External balance

Question 1

What is this objective

Answer 1

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

Question 2

20%

Answer 2

20% of what we produce is exported, 20% of what we consume is imported

Question 3

What does external balance require

Answer 3

Money into australia needs to equal the money out of australia so we have a stable exchange rate

Question 4

How is External balance measured

Answer 4

Exchange Rate
CAD as a % of GDP
Foreign debt as a % of GDP

Question 5

Floating exchange rates are determined by

Answer 5

Demand and supply

Question 6

Where does demand for AUD come from

Answer 6

Buyers of our exports

Travellers to our country

Question 7

Where does supply come from

Answer 7

Us - travelling overseas, importing.

Question 8

Who holds our foreign currency

Answer 8

RBA - and sometimes they sell these reserves or buy our dollar to effect the exchange rate

Question 9

What does a low exchange rate lead to

Answer 9

Inflation

Question 10

What does a high exchange rate lead to

Answer 10

Unemployment

Question 11

Factors determining exchange rate

Answer 11

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

Question 12

Effects of a depreciating currency

Answer 12

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

Question 13

Winners of depreciating currency

Answer 13

o	Exporters
o	Investors into Australia
o	M competing industries
o	U/E job prospects improve
o	Tourists visiting Australia

Question 14

Losers of a depreciating currency

Answer 14

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

Question 15

Balance of payments

Answer 15

• 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.

Question 16

2 Components of the BAL

Answer 16

Current account

Capital and financial

Question 17

The 2 components must

Answer 17

be equal. The current will be a deficit, the capital and financial a surplus.
= 0

Question 18

The current account comprises of

Answer 18

• 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)

Question 19

The Capital account consists of

Answer 19

• Transfers of migrant funds

- Non-finaincal, non-produced assists such as trademarks

Question 20

The financial account consists of

Answer 20

Direct investment = more than 10% of firm

Portfolio invest = less than 10%

Reserve assets like gold

net errors and omissions

Question 21

CAD is current

Answer 21

2.6% of GDP

Question 22

Foreign debt current

Answer 22

61% of GDP

Question 23

Is debt a problem

Answer 23

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)

Question 24

Causes of external imbalance

Answer 24

♣ 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

Question 25

Effects of CAD

Answer 25

♣ 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