Balance of Payments Flashcards
What is the balance of payments?
The balance of payments is a systematic record, of all international transactions between Australian residents and the rest of the worlds.
Major Accounts and small acount
Two major accounts, the current account, and the capital and financial account.
What do these accounts add up to?
These accounts balance each other to equal 0. When one account is in a surplus the other account will be a deficit.
What two types of transactions are there?
Recorded as debits and credits
What are debits and credits
Debits are transactions out of the country. Credits are transactions into the country
What is the current account and things listed under it
The current account tracks the financial flow between Australian and the rest of the worlds trade income.
Trade:
Goods (commodities) and imports (manufacturing)
Services (education) and imports (personal travel)
Income:
Primary Income (dividends, income, wages, profits)
Secondary income (aid without obligations or return on profit)
Cyclical current account factors
temporary and subject to frequent change. Helps explain fluctuations in trade balance.- Domestics business cycle
World business cycle
Exchange rate
Commodity prices/terms of trades
Relative inflation
Structural current account factors
More permanent and changes gradually. Explains primary income balance.
Investment savings gap
Foreign investments
Foreign Liabilities
What is the capital and financial accounts normally in
(normally surplus, due to savings and investment gap)
Capital account
The capital account is the smaller of the two, and records and transfers of non-produced, non-financial assets, flows of migrant’s assets and exchange of intangible assets
Financial Account
records the transactions in financial assets and liabilities such as shares, securities and loans between residents of Australia and residents of overseas countries.
Different types of financial investments
Direct investment (10% or more ownership of a company or voting stock of a foreign enterprise)
Portfolio investment (bond, less than 10% of the country)
Other investment (loans, currencies)
Reserve assets (such as gold)
Current account deficit factors
When investment > savings = CAD
When saving > investment = We will lend (debits in financial account) to other countries therefore CAD
CAD = current account surplus
