Despite having just 24 million people, Australia is the 12th largest economy in the world, sitting just behind South Korea and just ahead of Russia on the global economic size league tables.
Part of the reason that Australia is such a large economy, relative to its population, is the prosperity of the Australian people and, as a consequence, the amount they consume. But Australia has always been a trading nation selling our goods, and now increasingly our services, to the world. Because we lack the economic diversity and scale of other nations, it also means Australia has always been a big importer of goods.
This means the Australian dollar is a very important part of our economic equation. It affects trade in both directions — both the sale and purchase of goods and services with foreign markets. Movements in the Australian dollar factors into the price that Australians pay to purchase goods from offshore. It also impacts the price at which foreigners buy Australian goods and services. When it appreciates or depreciates, there are flow-on effects.
A higher Aussie dollar means it’s cheaper for Australians to buy goods from offshore, to travel abroad, and to purchase foreign services. The flipside of course is that the higher Australian dollar, whether against the US dollar, Japanese Yen, Chinese Renmimbi or any other currency, the more expensive our goods and services are for businesses and consumers in other nations to buy.
Put simply, the rise or fall of the Australian dollar directly impacts the growth rate in the economy because it changes the relative cost structure of goods and services in Australia and against other nations.
This is an excerpt from Australia’s Business Challenges, a free e-book from Business Insider. Get your own copy below:
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