Balance of Payments Flashcards
Balance of Payments - definition
Record of all economic transactions b/w residents of Australia and residents of the world.
- All our external payments in a year.
- Can be used as a guide to analyse the relative performance of the economy.
- Changes in economic growth, inflation, terms of trade and exchange rates impact BOP.
Credit
Exports of goods and services, income receivable, increase in foreign liabilities, export currency
- Inflow of foreign exchange.
- Money flow in
Debit
Import of goods and services, income payable, increase in foreign assets, import of currency
- Money flow out
Current Account is made up of..
- Net goods
- Net Services
- Net Income
Income Category Of Current Account
- Primary Income
- Secondary Income
- Primary Income:
–compensation of employees = payment of wages / salaries
– Investment Income- income earned from the provision of financial capital / foreign investment e.g. dividends, interest
Secondary Income
Transactions where real or financial resources are provided but nothing of economic value is received in return.
- Labeled as one sided and includes transactions in foreign aid, gifts, donations and pensions.
- Small and insignificant
Capital Account comprises of…
capital transfers and acquisition and disposal of non-produced, non-financial assets.
- Capital transfers are mirgrants funds and aid funds related to fixed capital formation
- non produced, non financial assets refer to patentns, copyrights, trademarks and franchises.
The financial account comprises of..
Transactions associated with changes of ownership of Australia’s foreign financial assets and liablities.
- Credit entries are net inflows resulting from a reduction in Australian investment abroad / an increase in foreign investment into Australia.
- Debit entries are net outflows resulting from a increase in Australian investment abroad / a decrease in foreign investment into Australia.
- Surplus is recorded when capital inflow exceeds the increase of capital outflow.
Financial Account Surplus
- Means that a country draws on the savings (foreign investment) from the rest of the world.
- Transactions in the Financial Account
- > different types of investment
- Direct Investment
- obtaining a lasting interest in a foreign enterprise, exercising a significant degree of influence. 10% or more of shares
- Portfolio Investment
- International equity and debt securities. Short term and speculative
- Other Investment
- Residual category, comprises of trade credits, loans, currency and deposits.
- Reserve Assets
- Financial assets controlled by the monetary authority, eg. RBA
Increase in Foreign Investment into Australia
- Increase the financial account surplus
- Leads to an increase in the income deficit in the current account
- Due to greater servicing costs, thereby increasing the CAD.
Trends in the Current Account
- Net Goods balance in the current account fluctuates
- > e.g. 2007-08, large deficit of 26billion at the peak of a boom
- > 2010-2011, 22billion due to high commodity prices.
- Increase in world economic growth -> increase in demand for Australia’s minerals and fuel exports
- Increase in Australia’s economic growth -> boost demand for consumer and capital goods imports
- Service balance in deficit due to Australia’s large imports of travel and freight services.
- Primary Income Deficit due to interest payments on past borrowing
- > Payments of profits and dividends to overseas investors
Net Primary Income
- Ongoing cause of Australia’s high CAD
- Cyclical Factors:
- > Exchange Rates
- > Changes in domestic and global interest rates
- > 40% of Australia’s public share market is foreign owned
- Structural Factors:
- > Low level of national savings
- > High investment economy
Significance of the CAD
- No optimal or correct size for a current Account balance
- Whether the current account is in deficit or surplus depends on a number of factors: growth rate, relationship between a country’s saving and investment and the level of economic development.
- Country relying on F.I = CAD
- Country with a lot of savings = CAS
