"While the Budget factored in a decline in Australia's terms of trade, the fall in globalcommodity prices over recent months has been larger than anticipated." (Australian Treasury, Mid-year Economic and Fiscal Outlook2012-2013, 22 October 2012,p16)
a) Discuss the reasons for the main movements in Australia's terms of trade over the last decade.
Define the terms of trade. Obtain data for the terms of trade 2002 to 2012(ABS). Explain how the terms of trade are obtained and calculated. Plot the data you have obtained in a chart you have constructed. Describe the movements over the ten year period. Use library research to access academic, official and media sources in order to find reasons for the movements in Australia's terms of trade. List and explain those reasons and discuss in your view how important each one is.
b) What could be the likely impact of a decline in the terms of trade on the Australian Economy? Analyse the impact on the macroeconomic variables in Australia, making use of the Mundell-Fleming model, assisted by diagrams.
Explain and show in diagram(s) how a decline in the terms of trade could affect the ISLM -BPmodel. What would be expected to happen to GDP, the labour market, prices, consumption, investment, the exchange rate, balance of payments as a consequence? Compare this with the real data for Australia over the period of decline. Discuss how consistent the real data are with the predictions of the ISLM - BP model, and the reasons why.
c) Discuss the implications for monetary and fiscal policy of the decline in the terms of trade. Make use of diagrams in your answer.
Discuss what fiscal and monetary policies are indicated by the predictions of the ISLMBP model for a decline in the terms of trade, and show using diagram(s). Compare this with the actual fiscal and monetary policy for the period of decline. Outline and evaluate the reasons given for that policy. Do you think the policy approach is appropriate and why or why not.