Chapter 3 - Balance of Payments

balance of payments

a record of all the economic transactions between Australian residents and non residents in 1 year

current account

captures netflow of money thats from Aus engagement in international trade

capital and financial accounts

captures Aus net change in ownership of assets and liabilities

3 main components of current account

trade balance(BOGS), primary income balance(NPY), secondary income balance(NSY)

trade balance(BOGS)

• value of g/s that Aus residents export minus those they import, main source of fluctuation in current account

• WHY FLUCTUATE - aus mainly export comms which price is based on world demand and supply

primary income balance(NPY)

• income Aus residents earn from minus that they pay to the rest of world from working & financial investments

• WHY NEGATIVE: Aus is a capital importing nation, but when ROI fall means Aus need pay the FI more for investing, NPY worsen

secondary income balance(NSY)

• transations between Aus residents and the rest of the world where one party provide smthg without receiving anthg back(eg:emergency food/aid)

• donation for relief purposes

2 components of capital account

capital transfers and disposal of non produced, non financial assets

capital transfers

transactions where 1 party transferred ownership of smthg to another party without receiving anything specific in return

eg: forgiveness of debt

disposal of non produced, non financial assets

transactions that involve entries for the purchase & sale of non produced, non financial assets - intangible assets

(eg:brand names, copyright)

5 components of financial account

direct investment, portfolio investment, financial derivative, reserve assets, other investments

direct investment

• transactions related to long term capital investments(more than 10% share)

• machinery, buildings

portfolio investment

purchase of equity in business(less than 10% share)

shares, debenture

financial derivatives

purchase/sale of financial derivatives

reserve assets

purchase/sales of reserve assets held by the reserve bank

other investment

transactions that dont fit into any category

deposits, trade credit

balance of current account

BOGS + NPY + NSY

balance of capital & financial accounts

capital account balance + financial account balance

double entry

• 2 offsetting entries

• EG: current account credit 100, financial account debit 100

net errors and omissions(NEO)

• statistical adjustments to allow capital and financial account and current account to total under floating exchange rate system

• CA+C&FA+NEO=0

linkages between CA and C&FA

• direct investment dividend payment

• foreign debt and interest payment

• FDI and imports

direct investment and dividend payment

• direct investment inflow, direct investment improve, capital account improve, C.P, capital and financial account improve

• BUT dividend payment increase, NPY worsen due to debit, C.P, current account worsen

foreign debt and interest payment

• foreign debt increase, portfolio investment improve, C.P, capital and financial account improve

• interest payment increase, NPY worsen due to debit, C.P, current account worsen

FDI and imports

• FDI improve, direct investment improve, C.P, capital and financial account improve

• imports of capital goods increase, BOGS worsen, C.P, current account worsen

cyclical reason for CAD

• exchange rate

• domestic GDP

• interest rate

exchange rate

• if ER fall, since Aus mainly export comm with PED<1, demand unchanged, thus export revenue fall, BOGS worsen, C.P, CAD

• M of PED<1 items unchanged but price increase, BOGS worsen

• ER fall lead to higher debt servicing cost, NPY worsen

domestic GDP

• if aus GDP fall, national income fall, thus lower HH income, lower DD for luxury M, BOGS improve

• GDP fall lead to business contraction, business receive less profits, dont need pay so much dividend, NPY improve

interest rate

• if IR fall, COB fall, take up loan, higher DD for luxury M, BOGS worsen

• IR fall, discourage F.I, interest payment fall, NPY improve

structural reason for CAD

• savings investment gap

• export base

• capacity constraints

savings investment gap

• aus small country with savings less than investment req to stimulate economic growth

• aus look for FI, but if ROI increase(mean aus have to pay more to investor), NPY worsen, C.P, CAD

export base

• aus mainly export comms, if comm price fluctuate, X revenue fluctuate, BOGS fluctuate, C.P, CAD worsen

capacity constraints

• aus limited supplies at port, lead time high

• exports limited, BOGS worsen, C.P, CAD

trends

• 2014-2016(FALL)

• 2019-2021(RISE)

• 2021-2022(FALL)

• 2022-2024(RISE)

2014-2016 FALL

• BOGS worsen due to fall in demand of comms from asia and slow china E.G

• NPY worsen as ROI increased from mining industry, aus need pay mire to investors

2019-2021(RISE)

• BOGS improve due to high price of iron ore and fuel due to supply chain disruptions, imports of travel plunged due to border closure

• NPY improve due to fall in cash rate(1 to 0.25%)

2021-2022(FALL)

• BOGS worsen due to fall in exports of non rural goods bcs key metal importers cut production, rise in imports of manufacturing goods

• NPY worsen due to rise in income to non residents, rise in interest

2022-2024(RISE)

• BOGS improve due to high price of comms, fall in imports of fuel

• NPY improve due to increased aus investment abroad(get more ROI), fall in net foreign liabilities