Balance Of Payments

Question 0

Credit vs debit

Answer 0

Credit-money inflow

Debit-money outflow

Question 1

What is the balance of payments? (BOP)

Answer 1

Record of transactions between Aus & world

• current account +capital&financial account
• most important indicator of our relationship w/ global economy

Question 2

What is the current account?

Answer 2

• shows money flow from imports and exports, income flows & transfer payments over 1year
• covers non-reversible transactions

Question 3

What are the components of the current account?

Answer 3

• balance on goods and services (BOGS)
• net primary income
• net secondary income

Question 4

Describe BOGS

Answer 4

BOGS=net goods+net services

Question 5

Describe net primary income

Answer 5

This refers to net earnings on investment: when we invest overseas, we receive income inflows (& vice versa)

Net primary income deficit is main contributor to current account deficit(CAD)

Question 6

Describe the net secondary income

Answer 6

V. small part of overall BOP

• payouts on insurance claims
• unconditional aid
• workers’ remittances
• ‘giving money away’

Question 7

What is the balance on the current account?

Answer 7

BOGS+ net primary income +net secondary income

Question 8

What is the capital and financial account (CAF)?

Answer 8

• records the borrowing, lending, sales and purchases of assets btwn Aus &world ( e.g debts)
• transactions that are reversible eg borrowings can be repaid, assets traded

Question 9

What are the components of CAF?

Answer 9

• capital account

- financial account

Question 10

What does the capital account consist of?

Answer 10

1. Capital transfers: conditional foreign aid grants , debt forgiveness
2. non-produced & non- financial assets: intellectual property rights
   THINK CAR!

Question 11

What does the financial account consist of?

Answer 11

-transactions in foreign financial assets &liabilities
-consistent positive balance
1.foreign direct investment(FDI): financial transactions to fund I,or buy > 10% company’s shares
E.g jap company bringing funds to build a motorway. More long term
2.portfolio investment: buying land, shares, marketable securities. Often largest in CAF. More short term
3. Financial derivatives
4. Reserve assets (e.g monetary gold)
5.other investment: trade credits, loans, currency, etc

Question 12

What is the balance on the CAF account?

Answer 12

Capital account+ financial account

CAD+CAF=0 under floating exchange rate