chapter 14 Flashcards
The weakness of the Australian dollar during the 1980s and 1990s compared to the currencies of its major sources of overseas students, such as Singapore and Malaysia,
contributed to maintaining Australia’s competitiveness relative to its major competitors, the United States and the United Kingdom, against whose currencies the Australian dollar also depreciated.
In the 2000s the emerging mega-markets of India and China provided
huge opportunities for Australian educational institutions. In 2013, China and India were the largest and second largest, respectively
when did the $AU apprecitate? what happened?
Between January 2010 and February 2012, $AU appreciated significantly
cost of studying increased relative to competitors such as UK and US
open and closed economy
open economy: An economy that has interactions in trade or finance with other economies.
closed economy: An economy that has no interactions in trade or finance with other economies. (very few such as North Korea)
3 accounts in BOP
- Current account
- capital account
- financial account
what is the current account
Records current, or short- term, flows of funds into and out of a country.
Current account includes
net exports
net primary income
net secondary income
what is net exports/ balance of goods and services?
The difference between the value of the goods and services a country exports, and the value of the goods
and services a country imports.
how can you explain the huge trade deficit experienced between 2003 and 2008.
- nationwide drought –> fall in agricultural export earnings
- resource boom and strong economic growth –> increase in imports
When did BOGS move into a surplus?
why?
In 2009 and again in 2011
b/c
- droughts ended. agricultural exports recovered
- increase in export earnings from resource sector
what happened to BOGS from 2012 onwards?
Moved back into deficit due to fall in commodity prices
trend of Australia’s net primary income
has consistently been in deficit
net primary income includes
income received by Australian residents from investments in other countries including profits, dividends, rental income and interest repayments on foreign borrowing from Australia, minus income paid to overseas residents from investments in Australia.
Income into australia (credits)
Income going overseas (debits)
why has net primary income consistently been in a deficit?
low domestic savings –> insufficient funds borrowed for investment and gov expenditure–> firms and gov borrow from overseas to finance investment and spending
since firms and govs borrow from overseas, what does this mean for net primary income?
large component of net primary income are interest payments on foreign loans
describe why Australia is a net recipient of foreign investments
Foreign financial institutions, corporations and individuals buy bonds, securities and shares in Australia, and also own many businesses in Australia.
The outflow of profits and dividends usually exceeds the inflow that Australian residents receive from overseas investments,
describe trend of Australia’s net primary income account
began to grow during the second half of the 1980s, with the deficit accelerating in the 2000s.
From the early 1990s to 2007 the continual period of strong economic growth led to increased levels of domestic borrowing, largely for investment, together with increased foreign investment –> increased interest repayments and repatriation of profits and dividends
what happened to net primary income account during the GFC?
fall in the deficit on net primary income, as the sum of the returns on shares and interest earnings flowing out to overseas investors fell.
describe capital account
The part of the balance
of payments that records migrants’ asset transfers(assets people take with them when they leave or enter a country), debt forgiveness and sales and purchases of non- produced, non-financial assets (intellectual property)
The financial account records
purchases of physical assets and financial assets that a country has made abroad and foreign purchases of physical and financial assets in the country
what is foreign direct investment
When firms build or buy facilities in foreign countries e.g. Australian firm buys a factory in another country
what is portfolio investment
When investors buy shares, bonds or securities issued in another country
Another way of thinking of the balance on the financial account is as a measure of
net capital flows, or the difference between capital inflows and capital outflows
A closely related concept to net capital flows is
net foreign investment, which is equal to capital outflows minus capital inflows.
relationship between net capital flows and net foreign investment
Net capital flows and net foreign investment are always equal but have opposite signs i.e. when net capital flows are positive net foreign investment is negative, vice versa
e.g. If more is being invested by Australians abroad than the amount of foreign investment flowing into Australia, Australia’s net foreign investment is positive. vice versa
Net foreign investment is also equal to
net foreign direct investment plus net foreign portfolio investment
Why is the balance of payments always zero?
balance on the current account must equal to the balance on capital and financial accounts
Current account deficit offset by capital and financial account surplus
a net errors and omissions is included in BOP to ensure it is balance
In 2012/13 Australia spent nearly $55 billion more on goods, services, interest repayments and other items in the current account than it received. What happened to that $55 billion?
every dollar of that $55 billion was used by foreign individuals or firms to invest in Australia, or was added to foreign holdings of Australian dollars.
can’t have been spent on on Australian goods and services or interest repayments, they must have been spent on investments in Australia or not spent at all- added to foreign holdings of dollars.
The industrial countries are committing economic suicide. Every year they invest more and more in developing countries. Every year more Japanese and US manufacturing firms move their factories to developing countries. With extensive new factories and low wages, developing countries now export far more to the industrial countries than they import.’
critique this
The commentator asserts that developing countries are receiving large capital inflows from industrial countries. In other words, developing countries are running financial account surpluses.
The commentator also asserts that developing countries are exporting more than they are importing. In other words, they are running current account surpluses.
it is impossible to run a current account surplus and a financial account surplus simultaneously.
Nominal exchange rate
The value of one country’s currency in terms of another country’s currency.
Banks and other financial institutions around the world employ currency traders, who are linked together by computers. Rather than exchanging large amounts of paper currency,
they buy and sell deposits in banks.
A bank buying or selling Australian dollars will actually be buying or selling Australian dollar bank deposits.
There are three sources of foreign currency demand for the Australian dollar:
1 Foreign firms and consumers that want to buy goods and services produced in Australia.
2 Foreign firms and consumers that want to invest in Australia either through foreign direct investment or foreign portfolio investment
- speculators who believe $AU will appreciate
draw the foreign exchange market
Surpluses and shortages in the foreign exchange market are eliminated very quickly because
the volume of trading in major currencies such as the dollar and the yen is large and currency traders are linked together via computers.
Formula for private saving
