Balance of Payments & Terms of Trade Task 2 Flashcards
What is Balance of Payments(BoP)
a record of all the economic transactions between the residents of Australia and residents of the world
Def of residents
individuals, businesses and govt
Def of transaction
when something of value is provided by one party to another
5 types of economic transactions and examples
1) export/imports of goods(e.g iron ore, PMV’s-cars)
2)export/import of services(eg education, tourism)
3) income flows - income paid/received on foreign investment(eg dividends, interest - payments)
4) transfers - when nothing of economic value is received in return (eg foreign aid, migrant funds)
5) financial flows - change in ownership of assets (eg purchase of shares,bans)
How does the ABS record transactions in the BoP?
Using a double entry accounting system - each transaction has an equal and opposite entry
- reflects the inflow and outflow of every transaction
Describe double entry accounting system
CREDIT(positive entry): money received into aus
Examples
- exports of g/s
- income received from foreign investment
- purchase of aus assets by foreign investments
DEBIT (neg entry): money flowing out of Australia
Examples
- import of g/s
- income paid to foreign investors
- purchase of foreign assets by aus residents
The BoP must sum to
ZERO as every transaction has a matching credit and debit entry
What are the 3 types of accounts that make up BoP
Current, capital and financial
What are the 4 types of transaction in Current Account
- Goods (credit/debit)
- Services (credit/debit)
- Primary Income (credit/debit)
- Secondary Income (credit/debit)
What is Goods C/D?
G Credit = Aus resident selling goods overseas aka merchandise exports.
- eg iron ore
G Debit = Aus resident purchasing goods from overseas, aka merchandise imports
- eg PMV’s
GC + (GD) = Net Goods (aka merchandise trade)
What is Services C/D?
S Credit = overseas resident purchases aus service
- eg education
S Debit = aus resident purchases a service from overseas
- eg tourism
SC +(SD) = Net services
What does net services and net goods = ?
(BOGS) Balance on G/S (aka trade balance)
- (+) = trade surplus
- (-) = trade deficit
What is Primary Income C/D?
PI Credit = aus resident earning income from overseas investment
- reflects the return on foreign investment
- eg divident payment
PI Debit = overseas resident earning income fro aus investment
- reflects the cost of foreign investment
- eg interest paid in overseas loan
PIC+(PID) = Net primary income
What is secondary income C/D?
SI Credit = aus resident receiving funds from overseas without providing anything of economic value in return
- eg migrant funds
SI Debit = aus resident providing funds overseas without receiving anything of economic value in return
- eg foreign aid
SIC+(SID)= Net secondary income
Net SI + NET PI = ???
Net income (aka income balance)
-(+) = income surplus
- (-)= income deficit
BOGS + Net Income = ???
Balance on current account
- (+) = current account surplus
- (-) = current account deficit
3 Types of transactions in capital and financial account?
Capital transfers C/D
Non produced, non financial assets
- disposal of NPNFA CREDIT
- acquisition of NPNFA DEBIT
Foreign investment flows
- foreign investment CREDIT
- aus investment abroad DEBIT
What is capital transfers C/D?
CT = refers to unrequited payments over 12 months
CT Credit = aus residents receiving funds from overseas without providing anything of economic value in return
- eg LT migrant funds
CT Debit = aus residents providing funds overseas without receiving anything of economic value in return
- eg LT foreign aid
CTC+(CTD) = Net capital transfers
What is Non produced, non financial assets (intangible assets)?
Assets: copyrights, trademarks, patents, blueprints
Disposal of NPNFA (CREDIT) = aus resident sells intangible asset overseas
-eg selling copyrights
Acquisition of NPNFA (DEBIT) = Aus resident purchases intangible asset from overseas
- eg purchasing trademarks
Disposal of NPNFA + (Acquisition of NPNFA) = net disposal/aquisition of NPNFA
Net capital transfers + net disposal/aquisition of NPNFA = ???
Balance on capital account
What are foreign investment FLOWS? and 4 types
represent a change in ownership assets between residuals and non residents
1) direct Investment (10% or more ownership of the asset)
2) portfolio investment (less than 10% ownership of the asset including 0% eg laws)
3) govt debts/loans
4) reserve assets eg gold, currencies
What is Foreign invesment C/D
FI Credit = overseas resdient purchasing an aus asset
- FI into aus
- aka foreign liabilities
- eg selling of aus shares
Aus Investment abroad Debit = aus residuals purchasing an overseas asset
- FI flows out of AUS
- aka foreign assets
- eg loan overseas
FI + (AUS Inv Abroad)= Balance on Financial account
Balance of capital account + balance on financial accounts =???
balance on the capital and financial accounts
- (+) = capital and financial account surplus
- (-) = capital and financial account deficit
What is net errors and omissions?
NET ERRORS = difficult to record every transaction accurately
OMISSIONS = items which are missed
Balance on current account + Balance of capital account & balance on financial accounts + net errors and omissions = ???
ZERO
Long term trends in Current accounts
Historically, Aus recorded a CAD (44 years up until 2019)
WHY?
- aus records large net income deficits
- receives foreign investment to fund mining industry and eco growth
- this is eventually paid back in form of dividends and interest payments (outflow on debit in primary income)