what is going on with the TOT?!

[portia1605]

Hi everyone,

I'm in the middle of studying and I just can't get my head around the effect of TOT movements on the value of the $A? I just did a MC asking 'Which of the following is the likely effect of a rise in Australia's TOT?' and the answer is 'A fall in the CAD and an $A appreciation.' Can anyone please explain to me why the $A appreciates?

Thank you so much!

[isaacdelatorre]

Hi everyone,

I'm in the middle of studying and I just can't get my head around the effect of TOT movements on the value of the $A? I just did a MC asking 'Which of the following is the likely effect of a rise in Australia's TOT?' and the answer is 'A fall in the CAD and an $A appreciation.' Can anyone please explain to me why the $A appreciates?

Thank you so much!

Hi there,

The $A appreciates because in the short run, the demand for our exports is not elastic. Meaning that just because the price changes it doesnt mean that overseas people will stop buying our products immediately - this could be because they may require them or they may buy because they expect prices to increase further etc. When the TOT increases it doesnt say anything about volume of exports; it just means that we earn more for our exports relative to imports.
Thus if the volume of exports remains relatively the same, if we 'earn more' due to price increases it means that the price of those exports increases. when this happens, overseas people will have to convert more currency into AUD in order to buy our exports; thus causing an appreciation of the AUD

Hope this helps please let me know if you need further clarification