BOP

Question 1

Theory - definition

Answer 1

The Balance of Payments is a method of analysing, responding and clarifying Australia’s financial relationships with the rest of the world. It contains two broad accounts: the current account, dealing with non-reversible transactions; and the capital and financial account, dealing with reversible transfers regarding foreign debt and equity.

Question 2

Theory - Current account

Answer 2

The current account includes net goods, net services, the balance on goods and services (BOGS) meaning the sum of net goods and net services, net primary income which refers earnings on investments, and the small category of secondary income which refers to non-market transfers. BOGS is added with primary income and secondary income to find the balance on current account.

Question 3

Theory - KAFA

Answer 3

• The Capital and financial account is concerned with financial assets and liabilities and money flows that result from international borrowing, lending and purchases of assets
• transactions are reversible
• The capital account includes capital transfers mainly in the form of conditional aid grants, the second item in the capital account is for the purchase and sale of non-produced non-financial assets, this includes intellectual property rights
• The financial shows Australia’s transaction in foreign financial assets and liabilities. It is categorized by the type of investment, the five main financial account components are direct investment, portfolio investment, financial derivatives, reserve assets, and other investments
• The balance on the capital and financial accounts is determined by adding the categories together.

Question 4

Theory - AUD floating exchange rate

Answer 4

An important relationship between the current account and the capital and financial account is that they both add up to zero, together they represent a “balance of payments”. In theory, under a freely floating exchange rate, equilibrium occurs where the supply of A$ = the demand for A$. the strongest link between the current account and the KAFA is the net primary income which is based on the return from investments, so an increase in credits for the financial account lead to a long-term increase in debits in the primary income account. Australias historically low saving level makes it necessary to attract a large inflow from the financial account.

Question 5

REBAL

Answer 5

After the second mining investment boom, higher supply for commodities meant that the equilibrium price fell. As prices for commodities lowered there was less investment towards the Australian economy depreciating the AUD. Due to these lower commodity prices and depreciating in the AUD Australia was able to ship higher volumes at lower prices, increasing mining exports. The mining export boom commenced and LNG exports and commodity prices bounce leading to BOGS surplus. Global interest rates stayed low keeping NPI moderated.

Question 6

COVID / Trends in CAD

Answer 6

• In the 1970s the Australian current account deficit averaged 1%, this jumped to 4%
• Since the 1980s the CAD has moved in a range of around 3% to 6% of GDP
• Australia recorded an $8.4 billion current account surplus in the March quarter 2020, the fourth in succession since September 2019 which marked the first current account surplus since 1975
• surplus primarily been driven by the increase in demand for our exports after the collapse of Brazilian mines
• has been further combined with the reduction in imports due to COVID19
• COVID also caused a reduction in exports
• COVID19 pandemic driven a surge in investment as interest rates have fallen and investors are drawn to more lucrative returns offered from securities