U3 Foreign investmentnt Flashcards
Define foreign liabilities
The stock of domestic assets owned by overseas residents and the total amount of money Australia owes to overseas residents
What are the two types of foreign liabilities?
Foreign debt and foreign equity
What is foreign debt?
The stock of foreign borrowing where Australian residents (public and private) have borrowed from the rest of the world
What is foreign equity?
The stock of Australian assets owned by foreign residents
How does a change in foreign liabilities change the primary and secondary income account balance of the current account?
Foreign liabilities↑ →
income account balance↓
(more income is being paid to overseas)
Foreign liabilities↓ →
income account balance↑
(less income is being paid to overseas)
How are foreign liabilities serviced through the primary income account of the current account?
- Foreign liabilities are serviced through interest and dividend repayments
- Foreign liabilities need to be paid to overseas in the form of interest on loans and dividends on investments
- Results in outflows from the primary income account
What influences do foreign liabilities have on Australia’s current account?
- Foreign liabilities affect the income account balance
- Foreign liabilities need to be serviced through the primary income account through interest and dividend payments
What are the ways foreign investment has affected the Australian economy in recent years?
- Growth in mining industry
- Improved macroeconomics
- Bridged the savings investment gap
How has foreign investment affected the Australian mining industry?
- Generated growth in new mining infrastructure
- Increased employment and export revenue
- Allowed establishment of high-capital industries
- Has resulted in higher foreign ownership
How has foreign investment improved Australia’s macroeconomics?
- Increased economic growth
- Increased employment
- Increased government revenue via taxes, which funds government growth
- Causes multiplier effect from productive investment, which increases GDP
How has foreign investment bridged Australia’s savings investment gap?
- When there’s a lack of domestic savings compared to the desired level of investment, foreign investment inflows can fill that gap
- Contributes to financing investment projects in Australia, stimulating economic growth and development
Define foreign investment
The cross border movement of finance caused by borrowing and the sale of assets
What have been the recent trends in Australia’s level of foreign debt?
- Foreign debt has increased over the last 10 years from 50% of GDP to 64% of GDP
- Net foreign debt is $1000 billion dollars
- 75% of foreign debt is private debt, with the rest being owned by the government
Account for the recent trends in Australia’s level of foreign debt
- When Australia records a CAD, foreign debt or foreign equity increases
- All of Australia’s foreign liabilities are currently in the form of foreign debt because Australia has had a net equity asset position
- Global financial crisis and the end of the mining boom →
- Government budget deficits have occurred for the last 10 years →
- Increased public debt →
- Government has to borrow to fund the deficit
What impact have the recent trends in Australia’s level of foreign debt had on the economy?
- Australia mostly recording a CAD has led to foreign debt and foreign equity increasing
- All of Australia’s foreign liabilities are now in the form of foreign debt as Australia now owns more assets overseas than foreigners own in Australia
- The buildup of foreign debt was used to fund the expansion of the Australian capital-intensive mining industry
- An increase in foreign investment has led to an increase in the value of exports
- The size of the budget deficit has been reducing in the last few years
- The foreign debt has been used to produce higher rates of economic growth and a higher level of investment
