Balance of Payments

Question 1

What is the Balance of Payments?

Answer 1

A systematic record of all economic transactions between Australian residents (individuals, firms and gov.) and the rest of the world.

Question 2

Identify the structure of the BOP.

Answer 2

Current Account:

• BOGS = net goods (X-M of g’s) + net services (X-M of S’s).
• Income a/c = primary y (credits + debits) + secondary y (credits + debits).

Capital/Financial Account:

• Capital a/c = net capital transfer + net disposals of non-produced/non-financial assets.
• Financial a/c = FI into Aus + FI out of Aus.

BOP -> CAB + CFAB = 0

Question 3

What is the Current Account?

Answer 3

Captures the net flow of money that results from Australia engaging in international trade:
Non-reversible transactions (interset payments/dividends) - Examined via. credit/debit
- Aus Current account is in credit (CAD), until now in (CAS) from Corona Virus.

Components:

• Trade Balance - the value of goods and services that Australian residents export-import.
• Primary Income Balance - income that Australian residents earn - what they pay to the world - credit for Aus (interest of foreign loans, dividends).
• Secondary Income Balance - current transfers between residents and nonresidents - not include capital transfers - debit for Aus (foreign pensions, aid payments).

Y balance = Y received - paid (

Question 4

What is the Capital/Financial Account?

Answer 4

Records the capital and financial transactions between
Australia and the rest of the world:
Reversible transactions (loans/investment) - Examined via. credit/debit
- Aus Capital/financial account is in credit (CFAD).

Components:

• Capital a/c -
• Net capital transfers (debits) + Net acquisition/disposal of non-produced/non-financial assets (credits).
• Financial a/c -
• Direct/portfolio investment and reserve assets (credits) + Financial derivatives and other investment (debits).

Question 5

What causes the Current Account Deficit?

Answer 5

Cyclical - temporary factors that mainly impact the trade balance:
- domestic business cycle - world business cycle - exchange rate - commodity prices - TOT.
Structural - fundamental factors mainly impact the income balance:
- (I-S) gap - foreign investment - foreign liabilities.

Question 6

What is the significance of the CAD?

Answer 6

CAD high:

1) (I-S) Increased - fewer savings.
2) Aus receive loans/investment from abroad for economic growth - a (finance) into Aus - injection.
3) NFL increase.
4) Y payments - (service) FI into Aus.
5) Increase in CAD.

Question 7

How may particular issues impact Australia’s international transactions?

Answer 7

1) Fall in TOT - Xp > Mp decline (X receipts will fall - M payments will rise) - whenever TOT falls - Bogs will fall.
2) International Comp. Drop - Productivity falls/real wage rise more than productivity - X less competitive. A rise in inflation will also reduce competitiveness by increasing the price of domestic good relative to external good.
3) Increased Foreign Investment - increase financial account surplus (increase CAD). Aus is rich with natural endowments - countries invest in us (high capital inflow) - increase CAD. The repatriation of investment income (dividends/int payments) on borrowing will increase the primary income deficit.

Question 8

Outline the recent trend of CAS in Australia.

Answer 8

Y account - int rates have gone down. investment into AUS low. Income account high from low servicing cost.
BOGS - goods/services (x down < m down) = Increased CAS.

Question 9

What is the difference between a deficit and a surplus?

Answer 9

Deficit - more money is going out than coming in.

Surplus - vice. versa.