Balance of payments

Question 1

what is the balance of payments?

Answer 1

• The balance of payments is a systematic record of all economic transactions between the residents of Australia and the residents of the rest of the world

Question 2

in a boom what happens to the CAD

Answer 2

it deteriorates

Question 3

in a trough what happens to the CAD

Answer 3

it improves

Question 4

What are the structural reasons for Australia’s CAD

Answer 4

Savings investment gap
low international competitiveness
microeconomic reform
narrow export base

Question 5

Cyclical reasons

Answer 5

Economic growth 
terms of trade 
exchange rates 
twind deficit theory 
foreign investor confidence 
inflation 
business profits 
interest rates

Question 6

characteristics of the trade balance

Answer 6

• Range from 2 – 3%
• Very volatile, as Australia mainly exports commodities
• As a % of GDP it improves ina trough and deteriorates in a boom – because we import more in ab oom
• Import less in a trough, buy less consumer goods companies invest less in capital goods – Improves trough
• 2010-11 recorded a goods surplus due to mining boom which drove our export prices high due to mining demand for them (commodities)
• Cyclical in nature
• Follows the business cycle

Question 7

characteristics of the incomes balance

Answer 7

• Range: -2% to -4%
• Relatively stable – always in deficit
• People always have to keep paying off debt in troughs and booms – ( main reason for stability)
• Structural, with some cyclical aspects, as it does deteriorate ina boom slightly.
• 2016-17. The incomes balance has improved due to low world interest, lower levels of repatriation of profits and income, sluggish economic performance and high-income credits.

Question 8

characteristics of the current account balance

Answer 8

• Very volatile as it’s a combination of both trade and income
• Follows the trade balance
• Our CAD increased during the boom of 2007-8 recording a deficit of $78.b
• In 2008-9 the CAD dropped significantly to $42b, due to the GFC – Major trough = less imports
• In the March 2017 quarter, Australia’s current account deficit shrank to 0.7% of GDP, previously ranging from -2% to -7%