Chapter 8 - The goal of external stability Flashcards
What are the types of international transactions?
- Exports and Imports of goods and services
- The receipt or payment of debt
- The receipt or payment of interest on debt
- The receipt or payment of income for international labour
- The sale or purchase of equity
- The receipt or payment of dividends or rent
- Transfers of money in the form of foreign aid and migrant transfers
What is the Balance of Payments (BOP)?
Balance of Payments (BOP): provides a record of the financial transactions between residents of Australia and residents of the rest of world.
The BOP comprises of two major sets of accounts:
- the current account
- the capital & financial account
At the end of any particular period, any CA deficit (CAD) must be exactly offset by a CAFA surplus, such that the BOP equals zero. Similarly, a current account surplus needs to be offset by a CAFA deficit.
Outline the structure of the BOP
Structure:
What is the current account?
The Current Account (CA): records all receipts and payments of a ‘current’ nature, as opposed to transactions of a ‘capital’ nature which are recorded in the CAFA. A deficit on the current account means that payments to foreigners (debits) exceed receipts from foreigners (credits). CA is made up of;
- Balance on Merchandise Trade (BOMT)
- Net Services
- Net Primary Income
- Net Secondary Income
CA - What is the Balance on Merchandise Trade?
Balance on Merchandise Trade (BOMT): is made up of merchandise export receipts (credits) minus merchandise import payments (debits), such as the sale of manufactured goods.
CA - What is Net Services?
Net Services: is made up of services export receipts (credits), such as money received for the provision of education to foreigners, minus services import payments (debits), such as money spent overseas on tourism.
CA - What is Net Primary Income?
Net Primary Income: is made up of receipts (credits) of income from holding foreign assets, such as dividends from shareholdings in foreign companies, minus payments (debits) of income to service foreign liabilities, such as interest payments for foreign debt.
Net Primary Income is historically the largest component of the current account and it is the primary reason for the relatively large CAD’s in Australia.
CA - What is Net Secondary Income?
Net Secondary Income: is made up of receipts (credits) in the form of foreign pensions, gifts or gratuitous payments minus payments (debits), such as foreign aid, gifts, pensions or other gratuitous payments.
CA - What is the Balance of Goods and Services?
BOMT & Net Services together are referred to as the Balance of Goods and Services (BOGS), which has been in deficit for approximately half the last four years.
What is the CAD generally compared to?
CAD as a percentage of GDP is the most common statistic referred to when discussing movements in the current account deficit. The highest was in early 2010 at 5.3% (March Quarter) and the lowest was June Quarter 2011 with a CAD of 1.9% of GDP.
What is the Capital Account and Financial Account?
The Capital and Financial Account (CAFA):
- The Capital Account is a relatively insignificant account and covers capital transfers (migrant transfers, debt forgiveness…) and the acquisition/disposal of non-produced, non-financial assets (sale of embassy land or copyrights) between residents and non-residents.
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The Financial Account is more important in that it effectively records how Australia finances its Current Account Deficits. In other words, national spending (GNE) exceeded national income (GDP) because Australia spent more on imports and foreign liabilities than it received from exports and earnings from foreign assets. It is made up of
- Official Capital inflow & outflow: Australian Government spending and lending
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Non-official Capital inflow & outflow: borrowing & lending between Australian and overseas economic agents.
- Net Direct Investment: purchasing more than 10% of a company (or setting up in Australia)
- Net Portfolio Investment: purchasing less than 10% of a company
What is Australia’s Net International Investment Position?
Net International Investment Position (Net IIP): is the value of Australia’s net international liabilities to the rest of the world. This is made up of Australia’s stock of net foreign liabilities (NFL’s), which is comprised of both net foreign debt (NFD) and net foreign equity (NFE).
Net IIP - What is Net Foreign Debt?
Net Foreign Debt: is calculated by looking at the net debt obligations that flows from out ‘total borrowings’ from overseas and subtracting our ‘total lending’ to overseas. It is the largest component of NFL (>85%), with the private sector holding more than 72% in September 2014.
Net IIP - What is Net Foreign Equity?
Net Foreign Equity (NFE): is equal to the net equity obligations that stem from foreign ownership of Australian assets, such as property and shares minus the Australian ownership of foreign assets.
What is the exchange rate?
The Exchange Rate is usually measured by the value of the AUD compared to the USD or trade-weighted index (TWI). As the AUD is a floating currency, the value of the exchange rate is primarily determined by the forces of supply and demand.
