Praveen Jude Cooray ( COPJB92)

Australian College of Business and

Technology (ACBT)
ECF 1110 Economics 1 – Semester 11D
Theme 3 assignment – The international
economy
a. Assume you manage a business firm in Australia. On 1
March, AUD1 = GBP 0.42. On 1 July, AUD1 = GBP 0.45.
Your company exports native flowers to British florists,
and signed a contract on March 1 to sell 10 tonnes of
flowers at AUD 385 per tonne, to be delivered on 1 July.
Explain how the exchange rate movement between the
two dates impacts on the British buyer.

Impacts of the movements of the exchange rates to

the British buyers.

Exchange Rates

1 March – AUD 1 = GBP 0.42

1 July – AUD 1 = GBP 0.45
On 1st of March – 10 tonnes of flowers at AUD 385 per tonne to be
delivered on 1 July.
Australian Dollar has appreciated from 1st of March to 1st of July.
Therefore, on the 1st of July when the flowers are delivered to UK the
British buyer will have to pay GBP 0.45 which is 0.03 higher than 1st
of March.
If the 1 AUD remained at GBP 0.42
AUD 385 X 10X 0.42 = GBP 1617
If the 1AUD remained at GBP 0.45
AUD 385 X 10 X 0.45 = GBP 1732.50

The appreciation of the AUD will make the British buyer to pay
GBP 115.5 extra for the flowers imported. Therefore, Australian
exports have become more expensive for importers and this
could decrease the competitiveness of Australian exports. The
appreciation of the Australian Dollar would discourage the
British importer in future because the importers have to pay
more due to the appreciation of the Australian Dollar. This
could affect the Australian exports because exports (flowers in
 Praveen Jude Cooray ( COPJB92)

this instance) would be expensive for foreign buyers. Therefore

British buyers will have to consider other markets in future in
the long run if the Australian Dollar continuously keeps on
appreciating. Therefore the exchange rate movements between
the two dates is unfavourable for the British buyer due to the
appreciation of the Australian Dollar. This could go either way
and if the Australian dollar depreciates for some reason then
the British buyer will have to pay less for the flowers. Therefore
the bottom line is if the Australian Dollar appreciates then s its
unfavourable for British buyer and if the Australian Dollar
depreciates it will be favourable for the British buyer.

b. The following graph shows the exchange rate (LKR vs

AUD) over the period November 2, 2010 to December
2, 2010.Describe and explain the trend evident in the
graph. [1+4 marks]

According to the graph which was given it is clearly evident that

there have been fluctuations in Australian Dollars AUD to 1 Sri
Lanka Rupee (LKR) over the period of Nov 2, 2010 to Dec 2,
2010. There is a slight appreciation of the Sri Lankan Rupee
from .008929 to .009185 from 02 Nov to 2 Dec and Australian
Dollar has been depreciated at the same time. This will be
favourable for Australian exports as there the competitiveness of
the exports increase due to the depreciation of the dollar. There
is a slight appreciation in the AUD from 2nd Nov to 02nd Dec. This
again will decrease the competitiveness of the Australian exports
 Praveen Jude Cooray ( COPJB92)

as the importers will have to pay more for the goods. There
hasn’t been a significant fluctuation in the exchange rates till 09
Nov. There is a significant appreciation in Sri Lankan Rupee and a
depreciation in the Australian Dollar from 9th to 13th November.
There hasn’t been a major fluctuation from 17th to 21st Nov. The
Rupee has appreciated from 21st to 23rd Nov and there is a
gradual decrease in the Australian Dollar from 22nd Nov to 23rd
Nov. Again, there isn’t much fluctuation from 25th to 27th of Nov
and there is a significant appreciation of the Australian Dollar
from 28th Nov – 02nd Dec.

c.
The Aussie dollar has appreciated strongly against the USD
in recent times. Discuss the consequences of this
appreciation for Australia’s Balance of Payments. [5 marks]
Consequences of the appreciation of the Aussie Dollar
against the USD to Australia’s Balance of Payment
Appreciation of the Australian Dollar against the USD will decrease
the competitiveness of Australia’s exports and import – competing
industries. The Dollar is appreciated Australian’s have to pay less
for imports simply for the reason that the Australian dollar is
relatively stronger than other currencies. Therefore, imports can be
cheaper than the domestic products and this will result of an
increase The Australian Dollar. There are other advantages to
Australians such as cheap overseas travel, and farmers earn more
money for their harvest and inflationary pressures can be reduced
at the same time.
On the other hand this will affect Australia’s balance of payment.
Balance of payment is the account of a country’s exports and
imports. In this instance where the Australian Dollar is appreciated
strongly appreciated against the USD will decrease the
competitiveness of the Australian exports and Australian produces
could get discourage because they won’t get better value for their
products. This could reduce the value of the exports of the balance
of payments. At the same time its cheaper for Australians to buy
goods from overseas because they have to pay less for the imports
because the dollar is much stronger than USD. This will increase the
imports of Australia. Therefore, this could result of an increase of
imports and decrease of exports which will affect the balance of
payment of Australia.

CONCLUSION

All the answers for the above mentioned questions reveals that
 Praveen Jude Cooray ( COPJB92)

fluctuations of the exchange rates play a vital role in international

trade. Therefore it is important for importers/exporters and
country’s to have close look and stabilize the fluctuations in order
to minimise the impacts of the currency fluctuations in day to day
economic activities.