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An Analysis of the Effects of Recent Changes in the Exchange Rate and the Terms of Trade on the Level and Composition of Economic Activity
Author(s) -
Fallon John,
Thompson Lynne
Publication year - 1987
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/j.1467-8462.1987.tb00662.x
Subject(s) - economics , devaluation , exchange rate , indexation , balance of trade , economic rent , wage , terms of trade , econometrics , monetary economics , international economics , labour economics , microeconomics , monetary policy
Over the eighteen‐month period ending June 1986, the Australian economy experienced two major shocks: a nominal devaluation of the $A of some 28 per cent and a terms of trade decline of some 16 per cent. The effects of these influences are examined using the ORANI model of the Australian economy. The effects of the devaluation on selected macroeconomic variables and key sectoral variables are presented for various degrees of wage indexation. Effects on quota rents are calculated and compared with actual outcomes. The terms of trade decline has an adverse impact on the balance of trade and in order to offset this impact while maintaining aggregate employment demand the model calculates that both real wages and real absorption would need to be around 4 per cent less than the values they would otherwise take.