week 3 TOT, foreign debt and equity Flashcards
(22 cards)
what does net international investment position (NIIP) mean
refers to australias net financial position with the rest of the world
how to measure the NIIP
NIIP = net foreign assets - net foreign liabilities
define net foreign liabilities
is the total value of what australia owes to the world minus what the rest of the world owes australia. - including both debt and equity
how is net foreign debt and net foreign equity apart of net foreign liabilities
Think of Net Foreign Liabilities (NFL) as the total amount Australia owes the world through two main types of financial commitments:
- Foreign Debt (🔁 Borrowing)
This is money Australia has borrowed from overseas (like loans or bonds).
This goes into NFL because it’s a liability — we have to repay it.
Foreign Equity (📈 Ownership)
This is when foreigners own shares or businesses in Australia.
This also goes into NFL because it’s foreign ownership of Australian assets — meaning the profits (dividends) often flow overseas.
define net foreign debt
NFD is the total foreign borrowing by Australians - lending by Australians to foreigners
whats the economic significance of NFD
reflects the accumulated result of financial capital inflows, to fund domestic investment.
a cad imp lease australia must borrow to finance the shortfall, increasing NFD
define net foreign equity
The difference between foreign ownership of Australian assets (like companies, land) and Australian ownership of overseas assets.
what does a negative NFE mean
this implies that Australians own more foreign equity than foreigners own in australia - recorded as a net assets
what is the implication of negative NFE
a negative NFE reduces the overall burden of NFLS.
Helps improve australias NIIP, boosting external stability
what causes NFL to grow (structural)
historically, australia has seen long term imbalance between savings and investment, meaning we have low savings. to fund large projects we cannot use our own low savings, so we borrow overseas, increasing out NFD and thus NFL.
what causes NFL to grow (cyclical)
post COVID, high demand drove export receipts of coal and iron ore, due to ease on terms of trade.
this improved the current account, reducing need for forge in capital leading to slower NFD growth
reasons why growth in NFL is good
If the borrowed money or foreign investment is used to build productive infrastructure, boost economic growth, or create jobs.
If the return on investment is higher than the cost (e.g. a company earns more than it pays in interest or dividends).
reasons why growth in NFL is bad
If it increases interest or dividend payments, worsening the net primary income (NPI) deficit in the Current Account.
If we’re relying too much on foreign money due to low savings, which is a sign of structural weakness.
If it causes a loss of economic sovereignty (e.g. too much foreign control over Aussie industries).
what makes NFLs sustainable
- a stable or improving NIIP
-NFD and CAD remain manageable and serviceable over time - future generations are not burdened with excessive repayments
what could unsustainable NFD/CAD lead to
- higher interest rates
-capital flight - falling exchange rate
- credit rating downgrades
describe australias current position for net foreign debt
approximately 1.389 trillion dollars in debt, making an increase of 90 billion from the previous quarter.
this was mainly due to overseas investors are lending money to Australian banks by buying the debt they issue.
what is the economic implication of a high NFD currently in Australia
increased NFD indicates an increase obligation for future payments to foreign lenders, which can affect national income and the CA.
sustained NFD growth may raise concerns about external vulnerability and the countries ability to service its debt, especially as global interest rates rise.
define terms of trade(TOT)
the terms of trade refers to the ratio of export prices to import prices.
calculate the terms of trade index
TOT= (export price index divided by import price index) x 100
what is a favrouable movement for the TOT
when export prices rise faster then import prices, pr when import prices fall relative to export prices.
this increases the purchasing power of a nation,
results in a positive impact on national income; more revenue is earned per unit of export, thus improve the CA
how does a higher TOT affect the BOP
improves trade balance, especially if the volume of exports remains stable or grows. can lead to a CA surplus, reducing the need for foreign borrowing. ( decrease NFL and CAD)
how does a high TOT affect national income
A rising TOT means that export revenue increases relative to the costs of imports, boosting national income .
this can strengthen gdp, raise profits in the export industry, and improve government tax revenue
