Balance of Payments Flashcards
The Balance of Payments
It’s a record of the financial transactions between Australia and the rest of the word.
- Money received by Australia from overseas = credit
- Money paid by Australia to overseas = debit
Two broad accounts of the Balance Payments
- Current Account (CA)
- Capital and Financial Account (CAFA)
Current Account - Definition
Records transactions of a ‘current’ nature. Those that do not result in any future obligations.
The current account captures the net flow of money that results from Australia engaging in international trade.
Examples:
- sale of coal
- purchase of a Japanese car
Capital and Financial Account
Records transactions of a ‘capital’ nature. Those that do result in future obligations.
The combined capital and financial accounts capture Australia’s net change in ownership of assets and liabilities.
examples:
- loans (interest)
- purchase of shares (dividends)
Language of Balance of Payments
Credits = Money flowing into Australia
Debits = Money flowing out of Australia
Net = ‘after deductions’ - (Credits after - debits)
Current account: Sub-accounts
Trade and Income
- Balance on Merchandise Trade (BOMT): Net goods
- Net Services
- Net Primary Income
- Net Secondary Income
Capital and Financial Accounts: Sub-accounts
Net change in ownership of assets and liabilities
- Net reserve assets
- Net financial derivatives
- Net direct investment
- Net portfolio investment
- Net other investment
Net goods (BOMT)
A sub-account of the Current Account
Total value of exported goods - total value of imported goods over the quarter
Net goods = goods credits - goods debits
Examples: Cars, furniture, gadgets
Net services
A sub-account of the Current Account
Net Services = services credits - services debits
The total value of exported services - total value of imported services over the quarter
Examples: Entertainment, tourism, call centre services
Net Primary Income (NPI)
Primary Income = dividends, profits, rent and interest
NPI = Primary income credits - primary income debits
Total value of primary income received - total value of primary income
Net secondary Income (NSI)
Records current transfers. ~ One-way transactions ~ (foreign aid, gifts)
Net secondary income = secondary credits - secondary debits
NSI = Gifts into Australia - Foreign Aid
Financial Account (Part of CAFA)
Much larger and more important than the capital
Records a change of ownership of Australia’s assets or liabilities
Broken down into sub-accounts depending on the type of assets
Net Direct Investment
A sub-account of the CAFA
Where there is a change in controlling interest in an asset - 10% or more - voting power in a business
Measures direct investments into Australia (credits) - direct investments overseas (debits)
Example: Sale of an Australian coal mine to a Chinese business
Net Portfolio Investment
Where there is a change in a non-controlling interest in an asset. | Less than 10% change in the overall ownership of an asset
Examples:
- An Australian investor buys 1000 shares in Apple on the NASDAQ
- A Japanese investor 100 Australian government treasuries (Bonds)
Less important sub-accounts of the CAFA
Financial Derivative: Changes in ownership of financial contracts ‘derivatives’ - Just another form of assets / liability
Reserve Assets: Changes in assets / liabilities between central banks
Other Investment: Transactions that do not fit into one of the categories
