IA2 - International Economic Issues

Question 1

what is the key idea of the current account?

Answer 1

involves the balance of payments:
- an accounting record of a country’s international economic transactions

Question 2

what is the balance of payments?

Answer 2

measures the economic transactions between Australian residents and the rest of the world
- divided into:
- The Current Account
- The Capital and Financial Account

Question 3

recall the five-sector circular flow of income model

Answer 3

refer to picture

Question 4

what are the 4 headings categorized within the current account?

Answer 4

1. Goods
2. Services
3. Net primary income
4. Net secondary income

Question 5

define goods

Answer 5

• the visible/tangible commodities
• exports of goods are credits (money flowing into Australia)
• imports are debits (money flowing out of Australia)
• net goods = credits - debits

Question 6

define services

Answer 6

• the invisible/intangible transactions in which no visible item changes hands
• exports of services are credits
• imports of services are debits
• net services = credits - debits

Question 7

what is net primary income?

Answer 7

• when Australian’s receive income from investing overseas and pay income overseas to foreign investors in Australia
• e.g. interest on debt, rent on property overseas, dividends paid to shareholders, australian residents working overseas

Question 8

what is net secondary income?

Answer 8

• movements of funds for which there is no reciprocal activity (one way movement)
• financial resources are provided overseas without without a good/service in return
• e.g. foreign workers sending money they earned in Aus back to country overseas/ international Aus workers sending money to Australia, foreign aid, gifts, foreign taxes/pensions,

Question 9

Recall the overall construction of the Balance of the Current Account (diagram)

Answer 9

refer to image

Question 10

what do assets represent for Australia?

Answer 10

australian investment abroad

Question 11

what do liabilities typically represent?

Answer 11

foreign investment in Australia

Question 12

What are net capital transfers?

Answer 12

• conditional foreign aid (linked to apecific capital projects)
• ie. money to build a school, bridge

Question 13

what is net aquisition/disposal of non-produced, non financial assets?

Answer 13

• intangible assets, mainly intellectial property rights
• e.g. Australian company buying the rights from an American company to operate a Subway outlet in Australia

Question 14

what is direct investment

Answer 14

• share of ownership of 10% or greater in an existing comapny, that allows that individual ‘significant influence’ over decisons

Question 15

what is portfolio investment?

Answer 15

• purchase of under 10% of company by foreigners
• in form of shares, land etc

Question 16

what are financial derivatives?

Answer 16

• investments that have increased in values overtime due to market performance of interest rates, exchange rates etc, bought for the value at that point in time
• e.g. futures, swaps, forward rate agreement, forward foriegn exchange contracts

Question 17

what are reserve assets?

Answer 17

• financial assets (not money) that are used for regulating payment imbalances
• e.g. gold, foreign exchange

Question 18

what is other investment?

Answer 18

• a residual category for any other transcation not able to be classified in the other financial account categories
• e.g. trade credits, loans, leases

Question 19

why is the capital and financial account usually in a surplus?

Answer 19

• because the foreign sector is increasing ownership of Australian assets