Real Economics

Real Economics here, your one and only source into the world of Australian Economics.

Demand factors affecting External Stability:

Disposable Incomes:

When disposable incomes rise, consumption increases as people have more money to spend on their wants. This grows the demand for imports, since there will not be enough goods and services available in Australia. This increases the CAD due to increased debit transactions.

Interest Rates:

When the RBA sets high interest rates this means that it is more expensive to gain access to funds. This results in decreasing consumption and investment (therefore Aggregate Demand) and the Australian CAD should fall as there will be less demand for imports.

Business Confidence:

Increased business confidence attracts greater investment from overseas. As businesses are more optimistic about the future they tend to purchase more overseas capital, increase the Australian CAD.

Consumer Confidence:

When people are confident in the Australian economy they will tend to purchase more imports, increasing the CAD. This is because at times of extremely high consumer confidence the economy is near its productive capacity and the spill over causes an increase in spending on overseas imports. In these times more of the Australian Dollar (AUD) may be placed on the Foreign Exchange market causing a depreciation in the AUD. Therefore if increased consumer confidence causes increased consumption as well as depreciation of the AUD, it is evident that it creates increased external stability.

Overseas Activity:

As we know from earlier this year greater economic activity in overseas countries such as China causes a greater amount of exports in Australia. This increases the amount of demand for the AUD of the Foreign Exchange market and as a result causes the AUD to appreciate. Increased exports also help to improve our CAD as there are more credit transactions.

xoxo Real Economics.