Australia's Balance of Payments, Trade, and Exchange Rates (Vocabulary Flashcards)

A comprehensive set of vocabulary flashcards covering trade basics, balance of payments, financial flows, exchange rates, and key policies from the lecture notes.

Trade

Exports and imports; the exchange of goods and services between nations; Australia also imports of overseas technologies.

International trade

Exchange of goods and services between countries.

Direction of trade

The destination of exports (where exports go) and sources of imports (where imports come from).

Composition of trade

Pattern of goods and services traded; the types of products exported and imported.

Value of trade

Volume traded multiplied by the price; used to measure the overall value of trade.

Terms of Trade (TOT)

The ratio of export prices to import prices (export price index divided by import price index); reflects how much imports a country can finance with its export earnings.

TOT improvement

Export prices rise faster than import prices or export prices fall less quickly than import prices.

TOT deterioration

Export prices rise less quickly than import prices or export prices fall more quickly than import prices.

TOT formula (example 1)

If export index 120 and import index 105: TOT = (120/105) × 100 = 114.2.

TOT formula (example 2)

If export index 110 and import index 115: TOT = (110/115) × 100 = 95.6.

International financial flows

Movement of capital, money, and currencies between countries for investment or business activity.

Foreign Direct Investment (FDI)

Investment by a corporation/government in another country with controlling interest (usually at least 10%).

Development Aid

Financial assistance in the form of grants (no repayment) or loans with low interest.

Debt Repayment

Repayment of a loan, typically with interest, over a set period.

Portfolio Investment

Investment in overseas stocks, bonds, or assets without seeking control (usually <10% of the asset).

Loans

Money borrowed and expected to be repaid with interest.

Remittances

Money migrants send home to their source countries.

Financial Derivatives

Contracts whose value is based on an underlying asset (e.g., swaps, futures, options).

Foreign Debt

Borrowing from overseas with an obligation to pay interest and repay principal.

Gross Foreign Debt

Total debt Australians borrow from non-residents.

Net Foreign Debt

Gross foreign debt minus the total lending by Australians to non-residents.

Example of net foreign debt

If gross debt is $2 trillion and Australians lent $0.5 trillion, net foreign debt = $1.5 trillion.

Public sector debt (external sovereign debt)

Money owed by government to overseas parties; about 40% of net foreign debt.

Private sector debt

Money owed by financial institutions and other businesses to overseas parties; about 60% of net foreign debt.

Total Foreign Equity

Total value of Australia’s domestic assets owned by foreigners.

Net Foreign Equity

Total value of Australia’s domestic assets owned by foreigners minus value of overseas assets owned by Australians.

Foreign Liabilities

Australia’s total financial obligations to foreigners (foreign debt plus foreign equity).

Total Foreign Liabilities

Sum of gross foreign debt and value of foreign-owned Australian assets; a capital inflow.

Total Foreign Assets

Sum of Australians’ lending to foreigners and overseas assets owned by Australians; a capital outflow.

Net Foreign Liabilities

Total Foreign Liabilities minus Total Foreign Assets (also equals Net Foreign Debt plus Net Foreign Equity).

KAFA

Capital and Financial Account; records reversible financial transactions between Australia and the world (usually in surplus).

Capital Account

Transfers of non-produced, non-financial assets (intellectual property rights, patents, copyrights, royalties).

Financial Account

Records reversible financial flows including borrowing, lending, and asset purchases.

Errors and Omissions

A component under KAFA to balance the balance of payments due to measurement errors or omissions.

Balance of Payments (BOP)

A record of all transactions between residents of a country and the rest of the world over a period; includes CA and KAFA.

Goods balance (BOGS)

Goods credits minus goods debits within the current account.

Service balance

Service credits minus service debits within the current account.

Current Account (CA)

Records all non-reversible transactions between Australia and the world; includes BOGS, net primary income, and net secondary income.

Credits

Inflows of money; payments received.

Debits

Outflows of money; payments made.

Net Primary Income (NPI)

Income flows from factors of production (land, labor, capital); credits include lending income and Australian asset income; debits include borrowing and income paid to foreigners.

Net Secondary Income (NSI)

Non-market, one-sided transfers (grants, remittances, insurance claims, foreign aid).

Net Primary Income deficit

When net primary income is negative (outflows exceed inflows) typically in deficit.

Foreign Investment (KAFA context)

Foreign borrowing, lending and asset purchases recorded in KAFA.

Capital and Financial Account components

Capital Account (non-produced/non-financial transfers) and Financial Account (investments, loans, assets).

Foreign Derivatives (in KAFA context)

Contracts whose value is based on underlying financial assets; part of financial instruments in KAFA.

Reserve assets

Central bank-held foreign assets (foreign exchange, gold, SDRs) used to finance payment imbalances.

KAFA credit

Money flowing into Australia on KAFA (foreign lending or investment).

KAFA debit

Money flowing out of Australia on KAFA (investing or lending overseas).

Current account deficit (CAD)

When CA outflows exceed inflows; need for greater KAFA inflows.

GDP equation reference (growth impact)

GDP = C + I + G + (X − M); higher imports (M) can reduce growth.

Debt trap cycle

Cycle where CAD increases KAFA inflows, raising foreign liabilities and servicing costs, potentially worsening CAD further.

International competitiveness

A country's ability to compete internationally; affected by inflation, wages, productivity, and exchange rates.

Inflation impact on competitiveness

Higher inflation raises domestic costs, lowering competitiveness; lower inflation can boost competitiveness.

Wages and labour costs impact

Higher wages raise prices, reducing competitiveness; lower wages can improve competitiveness.

Productivity

Higher productivity increases competitiveness and efficiency.

Terms of Trade (TOT) effect on BOGS

Higher TOT can raise export revenues, potentially reducing the BOGS deficit.

Globalisation and TOT

Globalisation can lead to cheaper imports and rising TOT due to commodity prices.

Net Primary Income deficit trends

A key driver of the current account deficit; influenced by commodity booms and foreign investment.

Savings-Investment Gap

Australia’s domestic savings are insufficient to fund investment, leading to reliance on overseas funds.

Interest rates and NPI

Lower global rates can reduce interest payments and improve NPI balance.

Sustainability of CAD (4% of GDP)

A CAD above about 4% of GDP is generally considered high and potentially unsustainable.

Pitchford Thesis

CAD matters less if driven by private sector savings and investment decisions; can fund productive capacity.

Exact exchange rate definition

The price of one currency in terms of another currency or a basket of currencies.

Bilateral rate

Value of a currency relative to one specific other currency (e.g., AUD vs USD).

Indirect quotation

How many units of foreign currency can be bought with 1 AUD.

Direct quotation

How many AUD are needed to buy 1 unit of foreign currency.

Trade Weighted Index (TWI)

An index measuring the AUD against a basket of major trading partners to assess competitiveness.

Floating exchange rate (clean)

No government intervention; exchange rate determined purely by market forces.

Floating exchange rate (dirty)

Some government intervention to smooth fluctuations, as needed.

Managed exchange rate

Central bank intervention within a target band to keep the rate within a range.

Fixed/pegged exchange rate

Central bank maintains a fixed value relative to another currency or basket; requires ongoing intervention.

Appreciation

Increase in the value of a currency; demand rises or supply falls.

Depreciation

Decrease in the value of a currency; demand falls or supply rises.

Revaluation

Central bank increases the value of a fixed currency within a fixed regime.

Devaluation

Central bank decreases the value of a fixed currency within a fixed regime.

Jawboning

Public statements by officials intended to influence the forex market without policy changes.

Unsterilized intervention

Direct intervention in the forex market that changes the money supply and affects interest rates.

Sterilized intervention

Intervention paired with offsetting domestic financial operations to keep the money supply unchanged.

ESAs (Exchange Settlement Accounts)

Banks' accounts at the central bank used to settle payments; liquidity management in interventions.

RBA intervention rationale

To prevent excessive depreciation/appreciation, reduce volatility, and damp speculative pressure.

Free Trade Agreement (FTA)

Trade agreement between two or more countries reducing tariffs and barriers.

Multilateral vs Bilateral agreements

Multilateral involves many countries (e.g., CPTPP, ASEAN+NZ); Bilateral is between two nations (e.g., CHAFTA, KAFTA).

AANZFTA

ASEAN–Australia–New Zealand Free Trade Agreement; regional tariff reductions and cooperation.

CPTPP

Comprehensive and Progressive Agreement for Trans-Pacific Partnership; a major regional FTA.

CHAFTA

China–Australia Free Trade Agreement; tariff reductions and broader market access.

KAFTA

Korea–Australia Free Trade Agreement; tariff reductions and market access improvements.

ASEAN

Association of Southeast Asian Nations; major regional trading bloc for Australia.