The Balance of Payments

Question 1

What is the balance of payments?

Answer 1

record of transaactions between Australia and the rest of the world during a given period, consistency of the current account and the capital and financial account

Question 2

What are economic transactions?

Answer 2

• exports and imports of goods
• exports and imports of services
• income flows i.e. dividend and interest payments
• transfers i.e. foreign aid and funds brought by migrants
• financial flows i.e. investment in shares and securities and loans

Question 3

What are foreign liabilities and assets?

Answer 3

foreign liability - foreign investment into Australia

foreign assets - Australian investment abroad

Question 4

What are the components of foreign liability?

Answer 4

• foreign debt: Australians borrowing from overseas

- foreign equity: foreign ownership, when an Australian sell assets to overseas residents

Question 5

What is the terms of trade?

Answer 5

the relationship between the price paid for imports and the prices received for exports (relative prices)

Question 6

How do the balance of trade and the Terms of Trade relate?

Answer 6

• if the Terms of Trade decreases, the prices we receive for our exports decreases and the price we pay for imports increases, the balance of merchandise trade deficit becomes larger
• things that we import are typically consumer durables and are classified as discretionary spending (spending that can be put off, on wants generally not needs)

Question 7

What are factors affecting the current account balance?

Answer 7

cyclical factors
- economic growth in Australia: trade balance is reverse of the business cycle i.e. during a boom, increased imports of capital goods, increased investment, more spending on consumer durables so trade balance becomes more negative
- world economic growth
structural factors
- how export base is comprised

Question 8

What balances the balance of payments?

Answer 8

since for each transaction there is matching credit and debit entry, the overall balance of payments must always balance. This is due to the floating exchange rate

• demand for $A = credit items of the balance of payments
• supply of $A = debit items in balance of payments

Question 9

What is the current account?

Answer 9

shows the receipts and payments for trade in g&s, transfer payments and income flows between Australia and the rest of the world in a given time period. These are non-reversible transactions

Question 10

What is the trade balance?

Answer 10

net goods - refers to the difference between what Australia receives for its exports and pays out for its imports of goods
net services - refers to services that are bought and sold without people receiving a ‘good’ i.e. tourism, education, transport

• merchandise trade account surplus of $8 billion in 2013-14
• net services deficit of $14 billion in 2013-14

Question 11

What is the primary account?

Answer 11

refers to earnings on income, it covers interest payments on borrowings and return on other foreign investments. Consists of:

• compensation of employees (for the use of labour): is the payment of wages and salaries to workers, relatively small ($3.76 bill deficit in 13-14)
• investment income (for the use of capital): comprise income earned from the provision of financial capital of foreign investment, its divided into dividends, reinvested earnings and interest, over 95% of primary income are associated with investment income

overall balance was a deficit of $39 bill

Question 12

What is the secondary income?

Answer 12

refers to non-market income, when products/financial resources are provided without a specific g&s being provided in return i.e. payouts on insurance claims, worker’s remittances and unconditional foreign aid
- balance was $2 bill

Question 13

What is the capital and financial account?

Answer 13

the record of the money flows that result from international borrowing, lending and purchases of assets such as shares and real estate for a period of one year. These transactions are reversible

Question 14

What is the capital account?

Answer 14

comprises of capital transfers (mainly conditional foreign aid grants and debt forgiveness) and the purchase and sale of non-produced, non-financial assets i.e. intellectual property payouts
- balance is usually close to zero

Question 15

What is the financial account?

Answer 15

shows Aus’s transactions in foreign financial assets and liabilities. Categorised by type of investment
- credit entries: net inflows resulting from a reduction in Australia investment abroad and/or an increase in foreign investment into Australia
- debit entries: net outflows, opposite of above
Aus: usually positive financial account balance, which shows that during each year the rise in Aus’s liabilities is higher than the increase in the liabilities of the rest of the world to Aus
types:
- direct investment: obtaining a lasting interest/significant influence in a firm (>10%)
- portfolio investment: short term,

Question 16

What are impacts on the balance of payments?

Answer 16

• economic growth
• inflation
• terms of trade
• exchange rates

Question 17

What are trends in the goods account?

Answer 17

2007-08

• recorded large deficit of $26 bill in goods balance
• economy was at the peak of a boom, just prior to the global financial crisis

2010-11

• significant surplus of $22 bill in goods balance
• due to the high commodity prices for coal and iron ore which resulted in high export values

Question 18

What influences the variable nature in the merchandise balance?

Answer 18

explained by the composition of our imports and exports
- Aus exports mainly commodities (primary products), both the demand and supply of these are very price inelastic and are subject to large price fluctuations
- world economic climate i.e. increase in world economic growth would increase the demand for Aus’s minerals and fuel exports, an increase in Aus’s economic growth would boost demand for consumer and capital goods imports, rise in he price of oil, recessions in our leading trading partners or a serious drought would increase our trade deficit. Conversely, a surge in economic growth in China will boost Aus’s resources sector
- rate of economic growth in Australia
~ high rate of economic growth - demand for imports increases, especially capital goods imports and consumer goods i.e. 2002-08 high deficits in net goods balance due to increased investment associated w mining boom, 2002-05 prolonged drought added to this
~ 2006 - Aus’s export performance benefited from strong economic growth in China and India, the surge in Aus’s commodity exports turned the trade deficit to a trade surplus