3AEC0 – Australian in the Global Economy
4.
The Balance of Payments
Student Objectives
 describe the structure of Australia's balance of payments
 explain the concept of the Current Account Deficit (CAD)
 explain the reasons for Australia’s CAD
 account for the recent trends in Australia’s current account
 explain the implications of Australia’s CAD
 recognise that there are different views as to the significance of Australia’s CAD
BALANCE OF PAYMENTS
Definition: The BOP is an official balance sheet which records Australia’s
transactions with the rest of the world.
The balance sheet is broken into two sections:
a) The Current Account - this records the sale and purchase of goods and services,
earnings or income on investments which flow between Australia and the rest of the
world, and transfers of funds on which there is no return or for which there is no
good or service received.
b) The Capital and Financial Account – this records the inflow and outflow of money
for investment and borrowing purposes and the movement of certain capital nonproduced, non-financial assets in or out of Australia. It is not related to the sale or
purchase of goods and services.
Capital inflows - when foreigners (non-residents) buy Australian assets or lend
money to Australians. Financial capital (investment funds) flowing into Australia.
Capital outflows - when Australians buy foreign assets or lend money to nonresidents. Financial capital (investment funds) flowing out of Australia.
THE CURRENT ACCOUNT
Is sub-divided into three categories:
i) BALANCE ON GOODS AND SERVICES
a) Goods: (also known as Merchandise Trade) - simply net exports (X – M), ie. the
difference between the value of sales of exported goods (eg iron ore, cars) and the
purchases of imported goods (eg TVs, transport machinery). Exports are known as
goods credits and imports as goods debits.
b) Services: is the term used to describe transactions of a tertiary nature, ie. doing
things for sale as opposed to making things for sale. Net services is simply the
difference between service credits (sales of services such as education and tourism)
and service debits (purchases of services such as sea transport and overseas
tourism). When you add net goods and net services together you get the Balance on
Goods and Services.
ii) PRIMARY INCOME - all earnings on different kinds of investments which accrue
to Australians for their overseas investments (dividends, profits, rent and interest)
plus income from the labour of Australians earned overseas minus the earnings
accruing to foreigners for their investments in Australia and income from foreign
labour earned in Australia. This is the largest deficit component of the Current
The Balance of Payments
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3AEC0 – Australian in the Global Economy
Account and is often larger than the CAD itself. Income sources include:
• Investment income:
Direct or equity investment income
– income from shares (if more than 10% of the shares in a company are
owned) or ownership of physical assets eg a shopping centre - dividends, rent
and profits.
Portfolio investment income
– income on equity (dividends from holdings of shares of up to 10% in a
company)
– income on debt (interest), eg. bonds. This is the main source of portfolio
investment income.
• Compensation of employees (wages and salaries)
iii) SECONDARY INCOME (formerly known as CURRENT TRANSFERS) – flows of
money into and out of Australia for which there is no return or good or service
purchased, eg. Worker’s remittances (foreign workers saved income sent back home),
gifts, pensions, foreign aid.
More money flows out of Australia than into Australia on the Current Account,
therefore it is constantly in deficit (CAD).
THE CAPITAL AND FINANCIAL ACCOUNT
This part of the BOP shows transactions in foreign financial assets and liabilities. It
is sub-divided into two categories:
i) CAPITAL ACCOUNT
This consists of:
• Migrants funds, ie. migrants’ funds brought into Australia minus the funds taken
out of Australia when people emigrate to another country.
• The acquisition less disposal of non-financial, non-produced assets such as sales of
embassy land, patents, copyrights, trade marks.
• Debt forgiveness, eg. writing off the debt of impoverished developing nations who
can’t repay loans.
ii) FINANCIAL ACCOUNT
This shows transactions in Australian and foreign financial assets and liabilities and
consists of:
• Net Direct Investment: refers to equity capital or the value of physical assets in
Australia owned by non-residents minus the value of physical assets owned by
Australians abroad. Such assets would include residential, commercial and
industrial real estate, mining, manufacturing, tourist and agricultural enterprises,
etc.
• Net Portfolio Investment: refers to foreign ownership of equity securities (holdings of
shares up to 10% in a company) and debt securities such as government and private
sector bonds minus Australian owned equity and debt securities overseas.
• Net Other Investment: this includes assets minus liabilities of loans, currency
holdings, deposits and trade credits (deferred payments for exports and imports).
• Reserve Assets: this refers to Reserve Bank dealings in gold and foreign exchange
(currencies) and holdings of securities.
The value of all types of investment into Australia can be referred to as capital inflow
and investment flows out of Australia, can be termed capital outflow.
The Balance of Payments
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3AEC0 – Australian in the Global Economy
When all the sections are added together you get the Balance on the Capital and
Financial Account.
These flows should balance the flows on the Current Account. Therefore the Capital
and Financial Account is constantly in surplus and must offset the Balance on the
Current Account which is constantly in deficit. In that sense the BOP always
balances, eg: if CAD = -$30 billion then the C & FA = +$30 billion.
Any difference between the two components is removed by a convenient balancing
item called net errors and omissions.
SOME IMPORTANT OBSERVATIONS
1. Australia usually runs a deficit on the current account. To achieve a balance on
the BOP the capital & financial account must be in surplus to offset the CAD. In
other words Australia’s CAD is financed by attracting foreign investment and/or
borrowing from overseas, ie. increasing Australia’s external liabilities.
2. There is a long term relationship between the level of capital inflow and the size of
the CAD. Increasing our use of foreign savings increases the flow of income debits
overseas (returns on foreign direct investment and servicing foreign debt). These
income flows on investment in Australia are registered in the income section of the
current account. This component of the current account is in substantial deficit and
is the main contributor to the CAD. This is potentially a problem because foreign
lenders may see a rising CAD as increasing investment risk and so demand a higher
risk premium when investing in Australia (higher interest rate on loans and higher
returns on equity investments). This can act as a brake on Australia’s economic
growth.
STUDENT ACTIVITY 4.1NT ACTIVITY 7.2
1. Fill in the blanks.
Goods and services credits minus _______________________________________________
= Balance on ______________ and _________________
+ Income ________________ minus income debits + Net Current _________________
= Balance on __________________________________________________.
2. Examine the information on the balance of payments on the next page. Explain to
a partner in your own words what the information tells you about the balance of
payments and the concept of credits and debits. When you’ve finished this, write
about a half a page describing what you have just discussed.
The Balance of Payments
43
3AEC0 – Australian in the Global Economy
BOP summary
Current Account
Trade (X-M):
1. Goods (credits – debits)
2. Services (credits – debits)
Balance on Goods & Services
(when debits > credit the
result is a trade deficit)
Primary (Net) Income:
1. Credits: income from
overseas investments
2. Debits: payments to
foreign investors
Capital and Financial Account
Capital Account: (minor part
of the C&FA)
Income earned
on investments
is recorded in
the current
account under
income
Secondary Income: formerly
known as current transfers – a
minor part of the CA
Debits > Credits = income
deficit is the biggest part of
the CAD
Balance on the CA = Deficit
(CAD)
Financial Account: (major
part of the C&FA).
Investment (capital) flows in
& out of Aust.
1. Credits: inflow of funds
(for. Invest. in Australia
and Australian invest.
returning from overseas)
2. Debits: Australian invest.
overseas and for. invest.
pulling out of Australia
Credits > Debits = surplus on
the financial account to cover
the savings/invest gap
must balance
Balance on the C&FA =
Surplus
Remember money coming into Australia for any purpose is a credit and money going out
of Australia for any purpose is a debit
Credits:
1. Export receipts
2. Income receipts
3. Capital (invest) inflow
Total credits
Debits:
1. Import payments
2. Income payments
3. Capital outflow
Total debits
The Balance of Payments
When total credits > total debits the AUD appreciates
When total credits < total debits the AUD depreciates
A flexible exchange rate allows for the automatic adjustment
of the BOP to reduce imbalances . This leaves economic
policy (FP, MP & MER) free to target domestic economic
problems.
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3AEC0 – Australian in the Global Economy
THE CURRENT ACCOUNT DEFICIT
The CAD in 1980 = 1.7% of GDP. During the 1980s and 90s it increased
significantly, however, by the end of 2000-01 it had contracted to about 2.5% of GDP
due to the domestic economy slowing and continued strong export growth. In recent
times the CAD has risen above 6% of GDP, a result of sustained, strong economic
growth in an economy reaching maximum potential. It then dropped back to nearly
3% in 2008-09 thanks to the slowdown in domestic growth following the global
financial crisis (GFC). The CAD is cyclical, rising during an upswing and falling
during a downswing. It reaches its highest point in a boom and its lowest during a
trough or recession.
There is a close connection between the CAD and foreign debt. Each year’s CAD is
added onto foreign liabilities because, you will recall, the CAD must be balanced by a
Capital and Financial Account surplus (KFAS). Much of these liabilities are the
borrowings of both public and private sectors. The accumulation of these borrowings
is called Foreign Debt. The costs of servicing the foreign debt (interest payments) are
recorded as debits in the primary income part of the current account and therefore
contribute the size of the CAD.
Period
CAD as % of GDP
1990–91
1991–92
1992–93
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–00
-4.27
-3.17
-3.42
-3.45
-5.80
-4.13
-3.13
-3.84
-5.36
-4.80
Period
CAD as % of GDP
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007-08
2008-09
2009-10
-2.45
-2.54
-4.90
-5.48
-6.19
-5.60
-5.64
-6.49
-3.14
-4.58
(source: ABS: Australian Economic Indicators, 1350.0)
CAUSES OF THE CAD
• High levels of AD due to sustained economic growth in the 1990s and 2000s. Low
interest rates fuelled consumption and investment expenditure which pushed the
economy to the limits. Inflation has been averted so far by trade liberalisation and
the China effect which has kept prices down and imports and income debits up.
Australia’s need for investment capital has attracted strong capital inflow which has
added to the income deficit. Persistent trade deficits despite strong TOT and rising
export volumes, worsened the CAD prior to the GFC. Increased supply flowing from
strong mining investment should help boost export revenue even when prices come
back down to more sustainable levels so long as global growth remains positive.
• Low national savings mean financing the economy’s investment needs have
increased Australia’s dependence on foreign savings. This has increased Australia’s
external liabilities (foreign debt and foreign investment combined) and consequently
income debits (interest payments, profits, dividends and rent) have grown adding to
the CAD. Household savings have declined and external liabilities would be even
higher if not for government budget surpluses (public sector savings). Overall
national savings need to rise, especially from the household sector and the fact that
the public sector moved into deficit in response to the GFC (budget surpluses became
budget deficits).
The Balance of Payments
45
3AEC0 – Australian in the Global Economy
• More investment in infrastructure and human capital will increase the capacity and
productivity of the economy. This will allow the domestic economy to be more
competitive in the face of global competition and increase exports. Infrastructure
bottlenecks (eg. ports) and skills shortages reduced the economy’s capacity to
respond to strong global demand for Australian commodities. Supply did not keep up
with demand.
STUDENT ACTIVITY 4.2
1. Construct a line graph using the figures in the table above showing the CAD as a
percentage of GDP.
2. a) Explain in your own words two ways of explaining the CAD.
i) ________________________________________________________________________________
ii) ________________________________________________________________________________
b) The biggest contribution to the CAD comes from _________________________________
Explain why. ______________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
The Balance of Payments
46
3AEC0 – Australian in the Global Economy
3. Complete the following activity. Examine each component of the current account
then answer the following questions.
CURRENT ACCOUNT 1980-2010
Period
Current
Acc
Balance
Good &
Services
Balance
1980–81
-5,143
1981–82
-8,405
1982–83
Net
Goods
Goods
Credits
-2,848
-391
19,095
-5,886
-2,957
19,742
-6,178
-3,958
-734
1983–84
-7,079
-3,176
1984–85
-10,443
-4,927
1985–86
-14,538
-8,128
1986–87
-11,631
1987–88
-10,496
1988–89
Net
Services
Primary
Income
-19,486
-2,457
-2,346
51
-22,699
-2,929
-2,635
116
21,313
-22,047
-3,224
-2,279
59
271
24,049
-23,778
-3,447
-4,098
195
-183
30,200
-30,383
-4,744
-5,707
191
-3,424
32,603
-36,027
-4,704
-6,675
265
-4,732
-945
36,406
-37,351
-3,787
-7,577
678
-2,293
1,289
41,915
-40,626
-3,582
-8,943
740
-18,401
-7,042
-2,904
44,292
-47,196
-4,138
-12,245
886
1989–90
-23,219
-8,162
-2,243
49,027
-51,270
-5,919
-15,899
842
1990–91
-16,570
-853
3,031
52,685
-49,654
-3,884
-16,652
935
1991–92
-12,805
518
4,098
55,538
-51,440
-3,580
-13,852
529
1992–93
-14,123
-2,296
859
60,787
-59,928
-3,155
-12,184
357
1993–94
-15,214
-2,590
-269
64,514
-64,783
-2,321
-13,045
421
1994–95
-26,388
-10,091
-8,038
67,191
-75,229
-2,053
-16,561
264
1995–96
-19,943
-2,162
-1,365
76,309
-77,674
-797
-18,434
653
1996–97
-16,201
1,707
1,711
81,057
-79,346
-4
-18,393
485
1997–98
-22,349
-4,748
-3,376
88,583
-91,959
-1,372
-18,163
562
1998–99
-32,964
-14,367
-12,551
85,636
-98,187
-1,816
-19,046
449
1999–00
-31,920
-13,584
-12,933
97,685
-110,618
-651
-18,695
359
2000–01
-17,269
1,512
-105
120,201
-120,306
1,617
-19,273
492
2001–02
-18,742
608
-624
121,067
-121,691
1,232
-20,053
703
2002–03
-37,838
-16,320
-18,119
115,895
-134,014
1,799
-22,182
664
2003–04
-46,022
-22,038
-23,388
109,418
-132,806
1,350
-24,184
200
2004–05
-57,000
-23,291
-22,877
127,812
-150,689
-414
-33,722
13
2005–06
-54,075
-15,354
-15,476
154,035
-169,511
122
-37,884
-837
2006–07
-60,541
-13,231
-14,048
169,524
-183,572
817
-47,001
-309
2007–08
-73,980
-24,579
-21,894
182,952
-204,846
-2,685
-49,496
95
2008–09
-40,515
5,887
9,186
231,564
-222,378
-3,299
-45,407
-995
2009–10
-56,103
-5,965
-4,561
201,458
-206,019
-1,404
-49,224
(source: ABS: Australian Economic Indicators, December 2010, 1350.0)
-914
The Balance of Payments
Goods
Debits
Secondary
Income
47
3AEC0 – Australian in the Global Economy
1. Goods:
a) Suggest reasons for the weak export performance in 1998-99, 2001-02 to 2003-04
and 2009-10.
___________________________________________________________________________________
___________________________________________________________________________________
b) What do you notice about the import figures for 1982-83, 1990-91, 2003-04 and
2009-10? Suggest reasons for the change in imports in those years.
___________________________________________________________________________________
___________________________________________________________________________________
2. Primary Income:
Primary income contributes more than half of the CAD and in some years is actually
greater than the CAD itself. With a partner, discuss the possible reasons for this
significant contribution from primary income to the CAD.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
3. Current Account:
a) Explain the significant falls in the CAD in the years 1990-91, 1995-96, 2000-01
and 2008-09?
___________________________________________________________________________________
___________________________________________________________________________________
b) There seems to be a correlation between the CAD and the business cycle. Explain.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
The Balance of Payments
48
3AEC0 – Australian in the Global Economy
4. Examine the data in the Capital and Financial Account and answer the questions
following.
CAPITAL AND FINANCIAL ACCOUNT 1980-2010
Period
C& FA
Bal
Capital
Acc
Financial
Acc
Net
Direct
Inv
Direct
Direct
Investment Investment
Assets
Liabilities
Net
Portfolio
Financial
Other
Investment Derivatives Investment
1980–81
4,493
-136
4,629
1,930
-511
2,441
1,367
0
1981–82
8,343
-163
8,506
1,782
-670
2,452
1,498
0
1982–83
6,266
-184
6,450
488
-582
1,070
2,794
1983–84
5,546
-196
5,742
740
-1,263
2,003
1984–85
11,762
-215
11,977
873
-1,742
2,615
1985–86
15,900
-217
16,117
847
-2,759
1986–87
13,094
-196
13,290
4,187
1987–88
11,463
442
11,021
-2,773
1988–89
18,263
-234
18,497
6,756
1989–90
21,920
-231
22,151
1990–91
16,649
-205
16,854
1991–92
12,846
-234
1992–93
13,701
1993–94
15,724
1994–95
1995–96
Reserve
Assets
Net Errors &
Omissions
2,349
-1,016
650
6,590
-1,364
62
0
5,628
-2,461
-88
1,560
0
5,295
-1,853
1,533
4,611
0
4,973
1,520
-1,319
3,606
5,632
0
7,497
2,140
-1,362
-4,617
8,804
6,370
0
6,128
-3,394
-1,463
-11,565
8,792
7,059
0
10,659
-3,924
-967
-6,646
13,401
12,124
0
489
-871
138
6,455
-2,462
8,918
17,704
0
147
-2,156
1,299
8,407
4,996
3,411
6,380
0
3,476
-1,409
-80
13,080
4,041
-3,921
7,961
629
0
4,481
3,929
-41
-312
14,013
3,970
-5,185
9,155
6,865
0
-754
3,933
421
-308
16,032
2,707
-3,468
6,176
17,719
0
-3,357
-1,037
-511
27,928
-350
28,278
4,435
-3,836
8,271
21,005
0
868
1,971
-1,540
19,304
-368
19,672
4,964
-5,703
10,667
21,850
687
-7,012
-817
639
1996–97
17,082
-281
17,363
5,488
-6,273
11,761
15,772
1,089
217
-5,203
-882
1997–98
23,674
-292
23,966
3,718
-7,640
11,357
21,466
-4,178
2,502
458
-1,325
1998–99
32,514
-367
32,881
5,466
-4,848
10,314
8,061
3,348
16,401
-394
449
1999–00
31,733
-494
32,227
6,412
-5,471
11,883
13,670
595
14,173
-2,622
187
2000–01
17,301
-502
17,803
10,042
-17,106
27,148
11,765
27
4,849
-8,880
-32
2001–02
19,851
-363
20,214
-21
-22,313
22,292
9,792
-225
9,891
777
-1,109
2002–03
38,119
-329
38,448
8,747
-13,120
21,866
17,673
-1,036
18,684
-5,619
-281
2003–04
46,460
-223
46,683
-9,991
-27,039
17,048
83,218
-2,469
-18,949
-5,127
-438
2004–05
58,239
-104
58,343
53,804
48,022
5,782
1,477
1,630
9,554
-8,122
-1,239
2005–06
54,435
-141
54,576
-5,675
-29,750
24,074
64,937
-3,511
4,431
-5,605
-359
2006–07
61,153
281
60,872
11,507
-34,432
45,938
66,370
2,006
1,116
-20,127
-613
2007–08
72,572
-232
72,804
29,117
-27,291
56,407
-4,084
-7,043
10,523
44,292
1,407
2008–09
39,873
-611
40,484
17,665
-30,474
48,140
49,220
-3,726
-10,779
-11,896
642
2009–10
56,613
-132
56,745
17,398
-17,550
34,948
68,112
-5,951
-28,743
5,929
-510
(source: ABS: Australian Economic Indicators, December 2010, 1350.0)
a) In which year did net portfolio investment reach its peak? ___________
b) In which year did equity or direct investment in Australia reach its peak?
___________
c) Why did the balance on the capital and financial account drop so significantly in
2000-01 and 2008-09?
___________________________________________________________________________________
___________________________________________________________________________________
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3AEC0 – Australian in the Global Economy
d) From about 2000, there has been increase in Australian investment overseas in
general. How will this affect the BOP in future years.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
e) Explain the link between the C&FA balance and the Current Account balance.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
f) What happens to the value of the AUD if the balance on the C&FA is greater than
the CAD?
___________________________________________________________________________________
g) What happens to the value of the AUD if the balance on the C&FA is smaller than
the CAD?
___________________________________________________________________________________
h) How would these changes in the value of the AUD affect the outcome on the
current account? Explain in some detail.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
The Balance of Payments
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3AEC0 – Australian in the Global Economy
5. The following charts are derived from the current account and capital and
financial account tables. Examine them and answer the questions which follow.
Current Account Balance $millions
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
-10,000
1980–81
0
-20,000
Trend 1980-2000
-30,000
-40,000
-50,000
CAD means X + Y credits < M + Y debits
-60,000
Steeper trend
2000-2008. Why?
-70,000
-80,000
a)
Suggest reasons for the steeper trend in the CAD between 2000-08.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
Net Goods Balance $millions
15000
10000
5000
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
-5000
1980–81
0
-10000
-15000
-20000
-25000
-30000
The Balance of Payments
51
3AEC0 – Australian in the Global Economy
b)
Notice the trade balance shifts between surplus and deficit from 1980-81 to the
end of the 1990s then it changes. Describe the change and suggest reasons for
the change in the behaviour of net goods.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
c)
What happened in 2008-09?
___________________________________________________________________________________
___________________________________________________________________________________
d)
The period from 2001-02 to 2007-08 experienced persistent trade
surpluses/deficits (underline the correct word) yet during this time the terms of
trade (TOT) rose strongly (price of exports rose much faster that import prices).
Suggest reasons why this improvement in the TOT did not help Australia achieve
better trade balance results.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
Net Primary Income $millions
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
1980–81
0
-10,000
-20,000
-30,000
Remember income deficit
is Y debits > Y credits.
Note the trend change
-40,000
-50,000
Rising debits are due to
the steep rise in foreign
liabilities (debt and FDI)
-60,000
The Balance of Payments
52
3AEC0 – Australian in the Global Economy
e)
Notice the steeper rise in the income deficit after 2003-04? Explain what primary
income is, why the income account is always in deficit and why the acceleration?
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
Exports (dashed line) and Imports (solid line) $millions
250,000
200,000
150,000
Which are more prevalent, trade surpluses
or deficits particularly since 1997-98?
100,000
50,000
f)
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
1980–81
0
Suggest reasons for the rise in both exports and imports over the period in the
graph.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
The Balance of Payments
53
3AEC0 – Australian in the Global Economy
Net Services $millions
3,000
2,000
1,000
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
-1,000
1980–81
0
-2,000
-3,000
-4,000
-5,000
-6,000
-7,000
g) Between 1980/81 and 1994/95 the services account was in
_________________ (surplus or deficit).
h) Suggest reasons for the improved performance in the services account from
the late 1990s to 2006-07.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
Capital and Financial Account Balance $millions
80,000
70,000
60,000
50,000
If you flip this graph over (top to bottom) it
will fit neatly over the CAD graph. Explain
why to a partner.
40,000
30,000
20,000
10,000
The Balance of Payments
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
1980–81
0
54
3AEC0 – Australian in the Global Economy
Foreign Direct Investment in Australia $millions
60,000
50,000
Why the surge in foreign direct investment
after 2004-05?
40,000
30,000
20,000
10,000
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
1980–81
0
Net Portfolio Investment in Australia (foreign portfolio
investment in Australia minus Australian portfolio
investment overseas)
90,000
80,000
70,000
60,000
50,000
Notice the volatility after 2003-04.
Any thoughts as to why? Discuss
with a partner.
40,000
30,000
20,000
10,000
The Balance of Payments
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
1996–97
1995–96
1994–95
1993–94
1992–93
1991–92
1990–91
1989–90
1988–89
1987–88
1986–87
1985–86
1984–85
1983–84
1982–83
1981–82
-10,000
1980–81
0
55
3AEC0 – Australian in the Global Economy
6. Complete the following multiple choice questions.
i) Assume Australia’s CAD increases significantly causing some alarm in financial
markets. Which of the following would you most expect to occur?
a) interest rates to rise.
b) the capital and financial account surplus to increase.
c) the income deficit to increase in the coming period.
d) all of the above.
ii) A deficit on a country’s current account
a) can cause an increase in the country’s level of foreign debt.
b) increases market pressures for an appreciation of the country’s currency.
c) decreases if the country’s average propensity to consume increases.
d) will be made worse by a rise in income credits.
iii) A consistently unfavourable component in Australia’s BOP has been
a) net services.
b) net goods.
c) net income.
d) net current transfers.
iv) If a country has a persistent current account surplus such as Japan, it follows
that
a) its consumers are being denied access to foreign goods.
b) foreign currency reserves will be declining.
c) exporters are gaining excessive profits.
d) there would be good arguments for protective barriers against imports.
v) Concern about the size of the CAD in the past led to interest rates being raised.
This was calculated to
a) slow down investment.
b) take the pressure off wages in sectors where shortages are occurring.
c) reduce the demand for imports.
d) raise the demand for exports.
vi) The overseas transactions of a certain economy are as follows:
$ millions
$ millions
X of goods
40
M of goods
51
X of services
8
M of services
10
Interest & dividend credits
5
Interest & dividend debits
2
Transfer credits
3
Transfer debits
3
The current account of the BOP will show a
a) deficit of $6m.
b) surplus of $10m.
c) surplus of $11m.
d) deficit of $10m.
The Balance of Payments
56
3AEC0 – Australian in the Global Economy
vii) Examine the table below showing current account balances for a selection of
countries in late 2005. Over time you would expect:
Countries
Australia
Britain
China
France
Germany
Japan
Spain
United States
Current Acc Balance $b
-43.1
-44.0
+68.7
-22.6
+110.5
+166.0
-72.6
-717.0
a) Germany, China and Japan to experience appreciating currencies and
faster growth.
b) Australia, Britain, France and the US to experience appreciating
currencies and slower growth.
c) surplus countries to experience depreciating currencies and slower growth.
d) deficit countries to experience depreciating currencies and faster growth.
viii) Broadly speaking, foreign investment movements in and out of Australia cover
transactions which:
a) increase or decrease the liabilities of residents to non-residents.
b) increase or decrease Australia’s foreign financial assets.
c) cause resources to be provided without something of economic value being
received.
d) are services rendered by Australian residents to non-residents.
ix) Over the last two decades Australia has experienced a rapidly growing CAD in
spite of goods surpluses in some years. This has been due to
a) growing external debt.
b) growing private fixed capital investment.
c) a declining $A.
d) none of the above.
x) In the Capital and Financial Account, direct investment refers to:
a) the purchase of financial assets in Australia.
b) the purchase of physical assets in Australia.
c) the purchase of government securities in Australia.
d) purchasing shares on the Australian stock exchange but less than 10% in
any one company.
xi) Which of the following would you most likely associate with strong economic
growth in Australia?
a) A rise in goods credits.
b) A fall in net income.
c) Rising transfers.
d) Increasing goods debits.
xii) International trade is mainly due to differences in comparative costs between
countries. This refers to
a) differences between the prices of exports and imports.
b) relative real wage rates in different countries.
c) the absolute advantage different countries have in different products.
d) the different opportunity costs of producing goods in different countries.
The Balance of Payments
57
3AEC0 – Australian in the Global Economy
A SUSTAINABLE CAD/BOP POSITION
Government economic policies are aimed at achieving internal balance, ie keeping
inflation and unemployment to acceptable levels. The state of the balance of
payments is not the target of economic policy. With a floating (flexible) exchange rate,
the BOP is left to adjust all by itself.
Good government policies should improve the productivity and therefore
competitiveness of the economy. This would automatically have a positive effect on
the BOP. Improved competitiveness would result in:
(i) more exports and import-replacement.
(ii) higher income and therefore higher savings reducing our dependence on foreign
savings.
(iii) a more diversified economy reducing our dependence on commodity exports with
more ETM and service exports - more value adding.
Good macroeconomic and microeconomic policies will improve the
performance of the Australian economy.
MACROECONOMIC POLICIES
• There must be a balanced use of Fiscal and Monetary Policies to restrain growth in
AD so it doesn’t exceed growth in the productive side of the economy (AS) and cause
inflation.
MICROECONOMIC REFORMS
• MER is aimed at increasing productivity and competition by improving the
efficiency of the private and public sectors. Much has been achieved but the reform
process must go on.
• Key areas of reform to date include:
o reduced tariffs → more competition achieved → more efficient domestic
industries → more international competitiveness → lower prices  exports.
o workplace reform → enterprise bargaining, multi-skilling, flexible work
practices, award restructuring → have reduced cost pressures → less
inflationary pressure → competitiveness ↑  exports.
o privatisation, deregulation and corporatisation of public enterprises and
utilities eg. Qantas, Commonwealth Bank, telecommunications, airlines,
transport, power - lower input costs and more competition → lower consumer
prices → higher real incomes and faster sustainable growth and job creation.
o deregulation of financial markets → more efficient and competitive capital
market → lower business and household borrowing costs → more competitive
economy  international competitiveness.
o incentives to encourage saving eg. Further tax reform & compulsory
superannuation. More national saving  less borrowing overseas  income
debits down on the current account.
CONCLUSION
• Greater efficiency → Australia gets more output from existing resources (higher
productivity) → more efficient allocation of investment funds → higher international
credit rating for Australia → lower interest rates on debt → positive for CAD.
• Macroeconomic policies keep domestic spending from being excessive. However,
these must be complemented by effective microeconomic policy otherwise the
economy will progress very slowly with unacceptably high UE. Both policy areas
The Balance of Payments
58
3AEC0 – Australian in the Global Economy
lower inflation which improves competitiveness in an increasingly competitive global
environment (globalisation) → CAD and foreign debt servicing capacity improves.
• There is a need to deal with political and social problems which arise with rapid
economic development eg. National consensus is needed on environmental problems
caused by economic development associated with forestry, mining and rural
industries, the job losses in industries which are vulnerable to globalisation
(structural UE) and equity issues (worsening income disparities) caused by the
release of market forces in the labour market and in general.
STUDENT ACTIVITY 4.3
Australian economic policy focuses on internal balance not external balance. Working
with a partner, explain this policy focus.
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
The Balance of Payments
59