Chapter 11

Question 1

Balance of payments direction

Answer 1

Asia-Pacific is geographically closer, stable, and is the most populous and fastest
growing region of the world; our rich endowment of natural resources compliments their
manufactured goods (need for our resources); moved away from trading with the UK after the
formation of the EU

Question 2

Balance of payments composition

Answer 2

changes over time, relates to what we have as an advantage in the production
process; used to export more manufactured foods, now more services (education and tourism) and
ETMs; due to high natural resource base, have moved away from agricultural exports to minerals
and energy

Question 3

Australias main trading partners exports

Answer 3

C, U, J, korea, UK

Question 4

Australias main trading partners imports

Answer 4

C, U, J, thailand, germany

Question 5

Australias main trading partners both

Answer 5

china, USA, japan

Question 6

Composition of australias trade EXPORTS

Answer 6

1. Iron ore
2. Coal
3. Education
4. Gold
5. Natural gas

Question 7

Composition of australias trade IMPORTS

Answer 7

1. Personal travel
2. Passenger MV
3. Refined petroleum
4. Telecom equipment
5. Freight transport

Question 8

Australias trade balance: trade surplus

Answer 8

occurs if the total value of goods and services exports (credits) exceeds
the total value of goods and services imports (debits)

Question 9

Australias trade balance: trade deficit

Answer 9

occurs when the total value of imports exceeds the total value of exports

Question 10

Balance of payments

Answer 10

The Balance of Payments are a set of accounts in which all financial transactions and
transfers between Australia and the rest of the world are recorded
The Balance of Payments accounts measure the extent to which Australia is paying its
way with other countries

Question 11

Current account

Answer 11

Records financial flows associated with trade and incomes.
trading account

Question 12

Capital and financial account

Answer 12

Records financial flows associated with changes in ownership of assets and borrowing.
Inflows – foreign purchase of assets in Australia or borrowing
Outflows – Australian purchase of assets abroad or lending

Question 13

Why do the accounts balance

Answer 13

Net errors and omissions
The floating dollar

Question 14

Net errors and omissions

Answer 14

account for the financial flows the ABS can’t account for (because errors have been made, transactions have been left out or because the trade was
illegal)

Question 15

The floating dollar

Answer 15

With freely floating exchange rates there is no government intervention
in the forex market and no change in official reserves

Question 16

Credits and debits

Answer 16

There are two sides to any transaction – the item being bought or sold and the payment for it
Dollar into aus –> credit
Dollar out aus –> debit

Question 17

Credits and debits exports and foreign investment, imports and net income

Answer 17

Exports and foreign investment inflows are recorded as credits, while imports and net income
outflows are recorded as debits.

Question 18

Transactions in the current account

Answer 18

Goods, services

Question 19

Primary income

Answer 19

Payments of interest, profits, dividends and wages.
Largest cause of the Current Account Deficit

Question 20

Second income

Answer 20

Forms minor element of the current account.
Includes pensions and the provision of foreign aid, whether in cash or in kind of a non-capital nature

Question 21

Expenditure > Production

Answer 21

If Australia spends more than it produces, the difference must be imported and Australia ends
up with a trade deficit

Question 22

Savings < Investment

Answer 22

If Australia does not save enough to finance its investment expenditure, the difference must be made up by using savings from overseas and Australia ends up with a financial account surplus which leads to a current account deficit

Question 23

Factors affecting balance on goods and services

Answer 23

Cyclical factors
Structural factors
Shocks

Question 24

Cyclical factors

Answer 24

(a) Growth in Australia
(b) Growth overseas

Question 25

Structural factors

Answer 25

(a) productivity
(b) infrastructure
(c) terms of trade

Question 26

Shocks

Answer 26

(a) GFC
(b) Droughts
(c) Exchange rates
(d) Terror attacks

Question 27

The net incomes deficit (NID)

Answer 27

Payments of interest, dividends and profits because of foreign debt (debt) and foreign
ownership (equity)

Question 28

NID rises if

Answer 28

Interest rates rise and/or credit rating falls
Savings-Investment gap gets bigger (less is saved in Australia, more incentives to
investment) so debt gets bigger and/or foreign ownership increases
Foreign owned companies earn more profit

Question 29

NID falls if

Answer 29

Falling interest rates
Lower profits in mining and energy (where foreign ownership is high)
Reduced CAD means reduced CFAS

Question 30

Transactions in the Capital and Financial Account: capital

Answer 30

Sale and purchase of non-produced non-financial assets, such as copyrights, patents, franchises and trademarks

Question 31

Transactions in the Capital and Financial Account: financial

Answer 31

direct, portfolio, reserve assets or other incestment

Question 32

Direct investment

Answer 32

reflects a long-term interest
implies a significant degree of influence
generally, involves 10% or more ownership

Question 33

Portfolio investment

Answer 33

Covers investment in equity and debt securities (other than direct investment)
Common with life assurance companies and pension funds
Less than 10% ownership

Question 34

Other investment

Answer 34

Other investment covers the remaining kinds of investments such as derivatives, trade
credits, loans, currency and deposits.

Question 35

Reserve assests

Answer 35

Reserve assets are foreign financial assets available to, and controlled by, the monetary authorities (principally the Reserve Bank of Australia) for financing or regulating payments
imbalances and other purposes.

Question 36

Why does Australia have a CAD?

Answer 36

Because we have a capital and financial account surplus. (Resource rich and capital starved)