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Economics 3A/3B > PoTrade/BoP/ToT/Foreign Liabilities > Flashcards

PoTrade/BoP/ToT/Foreign Liabilities Flashcards

0
Q

Define current account

A

Non-reversible money flows from all exports and imports of goods, services and income transfers for a period of one year.

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1
Q

Define balance of payments

A

Summarises all transactions that Australia has with the rest of the world over a given period of time.

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2
Q

What is the current account made up of?

A

1) GOODS (e.g. Minerals, cars, electronics)
2) SERVICES (e.g. Tourism, transport, education)
3) INCOME (e.g. Wages, dividends, interests, profits)

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3
Q

How to find balance on current account?

A

(Net goods+net services) + net primary income + net secondary income

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4
Q

What is a current account deficit?

A

When payments to overseas countries for goods, services and income EXCEEDS receipts from overseas for goods, services and income.

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5
Q

What are the causes of an increase in CAD? (6)

A
  • Decrease in TOT
  • Decrease in international competitiveness
  • Decrease in savings
  • Increase in economic growth
  • Increase in foreign investment into Aus
  • Increase in national investment
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6
Q

How does increased foreign investment into Australia increase the CAD?

A

Increased foreign investment means an increase in the FAS. This has to be matched with an increase in the CAD.

Also because of the repatriation of investment income (e.g. Dividends, profits and interest payments)

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7
Q

How does an increase in national investment increase the CAD?

A

IN SHORT TERM:
As increased national investment is normally associated with MER, must pay for capital.

LONG TERM:
MER will improve international competitiveness, boost savings and lowers CAD.

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8
Q

What are the different views of an increase in the CAD?

A

POSITIVE:
• Increased imports means an increase in living standards and an increase in growth
• Positive if fueled by MER, strong economy and increased investment.

NEGATIVE:
• If uncontrolled, may decrease credit rating
• Negative if fueled by decline in competitiveness

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9
Q

What factors have contributed to the growth in Australia’s CAD? (6)

A
  • Isolated geographical position
  • Lack of infrastructure
  • Dependency on foreign investment
  • Foreign borrowing
  • Strong Australian dollar
  • High rate of economic growth
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10
Q

How does our isolated geographical position contribute to our large CAD?

✈️

A

Means transport costs are more expensive

Increased service payments overseas

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11
Q

How has Australia’s the lack of infrastructure contributed to it’s large CAD?

E.g.

A

EXAMPLE:

We don’t have a national shipping line in Australia which means that must pay money for transport to overseas.

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12
Q

How has Australia’s borrowing contributed to our large CAD?

A

Because Australia has a small savings pool must borrow or depend on investment from overseas.

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13
Q

How has our strong Australian dollar contributed to our large CAD?

A

The strong AUD decreases international competitiveness.
This means productivity relative to wages pushes up inflation,
thus decreasing export revenue and makes domestic goods more expensive relative to foreign imports.

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14
Q

What is the capital and financial account?

A

A record of all transactions involving foreign financial assets and liabilities.

(REVERSIBLE)

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15
Q

Examples of capital account transactions

A

CAPITAL TRANSFERS= migrants’ finds or aid funds overseas.

NON-PRODUCED, NON-FINANCIAL ASSETS= intangible assets (e.g. Patents, copyrights, trademarks and franchises)

16
Q

What is the capital account?

A

Comprises of capital transfers and the acquisition and disposal of non-produced, non-financial transfers.

17
Q

What is the financial account?

A

Comprises of transactions associated with changes of ownership in Australia’s foreign financial assets and liabilities.

18
Q

What are examples of financial account transactions?

A

CREDIT ENTRIES= net inflows (e.g. Borrowing by Australians and foreign investment in Australia)

DEBIT TRANSFERS= net outflows (e.g. Repaying loans, foreigners borrowing from Australia)

19
Q

What are the effects of a CAD? (4)

A
  • Increasing foreign debt
  • Depreciation of $AU
  • Higher interest rates
  • Sign of major economic problems
20
Q

What is foreign debt?

A

Capital inflow in the form of borrowing from overseas.

= Main source of liabilities (~50%)
= More flexible than equity

21
Q

What is foreign equity?

A

Capital inflow in the form of investment in Australian assets.

22
Q

Why was there an increase in foreign investment (in both direct and portfolio) between 1990s-2008? (7)

A
  • Australia’s strong economic growth
  • Increases in commodity prices
  • To secure supplies of resources
  • Relatively high real interest rates
  • High credit rating
  • Appreciation of the $AU
  • Changes in foreign investment regulations and free trade agreements
23
Q

How does economic growth increase investment in Australia?

A

Makes investment in Australia less risky and more profitable
(Increases both portfolio and direct investment)

24
Q

How does the increase in commodity prices increase foreign investment?

A

Increase in commodity prices leads to an increase in demand for overseas funds in mining thus increasing the supply of commodities on the world market.
(increased both direct and portfolio investment)

25
Q

How do the relatively high interest rates in Australia increase foreign investment in Australia?

A

The higher real interest rate differential compared to overseas attracted portfolio investments.

26
Q

How has the appreciation of the $AU increased investment in Australia?

A

Need less Australian dollars to pay of debt in US dollars.

Increases portfolio investment but possibly reduces direct investment as Australian assets become more expensive

27
Q

What is an example of the “changes in foreign investment regulations and free trade agreements” that led to an increase in investment in Australia?

A

Australia’s free trade agreement with US has encouraged foreign investment.

28
Q

What are the factors that contributed to the increase in DIRECT investment from 2009/10? (3)

A
  • GFC shows Australia to be one of the stronger world economies
  • Changes to Foreign Direct Investment Regulations that have allowed more direct investment
  • Countries like China want to buy Australian assets to secure supplies of commodities.
29
Q

What are the factors that contributed to the increase in PORTFOLIO investment from 2009/10? (4)

(Same as earlier ones for portfolio)

A
  • Increase in CAD
  • Higher IR%
  • High $AU
  • High credit rating
30
Q

What are the benefits of foreign investment? (7)

A
  • Increases economic growth
  • Increases standard of living
  • Increases employment
  • Increases tax revenue
  • Funds greater rates of investment
  • Direct investment leads to expertise
  • Develops industries and resources
31
Q

What are the costs of foreign investment? (3)

A
  • Equity means a loss of control of Australian assets
  • Equity means loss of profits
  • High interest payments
32
Q

Benefits of foreign debt (3)

A
  • Increase in Australia’s net worth
  • Lead to increase in real income
  • Led to increase in Australia’s assets faster than liabilities
33
Q

Define TOT

A

An index that measures the relative movements in the price of imports and exports

Provides a measure of the quantity of imports a country can obtain in exchange for a given volume of imports.

34
Q

What causes a fall in TOT? (Unfavorable movement)

A

A reduction in the P(X) relative to the P(M)

35
Q

Causes of an increase in TOT?

A

An increase in P(X) relative to P(M)

36
Q

What is the impact of an increasing TOT? (6)

A 
• Increase in export revenue
• Increase living standards
• Increase in employment 
• Higher prices on commodities
• Increased investment 
(DUTCH DISEASE)
37
Q

What are the biggest categories of exports in Australia?

A

1) Primary goods
2) Services
3) Manufacturing

Economics 3A/3B (9 decks)

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