balance of payments

Question 1

definition of balance of payments

Answer 1

a systematic record of all economic transactions between the residents of Australia and the residents of the rest of the world.

Question 2

what are credits?

Answer 2

money flows into australia

exports of goods and services, income receivable, increase in foreign liabilities, export of currency

Question 3

what are debits?

Answer 3

money flows out of australia

imports of goods and services, income payable. increase in foreign assets, import of currency

Question 4

what is the current account?

Answer 4

concerned with transactions involving goods, services and income.

Question 5

what is the capital and financial account?

Answer 5

capital transfers and the acquisition/disposal of non produced, non financial assets, financial assets and liabilities.

Question 6

what are the three components of the current account?

Answer 6

goods, services, income

Question 7

what is primary income?

Answer 7

income earned by Australian residents from non residents (credits) and income paid to overseas residents (debits)

Question 8

what are the two components of primary income?

Answer 8

compensation of employees

investment income

Question 9

what is secondary income?

Answer 9

transactions where real or financial resources are provided but nothing of economic value is received in return.
includes, foreign aid, gifts, donations and pensions

Question 10

how do you find the balance on the current account?

Answer 10

credits minus the debits and then add all sections together

to gain a balance on the current account the balance on goods and services is added to the income balance

Question 11

what is the capital account?

Answer 11

capital transfers and the acquisition and disposal of non-produced, non-financial assets.

• migrants funds, types of aid funds related to fixed capital formation
• patents, copyrights, trademarks and franchises

Question 12

what is the financial account?

Answer 12

compromises transactions associated with changes of ownership of australis foreign financial assets and liabilities.

Question 13

what are the different types of investment?

Answer 13

direct and portfolio

Question 14

what is direct investment?

Answer 14

• undertaken with the objective of obtaining a lasting interest in a foreign enterprise and exercising a significant degree of influence in its management
• any purchase of 10% or more of a business between countries

Question 15

what is portfolio investment?

Answer 15

• international equity and debt securities not classified as either direct investment or reserve assets
• short term and speculative
• usually in the form of shares and less then 10% of the business

Question 16

what is the balance on the capital and financial account?

Answer 16

• the overall balance must always sum to zero
• this means that if the current account is in deficit, then the capital and financial account will be in surplus and equal to the current account in absolute value.
• usually does not balance so net errors and omissions is listed

Question 17

what are cyclical causes of the CAD?

Answer 17

something that is affected by changes in the business cycle
temporary and subject to frequent change
help explain the fluctuations in the goods and services balance

Question 18

what are structual causes of the CAD?

Answer 18

more permanent and only changes gradually

associated with the income balance

Question 19

what is the trade balance?

Answer 19

volatile and influenced by both australia’s business cycle and the world business cycle
whenever the economy expands at a rapid rate, the current account deficit will increase due to increased spending on imports from both consumption and investment
when the economy grows at a sustainable pace, the relative size of the deficit declines

Question 20

what is the income balance?

Answer 20

always a deficit
this is because australia relies on foreign investment to fund the investment-savings gap
aus is an importer of financial capital to develop its industries,. this capital inflow is recorded in the financial account. the tradeoff for this use of other countries savings is the payment of interest and dividends to foreign investors.

Question 21

what would cause the CAD to increase?

Answer 21

• a fall in the terms of trade
• a decline in international competitiveness
• a higher rate of economic growth
• an increase in foreign investment
• a decline in national savings
• an increase in national investment