Balance of payments (effect of currency change)

Question 1

Balance of payments

Answer 1

A country’s balance of payments tells you whether it saves enough topay for itsimports. It alsoreveals whether the country produces enough economic output to pay for its growth

Question 2

Current account

Answer 2

Trade balance
Net primary - overseas income (wages and returns on financial investments) from Australian residents
Net secondary income - unconditional foreign aid

Question 3

Capital account
Financial account

Answer 3

Capital
- Foreign direct investment in Australian-owned production
- Australian investment in foreign-owned production
- Conditional foreign aid

Financial
- Includes all borrowing and international sales and assets (real-estate and production)

Question 4

Advantages of current account SURPLUS (depreciated)

Answer 4

• Stronger economic growth from X > M and increased export-related employment
• Higher national savings – Australia is lending more to the rest of the world, accumulating foreign assets.
• Stronger ability to pay off overseas debt

Question 5

Disadvantages of current account SURPLUS (depreciated)

Answer 5

• Potential for resources to be used on exports rather than domestically.
• Continued surpluses can lead to currency appreciation reducing competitiveness.
• Capital and Financial Account Deficit as savings are invested abroad and less domestic investment.

Question 6

Advantages of current account DEFICIT (appreciated)

Answer 6

• Higher domestic consumption and investment as resources are allocated to domestic production.
• Increased foreign investment which can boost infrastructure, business expansion and technological development.
• Continued deficits can lead to currency depreciation, making exports more internationally competitive.

Question 7

Disadvantages of current account DEFICIT (appreciated)

Answer 7

• Dependence on higher foreign borrowing, increasing vulnerability to overseas.
• Can lead to imported goods becoming more expensive, impacting inflation.
• Higher interest repayments on foreign debt – a long-term burden.