week 2 - balance of payments

Question 1

define foreign debt

Answer 1

Money that Australia borrows from overseas and must repay with interest.

Question 2

what is a financial account surplus

Answer 2

A financial account surplus happens when more money is flowing into Australia than going out through investment-related transactions.

Question 3

what is foreign debts impact on the financial account

Answer 3

it is recorded under other investments and acts as a financial inflow when receiving loans form overseas, and an outflow when we repay the loan.

Question 4

foreign equity

Answer 4

When foreigners own part of Australian businesses (they invest in Aussie companies).

Question 5

how is foreign equity recorded in the financial account

Answer 5

🧾 This is recorded in the financial account as foreign direct investment (FDI) or portfolio investment, depending on the size.

Question 6

what is net foreign equity

Answer 6

it is foreigners owning Australian assets minus Australians owning overseas assets.

Australia currently has a negative net foreign equity meaning Australians own more overseas equity then foreigners Own australian equity.

Question 7

example of foreign debts

Answer 7

Gov borrows from overseas bank

Question 8

example of foreign equity

Answer 8

Overseas investor buys Aussie company shares

Question 9

example of net foreign equity

Answer 9

Foreigners own more of our businesses than we own of theirs

Question 10

define balance of payments

Answer 10

The Balance of Payments is a record of all financial transactions made between Australia and the rest of the world over a specific period of time

Question 11

what are credits

Answer 11

receipts from foreigners

Question 12

what are debits

Answer 12

payments to foreigners

Question 13

what are the two main accounts in the balance of payments

Answer 13

• current account
• financial account

Question 14

what is the current account

Answer 14

The current account records all transactions involving goods, services, income, and current transfers between Australia and other countries over a period of time
- can be in a surplus or deficit.

Question 15

what are the key components of the current account

Answer 15

Goods: exports and imports of physical products (like cars, food)

Services: exports and imports of services (like tourism, education)

Income: money earned from investments and wages abroad

Current transfers: one-way payments like foreign aid or gifts

Question 16

what is the capital and financial account ( CAFA)

Answer 16

The capital and financial account records all capital transfers and financial transactions between Australia and other countries over a specific period.

Question 17

what does the CAFA include

Answer 17

Capital account: one-off transfers like debt forgiveness or buying/selling of fixed assets
Financial account: money flowing in and out for investments such as:
Foreign direct investment (FDI)
Portfolio investment (shares, bonds)
Other investments (like loans and deposits)
Reserve assets held by the Reserve Bank of Australia

Question 18

simple difference between the CA and the CAFA is

Answer 18

CA = Trade & income flows

CAFA = Investment & capital flows

Question 19

how does human capital flows benefit australia

Answer 19

Skilled Migration Boosts Workforce
Skilled workers coming to Australia increase productivity and fill labour gaps.
Inflow type: Not a direct inflow but supports income inflows when migrants work and earn wages (Current Account – Income).

2. International Students Bring Income
   Foreign students pay tuition fees and living expenses.
   Inflow type: Service export inflow (Current Account – Services).

Question 20

describe the international transfer of foreign aid and donations and why it is beneficial

Answer 20

foreign aid and donations involves australia, as a wealthy country, providing monetary aid and goods/services to less developed nations to help alleviate poverty and support growth.

benefits
- it creates good will and future trade relationships

• helps raise global living standards

Question 21

what is the important principle of the CA ADN THE CAFA

Answer 21

any current account deficit must be exactly offset by a capital and financial account surplus ignorer to ensure an equilibrium

Question 22

how has the savings investment imbalance led to a CAD

Answer 22

Australia fro decades has had a savings investment imbalance, due to investments exceeding national savings.
australia must purchase foreign capital to fund investments such as mining, this led to increase net foreign liability through debt and equity inflows recorded as a credit in the CAFA.

Low national savings → more borrowing from overseas → more income paid out → current account deficit.

Question 23

how does persistence in net primary income deficit lead to a CAD

Answer 23

Australia has borrowed a lot of money and has many foreign-owned businesses. Because of this, we regularly send interest and profits overseas. These payments are recorded as net primary income (NPI) outflows in the current account.

Question 24

how does low international competitiveness lead to a CAD

Answer 24

due to high wages and needed to buy capital overseas.
We export less (because fewer countries want our expensive goods), and
We import more (because foreign goods are cheaper and better value).

This can cause a trade deficit, where imports > exports, creating a deficit in the BOMT. this influences out BOMT but in recent years we have had favourable conditions and are in a BOMT surplus

Question 25

whats the current state of net services in the current account

Answer 25

🔁 Varies Often a small deficit or surplus depending on tourism, education, etc.

Question 26

what is the current state of net primary income in the current account

Answer 26

❌ Deficit Australia pays interest and dividends to foreign investors.

Question 27

what is the current state of net secondary income in the current account

Answer 27

❌ Deficit (usually small) Includes foreign aid and personal transfers overseas.

Question 28

how does the exchange rate influence the current account

Answer 28

trade deficits led to a fall in AUD, boosting international competitiveness.

Question 29

what happens to the current account during strong economic growth

Answer 29

investments exceed savings, increase the need for foreign borrowing. increased import spending, worsen the BOGS leads to a current account deficit due to -more NPI debits -more import paymnets

Question 30

what happens to the current account during weak economic conditions

Answer 30

savings increase, investments fall , decreasing the need for foreign borrowing. lower import demand improves the trade balance leads to a narrower CAD or even a surplus as seen in COVID

Question 31

define what I sent by cyclical changes in the current account

Answer 31

Short-term changes in the current account that move with the business cycle (booms/recessions

Question 32

example of cyclical change on the current account

Answer 32

During a boom, imports rise → bigger trade deficit.

Question 33

define what is ment by structural changes in the current account

Answer 33

Long-term or permanent features that affect the current account regardless of the economic cycle.

Question 34

example of structural change in the current account

Answer 34

global transition to renewable energy - may cause fossil fuels export to decrease BOMT deficit