Chapter 4 - Balance of Payments

Question 1

Definition of Balance of Payments

Answer 1

Set of accounts that summarise all financial transactions passing between Australia and the rest of the world

Question 2

Structure of the current account

Answer 2

Financial flows linked to trade (export/imports) and incomes (interest, dividends, profit)

Question 3

Savings-investment gap

Answer 3

Difference between the level of money saved by Australians that is available to fund investment, and the demand for investment dollars

Question 4

Why is CAD shrinking

Answer 4

Fall in capital and financial discount surplus at end of mining boom
Exchange rate fallen, resulting increase in level of net exports

Question 5

Cyclical and Structural causes of CAD

Answer 5

Cyclical Factors - Temporary factors that mainly affect the trade balance: Aus business cycle, world business cycle, exchange rates, commodity prices, terms of trade, outflows (imports, dividends, interest payments
Structural Factors - Fundamental factors that mainly affect the income balance: Investment-savings gap, FI and Foreign liabilities

Always CAD because of structural factors, cyclical factors determine how large CAD is

Question 6

Structure financial account

Answer 6

foreign investment into Australia and Australian investment abroad
- direct investment, portfolio investment, financial derivatives, reserve assets and other

Question 7

Formula for CAB

Answer 7

Balance on G+S and Net Income = Balance on Current Account

Question 8

Component of Current Account largest and which is most volatile?

Answer 8

Largest - Primary Income

Most Volatile -