External balance Flashcards
What is this objective
This objective refers to Australia’s ability to meet it’s financial obligations that arise from overseas trade, foreign investment, payment of foreign debt and all other dealings with foreign countries
20%
20% of what we produce is exported, 20% of what we consume is imported
What does external balance require
Money into australia needs to equal the money out of australia so we have a stable exchange rate
How is External balance measured
Exchange Rate
CAD as a % of GDP
Foreign debt as a % of GDP
Floating exchange rates are determined by
Demand and supply
Where does demand for AUD come from
Buyers of our exports
Travellers to our country
Where does supply come from
Us - travelling overseas, importing.
Who holds our foreign currency
RBA - and sometimes they sell these reserves or buy our dollar to effect the exchange rate
What does a low exchange rate lead to
Inflation
What does a high exchange rate lead to
Unemployment
Factors determining exchange rate
o World commodity prices markets (the price we receive for most of our primary products is determined on the world market) o A countries inflation rate o Level of X and M o Payment of O/S debt o O/S borrowing and servicing o Level of foreign investment o Speculation o RBA o Level of domestic interest rates o Political stability
Effects of a depreciating currency
o X cheaper and more attractive
o Investment more expensive, may be a lower demand for M
o Import-competing industries better off
o Local production and employment could rise, improving economic growth and full employment
o Foreign investment more attractive
Winners of depreciating currency
o Exporters o Investors into Australia o M competing industries o U/E job prospects improve o Tourists visiting Australia
Losers of a depreciating currency
o Importers o Citizens travelling O/S o O/S investment o International traders paying foreign freight to O/S shipping companies o Those borrowing O/S o Repaying O/S debt and interest
Balance of payments
• A summary statement of all (legal) transactions between Australia and the rest of the world.♣ records all transactions between a particular country and the rest of the world.
2 Components of the BAL
Current account
Capital and financial
The 2 components must
be equal. The current will be a deficit, the capital and financial a surplus.
= 0
The current account comprises of
- Net primary income (profits, interest on investment income and borrowings)
- Net secondary income (aid)
- Goods and services (Exports income, import payments, tourism, transport, insurance, royalties, education)
The Capital account consists of
- Transfers of migrant funds
- Non-finaincal, non-produced assists such as trademarks
The financial account consists of
Direct investment = more than 10% of firm
Portfolio invest = less than 10%
Reserve assets like gold
net errors and omissions
CAD is current
2.6% of GDP
Foreign debt current
61% of GDP
Is debt a problem
o If debt is being used to finance investment, the productive capacity of the country to repay debt and helping to improve standards of living. Reliance on O/S borrowing rather than domestic savings to finance investment increases the CAD (because of the debt servicing requirements which are recorded in the current account)
Causes of external imbalance
♣ Net income deficit
♣ Elastic world demand for Australian commodities
♣ Volatile terms of trade
♣ Protectionist policies of other countries
♣ Falling tariffs, making import prices more attractive
♣ Lack of international competitiveness
♣ Reliance on other countries shipping lines to transport Australian commodities
Varying levels of demand in the Australian economy
Effects of CAD
♣ As the B of Ps should balance – the CAD must be balanced by a capital and financial A/C surplus
♣ This is achieved by borrowing from O/S therefore foreign investment will rise
♣ Possible shift in market power towards multinationals and political influence
♣ Increase in the CAD leads to increase in foreign investment and increasing in foreign debt and decrease in credit ratings in the long run
♣ Debt being passed on to future generations
♣ Lower standard of living for future generations
♣ Lower levels of economic growth as significant % of GDP is used for interest repayments
♣ Lower levels of government revenue and therefore infrastructure spending, health, education, etc
♣ Higher U/E
