Foreign Investment Flashcards
Explain the difference between foreign and domestic investment
Foreign investment is an inflow of money from overseas investors
Domestic investment is the outflow of money from Australian investors
Explain the link between foreign investment and the S-I gap
Australia relies on net inflow of foreign investment to develop its economy and to supplement its domestic savings. This occurs because Australia’s total investment exceeds its savings and we import foreign savings from the rest of the world.
Distinguish between Australia’s foreign liabilities and foreign assets. Which is larger?
Foreign liabilities are created when Australian residents borrow money from overseas or sell assets such as shares to foreign residents, an inflow of money from overseas.
Foreign assets are created when Australian residents lend money to foreign residents or purchase foreign assets, an outflow of money.
Foreign liabilities are larger but assets have increased at a faster rate than liabilities
Explain what is meant by Australia’s net international investment position
Australia’s net international investment position records the stock or level of foreign investment into Australia (FIA) and the level of Australian investment abroad (AIA)
What was the size of Australia’s net foreign liabilities in 2020?
$910billion
45% of GDP
Distinguish between the two types of foreign liabilities
Foreign equity - foreign ownership. If Australian residents sell assets to overseas residents, then this increases Australia’s foreign equity liability
Foreign debt - borrowing. If Australian residents borrow from overseas, then this increases Australia’s foreign debt liability
What is Australia’s largest foreign liability?
Foreign debt ($2589bn)
Explain why Australia’s net foreign liabilities have decreased over the past decade
Australia’s net foreign equity is no longer a liability. This is because the growth in Australia’s superannuation funds have enabled Australia to increase its holding of foreign assets
Why is Australia’s net foreign equity liability negative?
Australia owns more foreign equity than it owes, so net foreign equity is no longer a liability and is an asset
What proportion of Australia’s net foreign debt is held by the private sector?
69%
Explain the link between the current account and foreign liabilities
The servicing costs associated with foreign liabilities result in a large primary income deficit in the current account. A higher level of investment will increase the nation’s capital stock, expanding the economy’s productive capacity and provide for future income growth.
Why have the servicing costs of Australia’s foreign debt, measured as a percent of Australia’s exports, been falling over time?
Due to world interest rates declining over this period, reducing repayments on loans, and the fact that Australia’s export performance has improved.
Why is private debt considered to be superior to public debt?
Private sector debt is considered superior to public debt as it has the profit motive in mind. Private debt is likely to increase investment which expands the productive capacity of the economy and provides the income stream to service the debt. However, public debt such as government is not necessarily bad as if it used to finance government infrastructure, then this will increase future income and will not impose a burden on taxpayers
What effect will the COVID pandemic have on the government’s share of foreign debt?
When the Australian economy contract, the governments budget balance falls due to declining government tax revenue and increased welfare spending. The governments share of foreign debt increasing from 16% (2010) to 26% in 2019. In 2020, this rose to 31%. This shows the impact of the COVID-19 pandemic causing the government to record its largest budget deficit in history.
What has happened to Australia’s net worth over time?
Australia’s net worth has drastically increased, in 1990 Australia’s net worth was $1915bn and in 2020 Australia’s net worth was $12887bn
