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Effects Of A Strong Dollar On Australian Economy Economics Essay

The value of the Australian dollar has risen dramatically since late 2008 against the US dollar and other currencies,such as the pound and euro.Actually, China overheating investment in Australia mining industry and improved interest rate by Reserve Bank of Australia promote this appreciation of Australian dollar and the situation seems optimistic.A lot of Australian are optimistic about this appreciation of Australian dollor,because they can have cheaper shopping and tourism overseas.However,whether strong Australian dollar is a positive development for the Australian economy has aroused heated argument.This paper will argue that the strong dollar has negative effect on Australian economy.Strong dollar can cause trade deficit because of increasing import and decreasing export.This trade deficit is negative for Australian economy in the long-term.Additionally,strong dollar can cause the decrease of investment because of higher cost and low profit of investment in Australia.This decreasing investment can hinder the development of Australian economy.Furthermore,strong dollar can also have negative effect on tourism because of the increasing costs of tour.This damaged tourism can drive down Australia GDP.
Strong dollar can lead to trade deficit through falling export and rising import. Strong Australia dollar means high exchange rate between Australian dollar and other currencies, this high exchange rate will make Australia commodity export contract prices seem higher than other countries.This high prices will reduce the competitiveness of export industries in international market. Consequently, the value of export will decrease.This decrease especially occurred in manufacturing and agricultural sector.For example,the exports of manufacturing industry reduced by 7.8% from 2008 to 2009 because of the dramatically increasing exchange rate over 2009(Ridout 2010,pp.6). Similarly,
according to the Australian Bureau of Agriculture and Resource Economics(cited in AAP 2009),the value of farm exports is predicted to decline by 2.5 per cent to $31.1 billion from 2009 to 2010 because of the strength of Australia dollar.
On the contrary, strong dollar will make the commodity import contract prices seem lower than before, therefore import will rise. This rising import particularly occurred in energy resources. According to ANZ international economist Alex Joiner(cited in AAP 2007), the Australian dollar which appreciate to 92 US cents by the end of October in 2007, drove up the commodities imports,especially in energy resources.The imports of mineral fuels ,lubricants and related materials raised by about 0.3 billion in October when compared to September.
Therefore,trade deficit will occur when export decrease and import increase.
According to Australian Bureau of Statistics(ABS,2010), when Australian dollar rise to a high level in 2010,in seasonally adjusted terms, the balance of goods and services was a deficit of $2,082m in March 2010, a turnaround of $4,384m on a revised surplus in March 2009. In addition,trade deficit can lead to decreasing foreign exchange reserves.This decreasing foreign exchange rate means weak ability to repay foreign debt.And this weak ability to repay foreign debt can put huge pressure on the economic development.In conclusion,
strong dollar is negative for Australian economy because of trade deficit.
In addition, investment in Australia can decline in the short-term because of the strong dollar.This investment is from both foreign investors and domestic investors. For domestic investors, especially the investors who invest in a company with larger share of sales in export markets, will reduce investment in response to a strong domestic dollar (Swift 2006,pp.19).This is because strong dollar make their profits decline dramatically. For example, a theoretical model which is developed by Campa and Goldberg (1999, cited in Swift 2006,pp.20) showed that a 10 per cent real increase of the Australian dollar causes a net decrease of 4.2 per cent in total investment on average between 1988 and 2001.Furthermore,for foreign investors,the strong dollar make Australian assets seem more expensive while other countries’ assets seem comparatively cheaper.Consequently,they will not consider to invest in Australia in the short-term.This kind of investment from foreign investors can also be defined as Australia’s inward Direct Foreign Investment(DFI).Therefore,the appreciation of Australian currency can decrease the DFI. For example, according to Tcha (1999,pp.93),a unit(million) appreciation of Australian currency against the foreign currency will cause 0.3 million dollar decrease in inward DFI.Moreover,investment is important for Australian economy because it can improve the productivity.Investment includes importing new equipment and new foreign technology,all of this can improve the productivity and then develop the economy.If the investment decrease to a certain extent,the economy will suffer from the slow development.Therefore, Australian economy will suffer from strong dollar because of the dramatic decrease of investment.
Furthermore, strong dollar can also negatively affect tourism in the short-term. This tourism is made up of domestic tourists and foreign tourists. For domestic tourists,strong dollar make overseas tour seems cheaper than before. Consequently, most of them will travel overseas rather than stay at Australia for their holiday. For instance, when Australian dollar shot up to around 93 US cents in 2010, nearly 18 percent more people(about more than 554,400 Australians) departure from Australia for holidays compared with the same time last year (Money Matters 2010).Besides, for foreign tourists, the costs of travelling to Australia seem higher than other countries, therefore they will reconsider the destination of their tour rather than Australia.For example, when the Australian dollar increased from about 80 US cents at the beginning of 2007 to near 92 US cents at the beginning of 2008, the number of foreign visitors has declined 0.7 percent during this period (Chong 2008). Given all this, it is clear that strong dollar damage Australian tourism through stimulating outbound growth and weakening inbound arrivals.
Additionally, Tourism plays an important role in Australian economy. It has direct and indirect contribution to Australian Gross Domestic Product (GDP). The direct contribution includes tourist consumption and direct employment in tourism industry.The indirect contribution comes from other industries who satisfy tourism demand,such as hotel,transportation and catering industry.In the same way,this indirect contribution also includes direct consumption and employment in these industries.According to Australian Bureau of Statistics (2007,cited in Kookana,Maurer and Hales 2008,pp.4-5),from 2005 to 2006,the tourism contributed directly approximately 4% to Australia GDP,including tourist consumption and employment in tourism industry.The indirect contribution from other related industries is about 3%.Totally,tourism actually contributed about 7% to Australia GDP.Therefore,the strong dollar will cause the decline of Australian GDP to a great extent through damaging tourism.
However, some argue that a strong dollar can help the Australian economy by controlling inflation, because the strong dollar can decrease the money supply in domestic market.Strong dollar make the export products seem more expensive in foreign market while the import products seem cheaper. Consequently, the export tends to decline while the import tends to increase.This means less money flow into Australia market and more money flow out of Australia market. Therefore, there will be less circulation of money in the Australia market. This falling money supply can control the inflation to a certain extent. According to Sung Won Sohn (cited in Gongloff 2001), chief economist for Wells Fargo

Explain and describe what a limiting factor is

Limiting factor is any factor that restricts a company or an organisation’s activities. In simple words, a limiting factor is the factor which is limited or not freely available to the company. Limiting factors in an organisation can be labour time, raw material, machine hours or space. For example, when sales demand excess the productivity capacity, the company do not have enough resources to produce the product, the scarce resource will be the factor that restricts the company’s activities. The production constraints can be removing and additional resources can be acquired when the scarce resources are existed. Hence, the scarce resources should be identified to make sure the company has enough resources to produce their products as many as their wish. By using limiting factor, we can maximize the profit when obtained the greatest possible contribution to profit each time.
Example1: A B C Contribution per unit of output
RM 24
RM 20
RM 12
Machine hours required per unit of output
6 hours
2 hours
1 hours
Estimated sales demand
3,000 units
3,000 units
3,000 units
Required machine hours
18,000 hours
6,000 hours
3,000 hours
The machine hour is limited to 18,000 hours for the period because of the breakdown of one machine.
Consider Example 1.
From the example 1, we know that the company required total 27,000 machine hours to produce the total sales demand of the product A, B and C that they estimated. However, the company only has 18,000 machine hours for the period because of the breakdown of one machine. In this situation, company’s activities are limited in the available of machine hours. When we looking at the available information, we will think that the company should produce the product A first since the contribution per profit for product A is the highest but this assumption can be wrong. This is because produce a product A required 6 machine hours, whereas product B required 2 machine hours and product C required 1 machine hours only. The company can concentrates on producing 3,000 units of product B and C respectively and still have machine hours left to produce product A. In other words, if the company only concentrates on produce the product A, there will no machine hours left to the company to produce B and C. In order to maximize the company’s profit, we should use limiting factor to calculate the greatest possible contribution per profit for each product and rank profitability of the product to obtain the optimum production plan.
(b) Explain the techniques that have been developed to assist in business decision- making when single or multiple limiting factors are encountered
(16 marks) Single limiting factor- Limiting factor analysis When single limiting factor are encountered, we have to use limiting factor analysis to help companies to identify the scarce resources and maximize profit by using the best combination of available resource. In limiting factor analysis, we should identify the bottleneck resources first. Secondly, we should calculate the contribution per unit for each product. Next, we should calculate the contribution per unit of the bottleneck resource for each product. After we get the contribution per unit of bottleneck resource, we can rank the products of the contribution per unit of bottleneck resource. Finally, we can allocate the resources from the highest contribution per profit to the lowest contribution per profit by the ranking. By doing so, we can obtained the greatest possible profit when resources are limited by single limiting factor.
Example 2: X Y Machine hours per units
3 hours
4 hours
Sales demand
2,000 units
3000 units
RM RM Selling price
Less :
Direct Material
Direct Labour
Variable Overhead
The supply of materials for the period is unlimited, but the machine hours are limited to 15,000 hours.
In order to maximize the profit, we should using limiting factor analysis to solve the problem when there is only one limiting factor.
Step 1: Identify the bottleneck resource.
At sales demand level:
Sales demand
Machine hours per unit
Total machine hours
X 2,000 units
3 hours
6,000 hours
Y 3,000 units
4 hours
12,000 hours
18,000 hours
Thus, machine hours are the limiting factor.
Step 2: Calculate the contribution per unit for each product.
The contribution has been given at the above.
X Y Contribution per unit
RM 12
RM 14
Step 3: Calculate the contribution per unit of the bottleneck resource for each product.
To calculate the contribution per unit of the bottleneck resource for each product, the formulae is:
Contribution per units of the machine hours =
Machine hours
Product X =
RM 12
3 hours
= RM 4.00
Product Y =
RM 14
4 hours
= RM 3.50
Step 4: Rank the products from the highest contribution per machine hour to lowest contribution per machine hour.
Production should be concentrated on product X first, up to maximum sales available, then product Y.
Step 5: Finally, allocate the available resources using that ranking that we decided at step 4 and calculate the maximum contribution.
Production plan
Units produced
Machine hours per unit
Total machine hours
Balance of machine hours
15,000 hours
Product X
2,000 units
3 hours
6,000 hours
9,000 hours
Product Y
2,250 units
4 hours
9,000 hours
So, the maximum contribution is as follow:
Product X ( 2,000 units x RM 12)
Product Y (2,250 units x RM 14)
Multiple limiting factors- Linear programming We can use limiting factor analysis when there is one limiting factor. However, when there is more than one of scare resources which restricts organisation’s activities, we can use linear programming to solve the problem. Firstly, we must defined the variances when we using linear programming. After this, we can define and formulate the objective. Thirdly, we can formulate the constraints to formulating the problem. Next, we must draw a graph to identify the feasible region and we can get the optimum production plan from the graph. Finally, we can solve the problem and get the maximum contribution by doing so.
Example 3: A B Contribution per unit
RM 20
RM 10
Machine hours per unit
6 hours
3 hours
Kilos per unit
4 kilos
8 kilos
Maximum available :
Machine hours
= 18,000 hours
= 24,000 kilos
What should be the production plan?
To answer the example 3, we should use linear programming to get the optimum production plan because there is two or more of scarce resources.
Step 1: Define the variances
Let x = the number of units of the product A.
y = the number of units of the product B.
Step 2: Define and formulate the objective function.
The objective is to maximize the contribution C, given by:
Maximum contribution = 20 x 10 y
Step 3: formulate the constraints.
The limitations here are machine hours and kilos.
For the machine hours, product A required 6 hours and product B required 3 hours’ machine hours.
So, total machine hours required = 6 x 3 y
For the kilos, product A required 4 kilos and product B required 8 kilos.
So, total kilos required = 4 x 8 y
Machine hours
6 x 3 y
Ë‚ 18,000
4 x 8 y
Ë‚ 24,000
Step 4: Draw a graph and identify a feasible region.
For the equation 6 x 3 y = 18,000 – machine hours
When x = 0, y = 18,000/ 3 = 6,000
When y = 0, x = 18,000/ 6 = 3,000
Draw a straight line between the point (0, 6000) and (3000, 0) on the graph to represent the line for machine hours constraint.
For the equation 4 x 8 y = 24,000 – kilos
When x = 0, y = 24,000/ 8 = 3,000
When y = 0, x = 24,000/ 4 = 6,000
Draw a straight line between the point (0, 3000) and (6000, 0) on the graph to represent the line for kilos constraint.
The constraints can be show as below:
The original constraints were “<" types, so the feasible region is shown by the area bounded by the thick black line on the graph. Production can be at point P, Q or R.
Step 5: Determine the optimal solution
Calculate the contribution earned at each point P, Q and R
Point P
= RM 20 (0) RM 10 (3,000)
= RM 30,000
Point Q
= RM 20 (2,000) RM10 (2,000)
= RM 60,000
Point R
= RM 20 (1,500) RM10 (0)
= RM 30,000
Point Q gives the maximum contribution.
Step 6: Answer the question
The optimal point is at x = 2,000 and y = 2,000. This gives a maximum contribution of
C = (20 x 2,000) (10 x 2,000) = RM60, 000
(c) Explain the management idea known as throughput accounting. State and justify your opinion on whether or not throughput accounting and limiting factors are the same thing.
(18 marks) To reduce company’s cost and improves the profitability, every company’s managers are using cost accounting to help them on decision-making. Theory of constraints (TOC) or Throughput accounting (TA) is another method for decision making others than Standard Based Costing, Activity Based Costing and Marginal Costing. TOC/TA is new management accounting approach based on factors identification when constraints are restricts companies to achieving their goals and hence reduces company’s profits.
Throughput accounting is used when there are only few constraints, normally just one. The constraint can be a resource, company policy or management mindset. According to Goldratt’s ideas, TOC is forecasting on a limit capacity at certain critical points in any production plan. TOC can maximise organisations’ profit by increases the speed of producing through an organisation to eliminating bottlenecks.
Additionally, throughput accounting is not costing because it does not allocate all expenses (variable and fixed expenses, including overheads) to the products and services. Thus, throughput accounting helps managers to get better management decision in order to improve organisations’ profits by three measurements. They are:
Throughput (T) is the rate that company produces “goal units”. When the “goal units ” are money, throughput is net sales (S) less total variable costs (TVC), usually is cost of raw materials ( T = S – TVC ). However, T exists when there is only one product or service sold. Besides, finished goods of inventory in a warehouse are not count because it has not yet sold.
Operating expenses (OE) is all others expenses except the total variables cost that used to calculate the throughput. Basically, OE is total cost to operating the production system. Fixed or partially fixed costs no difference in throughput accounting. On the contrary, there only have either total variable cost or operating expenses in throughput accounting. Examples for OE include maintenance, utilities, rental, etc.
Investment (I) is total amount of money that invest in a new system to enhance its ability to improve the capacity, for examples machinery, inventory, building, and other assets and liabilities.
Therefore, throughput accounting use difference formulas to make difference types of accounting decisions by combined the throughput, total variable costs and operating expenses:
Net profit (NP) = Throughput – Operating Expense = T-OE
Return on investment (ROI) = Net profit / Investment = NP/I
Productivity (P) = Throughput / Operating expense = T/OE
Investment turns (IT) = Throughput / Investment = T/I
We can use the above formulas when making a decision that related to changes in revenue, expenses or investments to get the right decision, which must generate a positive answer from one out of three questions below:
Does it increase throughput?
Does it reduce operating expense?
Does it improve the return on investment?
Finally, there are five steps in the TOC to help managers maximize the throughput which causes them to achieve organisations’ goals. The five steps are as follows:
Identify the system constraints. There is an internal constraint? For example, in production, engineering or planning. There is an external constraint? For example, in the market. The constraints a resource or a policy?
Decide how to maximise the output from the constraint. Prepare all other activities subject to this decision. While Non-constraints need to be subject to constraints.
Consider the appropriate level of resources once the resource constraint has been identified. Therefore, the capacity constraints can be improved.
Enhance the system’s constraints.
Once the constraint has been corrected, return to Step 1 to determine the next most serious constraints and duplication.
In my opinion, throughput accounting and limiting factor is not the same thing but there are similarities and differences in between throughput accounting and limiting factor. For example, throughput accounting and limiting factor are using to assist companies to identify bottleneck resources instead to maximize companies’ profits.
However, throughput accounting is used when there are very few constraints; often just one but limiting factor is used when there are one or more than one constraints. Besides, limiting factor is focus on working to obtain greatest contributions while throughput accounting is focus on the premise that the limited capacity in some critical point of any production plan.
In addition, limiting factor maximise the organisations’ profit by using the best combination of available resources but throughput accounting is maximise the profit by increase the producing speed through organisation to eliminate bottlenecks. Throughput accounting calculates the products throughput as the selling price minus all variable costs. Variable costs or in another words cost of materials in throughout accounting included direct material costs only, labour and overhead costs are fixed and categories to total factory costs. In contrast, limiting factor calculated by sales price minus variable costs to get the contribution but variable costs in limiting factor are including the labour and overhead costs, this is difference from throughput accounting.