Ch 11: Balance of Payments Flashcards
What is the balance of payments?
record of transaactions between Australia and the rest of the world during a given period, consistency of the current account and the capital and financial account
credit-money that flows in (X)
debit-money that flows out (M)
What is the current account and what is it made of?
shows the receipts and payments for trade in g&s, transfer payments and income flows between Australia and the rest of the world in a given time period. These are non-reversible transactions
- net goods
- net services
- net primary income
- net secondary income
What are net goods and net services?
Net goods
- refers ti the difference between what Australia receives for its exports and pays out for its imports of goods
- deficit (M) - where payments exceed receipts
- surplus (X) - where receipts exceed payments
What is net services?
- refers to services that are bought and sold without people receiving a ‘good’ i.e. tourims, education, transport
- services debit (M) - services that Australia buys, an outflow of money
- services credit (X) services that Australia sells, an inflow of money
- currently in deficit, value of Australia’s services exports is lower than the value of its service imports
What are the balance of goods and services?
amount that is derived by adding net goods and services together
What is net primary and secondary income?
Net primary income
- refers to earnings on income, it covers interest payments on borrowings and return on other foreign investments
- debit - when Australians invest overseas, there is a flow of income back to Aus
- credit - when foreigners invest in Aus, income in the form of rent, profits, interest and dividends flow overseas
- divided into
- interest on borrowing
- dividends-share of profit
- always deficit, 2011-2012 it was $44.6 billion - this is why current account is in deficit
Net secondary income
- refers to non-market income, when products/financial resources are provided without a specific g&s being provided in return i.e. payouts on insurance claims, worker’s remittances and unconditional foreign aid
- accounts for only aroun $1 billion
What is capital and financial account?
concerned with financial assets and liabilities - the money flows that result from international borrowing, lending and pirchases of assets such as shams and real estate for a period of one year. These transactions are reversible
What is the capital account?
consists of capital transfers (mainly conditional foreign aid grants and debt forgiveness) and the purchase and sale of non-produced, non-financial assets i.e. intellectual property payouts
What is a financial account?
- shows Aus’s transactions in foreign financial assets and liabilities. Categorised by type of investment
- credit entries - net inflows, come about because either an increase in foreign investment Aus or a reduction in Aus investment overseas
- debit entries - net outflow
- Aus: usually positive financial account balance, which shows that during each year the rise in Aus’s liabilities is higher than the increase in the liabilities of the rest of the world to Aus
What are the components of the financial account?
- direct investment - covers foreign financial transactions to fund new investment in Aus or overseas or to buy >10% of shares in an existing company
- always credit in the country which has been invested in, however when money from profits get sent back overseas it is a debit
- positive
- portfolio investment - refers to the buying of land, shares and other marketable securities
- where most foreign debt is recorded and is often the largest item on the CFA
- includes buying <5% of shares, loans and paying back of principle of borrowing
What are the benefits of trade?
- exports - enable a greater level of production and income
- imports - enable a greater level of consumption and standard of living
- by increasing both exports and imports (specialising and engaging in trade) countries can actually consume outside their PPF)
- though trade always results in one group gaining while another loses the gains alaways exceed the losses. In terms of consumer and producer surplu there is always a net gain in total surplus (as one will increase by more than the other falls)
What are the effects of exports?
- the domestic price will be lower than the worl price (happens when domestic producers are efficient)
- if Aus enters the international market it can sell its goods/services at a higher price
- consumption in Aus will fall to Q1 but production will increase to Q2, there is now a surplus of goods that can be sold to world markets (equal to Q1Q2)
- producers gain - by selling more and receiving a higher price
- consumers lose - they consume less and pay a higher price
What are the effects of imports?
- world price is lowers than domestic price (Aus is not as effecient at producing the good compared with the rest of the world)
- consumption will increase to Q2 wihile domestic production falls to Q1 (imports = Q1Q2)
- consumers gain - from lower prices and increased consumption
- producers lose - receive lower prices and sell less
- however consumers gain more than producers lose so that overall economic welfare is increased
What does the graph of demand/supply look like after trade?
