Balance of Payments Flashcards
what is the balance of payments?
The balance of payments is a record of all economic transactions between the residents of Australia (individuals, firms and governments) and the residents of the rest of the world.
what are the 4 purpose of the BoP
- measures Australia’s economic relationships with other countries.
- reflects our international trade, investment flows and financial stability. 3. Persistent deficits or surplus can affect the value of our dollar, influence interest rates and impact economic policy.
- Important economic indicator, providing information of a nation’s trade account and its financial position with the rest of the world.
what is the current account
It is concerned with the transactions involving trade in goods and services as well as income flows between residents and non-residents.
what are the components of the current account?
primary income, secondary income, balance of services, balance of goods.
what is the financial account
records transactions that involve financial assets and liabilities → foreign investment.
what is the capital account
records financial transactions that have no effect on income or production (trademarks, copyrights, international transfers). Rather small and insignificant.
components of the financial account
direct investment, portfolio investment, other investment, reserve assets
what is the double-entry system
means that each transaction in the balance of payments is recorded as consisting of two equal and opposite entries, reflecting the inflow and outflow element to each exchange. - - - There are two entries, recorded on opposite sides credit entries (coming into) and debit entries (going out).
what are the components of the trade balance?
demand for our exports (quantity effect), value of our exports, rate of economic growth, movements in the exchange rate
what is the trade balance?
The trade balance shows whether Australia is selling more to the world or buying more from the world.
what is the income balance?
The income balance shows how much money we’re losing or gaining from foreign investment relationships.
what are the components of the income balance?
always in deficit because Australia relies on a net inflow of financial capital to supplement its domestic savings → helps develop our economy.
The trade-off for the use of other countries savings = the payments of interest and dividends to foreign investors (recorded in the primary income account)
what is the savings-investment gap?
the difference between how much Australia saves and how much is required for investment. The current account balance is equal to the difference between a country’s savings and investment.
what are the two situations that could occur in the savings-investments gap?
If a country’s savings exceeds investments, it will have a current account surplus → CAB = S - I
If a country’s investment exceeds savings, it will have a current account deficit→ CAB = I - S
what determines the savings-investments gap?
structural and cyclical factors
name all structural and cyclical factors
- fast growing economy
- fall in price of commodities
- decline in international competitiveness
- rise in domestic inflation
- higher rate of economic growth
- increase in foreign investment
- decline in national savings
- increase in investment
