← Macro-economic influences on the New Zealand economy

Exchange rates, trade & policy (every paper)

Appreciation chains, the current account, OCR vs fiscal — always in arrow form, always naming the model.

The appreciation chain (learn both directions)

  • NZD ↑ → exports dearer overseas → X volumes ↓ → AD ↓.
  • NZD ↑ → imports cheaper → M ↑ (consumers switch to imports) → AD ↓ further.
  • Net: appreciation is CONTRACTIONARY; depreciation is expansionary — but raises imported inflation.
Exam-style RBNZ raises the OCR by 50 basis points Trace the effects on inflation. Interest rates ↑ → mortgage/loan repayments ↑ → C ↓, I ↓ → AD ↓. Higher OCR attracts foreign funds → NZD ↑ → imports cheaper → imported inflation ↓. Both channels push inflation down — at the cost of slower growth. ✓ Demand channel + exchange-rate channel, both contractionary. Real paper — 2023 The Reserve Bank raises the OCR Explain how a rise in the OCR affects the market for the New Zealand dollar, and how this may negatively affect the trade balance. A higher OCR attracts foreign investors chasing a better return on NZ deposits/bonds → demand for NZD rises (D$NZ shifts right) → the exchange rate R appreciates to R₁. A stronger NZD makes NZ exports more expensive in foreign currency → export volumes fall. The same appreciation makes imports cheaper in NZD → import volumes rise. Both effects worsen the trade balance in the short term, even though the policy is aimed at price stability, not trade. ✓ D$NZ shifts right, R appreciates to R₁; exports fall and imports rise — the trade balance worsens in the short run. ✕

Appreciation and depreciation — which side helps whom

A stronger NZD (appreciation) HELPS importers and consumers (cheaper overseas goods) and HURTS exporters (dearer overseas). A weaker NZD (depreciation) does the opposite: exporters gain competitiveness, but imported inflation rises. A question naming which group is affected is really asking you to pick the right half of this table.

📖 The current account, precisely

3 terms
Current account
Balance of goods + balance of services + balance of income + balance of current transfers — broadly, trade plus investment income flows with the rest of the world.
Capital / financial account
Investment flows into and out of New Zealand.
The balance
The BOP always balances overall: a current account DEFICIT is funded by a matching surplus on the capital/financial account (New Zealand borrowing from, or selling assets to, the rest of the world).

Practise just this