The Relationship Between KAFA & NPY

Question 1

In the long term, a KAFA surplus will result in a larger _ on the NPY

Answer 1

Deficit

Question 2

Why does this occur?

Answer 2

Any foreign financial for that comes to Australia must earn some kind of return for its owner, and these earnings are a debit recorded on the NPY

Question 3

How can international borrowing lead to a widening of the NPY deficit?

Answer 3

Foreign debt will require interest payments (or servicing costs) that are recorded as debits on the NPY

Only the repayment of the principal is recorded on the financial account

Question 4

How can foreign investment lead to a widening of the NPY deficit?

Answer 4

Foreign equity will require returns on investment (such as rent, dividends and profits) that are recorded as debits on the NPY

Question 5

What is a ‘debt trap’ scenario?

Answer 5

Where an economy borrows from overseas merely to pay the interest servicing costs on its existing foreign debt