Balance of Payments

Question 1

Define the balance of payments… what is it an indicator of?

Answer 1

It is a record of the transactions between Australia and the rest of the world during a given period.

Most important economic indicator of the relationship between Australia and the global economy.

Question 2

What is money that flows into the economy called?

Answer 2

Credit

Question 3

What is the money that flows out of the economy called?

Answer 3

Debit

Question 4

What is the BOP composed of?

Answer 4

The BOP is composed of two accounts
1. The current account
2. The capital and financial account

Question 5

Define what the current account shows?

Answer 5

Shows the money flow from all exports and imports of G&S, income flows and non-market transfers for a period of one year; these are non-reversible transactions

Question 6

What was the value of the current account in 2023/24?

Answer 6

( $49.7 Billion in 2021-22 )

Question 7

Are current account transactions reversible or non-reversible

Answer 7

Non-reversible

Question 8

What are the different aspects that compose the current account?

Answer 8

Net goods (good credits - good debits)
Net services (service credits - service debits)
Balance on Goods & Services (exports - imports + net services)
Net Primary Income (Earns on investments)
Net Secondary Income (Returned from a factor of production)
Balance on Current Account (addition of the BOGS, net primary income and net secondary income)

Question 9

Define Net Goods… what are the three possible outcomes?

Answer 9

The difference between what Australia receives for its exports and what it pays for its imports of goods.

There are three possible outcomes;

Balance → Export Receipts = Import Payments

Surplus → Export Receipts > Import Payments

Deficit → Export Receipts < Import Payments

Question 10

Define Net Services

Answer 10

The services that are bought and sold without people receiving a ‘good’, e.g. transport, insurance charges, telephone calls, etc.

Question 11

Define Balance on Goods and Services BOGS

Answer 11

The amount that is derived by adding net goods and net services together

Balance of goods and services = exports - imports + net services

Question 12

Define Net Primary Income

Answer 12

Earnings on investments - income that is earned as a return from a factor of production; it covers interest payments on borrowings and returns on other foreign investments, such as foreign-owned companies in Australia or foreign land ownership ( -$87 Billion in 2023/24).

When foreigners invest in Australia, income in the form of rent, profits, interest and dividends flows overseas.

When Australians invest overseas, there is a flow of income back to Australia.

Question 13

Net secondary income

Answer 13

Non-market transfers - income that is not earned through a factor of production; these occur when products or financial resources are provided without a specific good or service being provided in return.

This is a small and relatively technical account, which has little importance in the scope of the overall BOP.

Net secondary income includes payouts on insurance claims, workers’ remittances - e.g. foreigners working in Australia and sending money overseas - and funds taken out of Australia in the form of unconditional aid to developing nations, such as funds given as a gift to a foreign government without a specified purpose.

Pensions received by residents from foreign governments - credits - are also included.

Question 14

Define Balance on Current account

Answer 14

Balance on Current Account:

This refers to the addition of the BOGS, net primary income and net secondary income

Question 15

What was the total value of net goods in 23/24

Answer 15

(Surplus of $92 Billion 2023/24 ).

Question 16

What was the total value of net services in 23/24

Answer 16

(-$22.B 2023/24)

Question 17

What was the total value of the Balance on Goods and Services BOGS in 23/24

Answer 17

( $70 billion in 2023/24 ).

Question 18

What was the total value of Net primary income in 23/24

Answer 18

( -$87 Billion in 2023/24).

Question 19

What was the total value of Net secondary income in 23/24

Answer 19

( -$1.6 Billion in 2023/24 ).

Question 20

What was the total value of the Balance on Current account in 23/24

Answer 20

( $19.1 billion in 2023/24 ).

Question 21

Define the capital and financial account

Answer 21

This is concerned with financial assets and liabilities - records the money flows that result from international borrowing, lending and purchases of assets such as shares and real-estate for a period of one year between Australia and the rest of the world.

Transactions are reversible; borrowings can be paid back, and assets that are bought can be sold again.

Question 22

What was the total value of the capital and financial account in 23/24

Answer 22

( -$49 Billion in 2023-24 ).

Question 23

Are transactions in the KAFA account reversible?

Answer 23

Yes

Question 24

What are the components of the KAFA account?

Answer 24

the Capital account
The financial account

Question 25

What two components make up to the CAPITAL ACCOUNT part of KAFA

Answer 25

Capital Transfers Entries for Purchase ( Debit ) & Sale ( Credit ) of Non-Produced, Non-Financial Assets

Question 26

Define Capital Transfers

Answer 26

Capital Transfers; mainly in the form of ‘conditional’ foreign aid grants which are linked to specific capital projects and debt forgiveness - may be in the form of assistance to other countries to build up their infrastructure or capital stock.

Question 27

Define Entries for Purchase ( Debit ) & Sale ( Credit ) of Non-Produced, Non-Financial Assets

Answer 27

Entries for Purchase ( Debit ) & Sale ( Credit ) of Non-Produced, Non-Financial Assets; intellectual property rights such as patents, copyrights, trademarks and franchises - e.g. Australian company buys rights to operate US franchise outlets in Australia.

Question 28

The financial account is categorised by the type of investment, with five main categories; name them:

Answer 28

Direct Investment; Portfolio Investment Financial Derivatives Reserve Assets Other Investment

Question 29

Define Direct Investment

Answer 29

Direct Investment; covers foreign financial transactions to new fund investment in Australia or to buy 10%+ of shares in an existing company ( -$63.8 Billion in 2021-22 ). e.g. A South-Korean company bringing in funds to build a motorway in Sydney. e.g. BHP Billiton sending funds to Indonesia to fund the construction of a copper mine.

Question 30

Define Portfolio Investment

Answer 30

Portfolio Investment; refers to the buying of land, shares and other marketable securities - that can be easily sold - in existing companies; is often the largest item on the CAFA account ( $88.8 Billion in 2021-22 ).

Question 31

Define Financial Derivatives

Answer 31

Financial Derivatives; are a category of complex financial assets that have become increasingly significant in recent years; the value of these investments is normally derived from the performance of specific assets, interest rates, exchange rates or indices ( -$11.4 Billion in 2021-22 )... → e.g. Forward Exchange Contracts; a very important part of global financial markets.

Question 32

Define Reserve assets

Answer 32

Reserve Assets; refer to those foreign financial assets that are available to and controlled by the central authorities for financing or regulating payment imbalances; reserve assets include monetary gold - held by the Reserve Bank - Special Drawing Rights, reserve positions in the IMF and foreign exchange held by the RBA ( -$20.2 Billion in 2021-22 ).

Question 33

Define other investment

Answer 33

Other Investment; a residual category that captures transactions not classified as direct investment, portfolio investment, financial derivatives, or reserve assets; other investment covers trade credits, loans - including financial leases, currency and deposits, and other accounts payable and receivable, etc ( -$41.9 Billion in 2021-22 ).

Question 34

Define the Balance on Capital & Financial Account:

Answer 34

Is determined by adding the categories together; should approximately equal the deficit on the CA ( $49 billion in 2021-22 ).

Question 35

What are net errors and ommisions?

Answer 35

Net Errors & Omissions; statistical discrepancies ( $0.7 billion in 2021-22 ). It is included because under a floating exchange rate system, the balance of payments would always balance to 0. For convenience, the balancing item is often added onto the CAFA account figure to ensure the BOP sums to 0.

Question 36

Since when has the BOGS been in a surplus, what is its average percentage of GDP?

Answer 36

It has been in surplus since 2016–17, averaging 3.2% of GDP.

Question 37

The size and movements on the BOGS and primary income account are influenced by both ? and ? factors;

Answer 37

Cyclical and Structural

Question 38

Define Cyclical factors, provide examples

Answer 38

Those that vary with the level of economic activity; e.g. Changes in global demand for commodities, Australia’s terms of trade and the value of the exchange rate - Dictates whether the size of the current account is a deficit or surplus.

Question 39

Define Structural factors, provide examples

Answer 39

Structural factors are those that are underlying persistent influences on the balance of payments; e.g. The structure of Australia’s export base, the international competitiveness of Australia’s exports, and the level of national savings.

Question 40

What are the 3 cyclical factors that effect BOGS

Answer 40

1. Exchange Rate 2. Terms of Trade 3. Economic Growth rates

Question 41

What are the 2 structural factors that effect BOGS

Answer 41

1. Narrow export base 2. Lack of international competitiveness

Question 42

Define exchange rate and Explain how it (cyclical) effects BOGS

Answer 42

Movements in the exchange rate affect the international competitiveness of Australia’s exports and the relative price of the G&S that Australia imports. A depreciation decreases the foreign currency price of Australia’s exports, increasing the international competitiveness of Australian exports on world markets. At the same time, a depreciation increases the $AUD price of imports and discourages consumers from purchasing imports, also improving the BOGS account. Exchange rate depreciates = import spending reduces Exchange rate depreciates = export revenue increases Exchange rate depreciates = larger BOGS surplus or reduced deficit

Question 43

Define Terms of trade

Answer 43

Measures the relative movements in the prices of an economy’s imports and exports over a period of time. The greatest influence on Australia’s BOP in recent years has been changes in Australia’s terms of trade; the terms of trade shows the relationship between the prices Australia receives for its exports and the price it pays for its imports. → If export prices are increasing relative to import prices, Australia’s TOT will improve. → If export prices are decreasing relative to import prices, Australia’s TOT will deteriorate. An improvement in the terms of trade means that the same volume of exports can buy more imports

Question 44

How do you calculate terms of trade?

Answer 44

Calculated as the export price index / by import price index X100.

Question 45

Define economic growth rates and explain how it effects BOGS

Answer 45

The level of domestic economic growth influences the BOGS balance by affecting demand for imports. - upturn = higher disposable income = high consumption GO READ

Question 46

Define Narrow export base and explain why it effects BOGS example

Answer 46

Narrow export base; Australia’s export base is narrow; weighted to a small number of commodities. Minerals and agriculture - which together account for around ⅔ of Australia’s export earnings. Australia is highly-exposed to movements in prices and demand in these markets; this volatility contributes to annual fluctuations in the BOGS e.g. In recent years, there has been an upturn in prices for agricultural exports - on average 28% higher since 2010 than for the 1990.

Question 47

What is being done to help australia's narrow export base?

Answer 47

The commodities boom benefited Australia’s trade accounts, however economists agree that Australia must reduce its reliance on fossil fuels - start developing in renewable energy sources as a new export product.

Question 48

Define lack of international competitiveness and explain why it effects BOGS example

Answer 48

AUS lacks international competitiveness in manufacturing and relies heavily on imports of value-added products, including consumer and capital goods, while relying on the export of bulk commodities usually exported without value-adding. As a result, BOGS has historically tended to be in deficit rather than surplus because import payments often outstrip export revenues. This is one of the goals of the Future Made in Australia policy announced by the Albanese Government in 2024, which will support manufacturing of solar cells, batteries and clean energy technology.

Question 49

Give two stats relating to the primary income account

Answer 49

Between 2004–05 and 2019–20, the net primary income account typically recorded a deficit between 2 and 3% of GDP. In 2023–24, the net primary income deficit was 3.6% of GDP.

Question 50

What are the 3 cyclical factors that affect the primary income account

Answer 50

1. Domestic Economic Growth 2. Exchange Rate 3. Changes in interest rates