Analyse the Effects of Fluctuations on the Aud for the Australian Economy.

Analyse the effects of fluctuations of the AUD on Australia’s economy.

A fluctuation in the exchange rate has profound effects on the Australian economy. Any slight movement, either up (appreciation) or down (depreciation), can have drastic, domino like effects. These effects will firstly be felt with importers and exporters, but slowly seep through the economy to influence the way in which the average person lives their life.

In recent years, the main reason for the appreciation of the AUD has been the demand for Australian resources from overseas, and in particular China.   China’s real GDP has expanded over six times whilst India’s has tripled. Their efforts to transform and increasingly industrialise their economy have required massive amount of raw materials, of which Australia has capitalised on. The high value of the AUD has been a result of large amounts of exports from the commodity sector, efficient production of primary products and its competitive advantage in the mining industry.
The Australian dollar was floated in 1983, and is thus determined by the forces of supply and demand in the foreign exchange market. There are two ways in which the Australian dollar can move. Either it can appreciate, or depreciate. Each respectively, has their own advantages and disadvantages.
An appreciation of the exchange rate acts to lower the domestic price of imports whilst raising the foreign price of exports.   It has both, positive and negative effects on the Australian economy. However a distinction must be made between short term and long term effects when analysing them.
The positive effects of an appreciation are as follows:
  * An immediate effect is that it reduces the level of net foreign debt that is denominated in other currencies. This means that an appreciation in the AUD will also decrease the debt servicing ratio. Lower interest payments on this debt could also lead a lower net primary income deficit and a thus a decrease in the size of the...