Topic 2 Flashcards
Direct investment
establish company, or purchase sustained proportion of shares in existing comp. (10% more). Its long term, with investor intending to manage biz
Portfolio investment
loans, other securities, smaller share holdings. Shorter term more speculative
Net foreign liabilities
net foreign debt + net foreign equity
Balance of Payments
record of financial transactions between Australian residents and the rest of the world during a given period, consisting of the current account and the capital and financial account
Current Account
shows the receipts and payments for trade in goods and services, income flows and non- market transfers in a given time period (1 year) These are non-reversible transactions.
Balance on goods and services (BOGS)
the amount that is derived by adding net goods and net Can be indicator of economic performance, i.e (X – M) component of Aggregate Demand.
Net Primary Income (AKA income)
covers earnings on investments and are debt servicing costs. It covers interest payments and returns on other foreign investments through dividends, profits and income. This component is the major component of Australia’s persistent current account deficit
Net Secondary Income (AKA current transfers)
non-market transfers; when products or financial resources are provided w/out a specific product provided in return, relatively small/technical.
Capital and Financial Account
records the borrowing, lending, sales and purchases of assets between Australia and the rest of the world. These transactions are reversible.
Capital account
consists of 2 parts
capital transfers- conditional foreign aid
purchase and sale of non produced + non financial assets- intellectual property rights
Financial account
Australia’s transactions in financial assets and liabilties
Direct Investment
Portfolio Investment
Financial Derivatives (Options, futures, swaps)
Other Investments (trades, loans, currency, deposits, financial leases, etc)
Reserve Assets (gold, exchange)
Supply of $A is represented by
▪ Payments for imports of G&S (M)
▪ Primary and secondary income/transfers to overseas (Y debits)
▪ Capital and financial outflow (K outflow)
Demand for $A is represented by
▪ Receipts for exports of goods and services (X)
▪ Primary and secondary income/transfers from overseas (Y credits)
▪ Capital and financial inflow (K inflow)
how Financial inflows can create debits in two ways
- International Borrowing (Debt): requires regular repayments. The payments after the repayment of the principal (original amount borrowed) shows up on the NPY.
- Foreign Investment (Equity): requires rent, dividends and profit. Investment goes into the KAFA because it is transferable. Dividends/rent/profit go into the NPY
cyclical factors
go up and down with business cycle
structural factor
underlying or persistent
Terms of trade
ratio of the export price index to import price index
relationship between prices aus receives for its x and its prices it pays for m
Terms of trade formula
(X price index / I price index) x 100
BOP constraint
the extent to which an economy’s capacity to grow is constrained by the need to prevent CAD worsening
Exchange rate
the price of Australia’s currency in terms of another currency
Trade Weighted Index
A measure of the value of the AUD against a basket of currencies of major trading partners. Weighted according to the significance of Aus’s trade flows.
Fixed rates
government determines exchange rate for a period of time
***Another way is to change rate ‘officially’, so its closer to market value (devalue/revalue)
• Advantages
o Certainty of short term value of the exchange rate
o Eases volatility (aiding exporters, importers, investors and policy makers)
• Disadvantages
o Encourage speculation
o RBA needs to hold large foreign exchange reserves
***unsustainable as they exhaust a country’s foreign currency and gold/ silver reserves
o Does not react to external structural changes
Managed rates (dirty float)
government intervenes to influence rate or set rate for short periods
• RBA ‘pegs’ value each day (depending on current market forces)
• Advantages
o More flexibles
o Eases volatility (aiding exporters, importers, investors and policy makers)
• Disadvantages
o May lead to drift away from what rate should be – overvalued/undervalued rate
o RBA needs to hold large foreign exchange reserves
• ***unsustainable as they exhaust a country’s foreign currency and gold/ silver reserves
Flexible/ floating (clean float)
market forces of S/D determine exchange rate
• Advantages
o Increase international competitiveness
o Price determined by the market which reflects on factors including economic growth, unemployment, BOP and inflation
o Independent & effective monetary policy
o Consistent with trading partners
• Disadvantages
o Increase volatility
o Increase speculation