income, the current account can deviate a lot from trade balance. However, for most countries, trade balance and the current account balance are similar. Initially, we focus on this letterShow MoreRelatedRSPCA and the Rolls Royce Group1807 Words   |  7 PagesGroup plc Financial Statement Analysis for RSPCA and Rolls Royce This essay analyses the financial statements of the RSPCA and Rolls Royce Group plc. The analysis reviews important information derived from their statements and discusses the implications for performance measurements. This analysis also discusses financial statement differences between charity and for-profit companies, as well as considers what additional information would facilitate financial analysis. 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