Economics - International Trade

Exports

Australian made goods and services that are purchased by those not based in Australia, including foreign households, governments, businesses or other groups

Imports

Foreign produced goods and services that are purchased by Australian households, businesses, governments and other entities

Net Foreign Debt

The indicator of Australia's net debt obligation to the rest of the world and is the value of all money owed to foreigners by Australians, minus the amount owed to Australians by foreigners.

Net Foreign Equity

The total value of Australian equity owned by foreigner investors less the total value of foreign equity owned by Australians.

Human Capital Flows

The export and import of labour services, individuals from one country choosing to work in other countries through temporary migration. In some cases, foreign Human Capital may be used to fill gaps in the labour market with skilled overseas workers

International Transfers

The provision of funds to another country, without the expectation of goods and services in return.

This funding may be done to address causes of poverty, ensure security in neighbouring states to improve a state's own national security, or to aid developing states in moving towards economic self-sufficiency to develop long term trading partners.

What Australia Trades

Mainly primary, land (raw) resources such as iron ore, natural gas, coal and gold, due to Australia's high resource endowment. As Australia is a developed state with high wages, manufacturing in Australia is expensive and difficult to compete with other economies with lower wages

Credits and Debits

When money enters the economy in return for exported goods and services, it is referred to as a credit, when it leaves in return for imported goods and services, it is referred to as a debit

Trade Balance (Balance of Trade/ Balance on Goods and Services)

The value of exports minus imports (credits less debits) in a given period, for both goods and services.

Balance of Payments

Records all financial transactions involving the movement of money across borders, not just money in and out for trade of goods and services.

Current Account

Balance of incoming revenues (credits) and outgoing expenditure (debits) for a country on items that are non reversible (no future obligations).

Includes: Net Goods (Balance on Goods), Net Services (BoS), Net Primary Incomes, and Net Secondary Incomes)

Net Goods (Balance on Merchandise Trade) (Balance on Goods)

Value of all receipts from the sale of merchandise exports (goods), minus payments for the purchase of merchandise exports)

e.g. sale of coal by Australian mine to the U.S (Cr)

Purchase of TV from China (Dr)

Net Services (Balance of Services)

Value of all receipts from the sale of service exports minus payments for the purchase of service imports

e.g. Australian tourist spends money on holiday in New Zealand (Dr)

Student from Taiwan enrols at Melbourne university (Cr)

Net Primary Incomes

Value of all receipts of income resulting from Australians holding foreign assets minus all payments of incomes to foreigners who hold Australian based assets

e.g. Australian investor receives dividends from shares on the foreign market (Cr)

Payment of New Zealand worker for labour (Dr)

Net Secondary Incomes

One way movements of money where nothing is expected in return - a transfer of money from one country to another. The value of all receipts minus payments of this type

e.g. Australian aid to the Philippines following a natural disaster (Dr)

Australian resident receiving an overseas pension (Cr)

Capital and Financial Account

Balance of incoming revenues (credits) and outgoing expenditure (debits) for a country on items that are reversible

Financial Account

Essentially used to finance current account deficit in the form of Debt and equities (sale of Australian and purchase of overseas assets)

Net Direct Investment + Net Portfolio Investment + Financial Derivatives + Net Reserve Assets + Other investments = Balance on Financial Account

Capital Account

Net Capital Transfers + Net acquisition of non produced, non financial assets.

(capital account is relatively insignificant)

Net Direct Investment vs Net Portfolio Investment

Direct: over 10% foreign ownership of assets

Portfolio: Less than 10% foreign ownership of assets

Net Reserve Assets

Transactions by the RBA in gold, currencies etc

Composition of Net Foreign Debt

25% public (Government)

75% private

35% short term

65% long term

Debt is not a bad thing, unless it can't be repaid. The higher the debt, the higher the interest repayments. Interest on debt is recorded as Net Income in the Current Account

Net Foreign Liabilities

Commonly referred to as the international investment position, Net Foreign Liabilities= Net Foreign Debt + Net Foreign Equities

Reasons for trade

Australia's prosperity depends on trade with other economies and the state of the world economy.

International trade occurs to improve the material and non material living standards of citizens in involved countries.

Benefits of goods and services trade for living standards

1. Imports allow Australians to access goods and services they may not have otherwise been able to access, increasing overall enjoyment of life

2. Lower prices of goods, due to cheaper overseas manufacturing as a result of high Australian wage, and increased competition

3. Greater access to resources for Australian businesses.

4. Ability to sell to a broader market for Australian firms

5. Increased competition encourages greater production efficiency.

6. Income from exports may be spent in the Australian economy, creating jobs in different sectors and growing the economy through encouraging economic circular flow

Benefits of international capital flows for living standards

1. Increased borrowing by Australian firms helps the economy expand, increasing employment opportunities.

2. Overseas investment increases activity that otherwise would not be possible, such as nation building projects, increasing employment opportunities

3. Australian institutions who lend to non residents generate income through interest on repayments

4. Australians who invest overseas generate incomes through dividends.

Competitive Advantage

Refers to the advantage a country has when they are the largest producers of a certain good or service

Economies of Scale

Where a business may experience cheaper production costs per unit with the higher output it produces, due to costs of production being divided between fixed and variable costs, the ability to spread fixed costs from production will decrease the cost price per unit

Lower prices due to economies of scale increase living standards for consumers.

Benefits of Human Capital Flows

Access to skilled migrants helps in a number of ways:

Eases capacity constraints or skills shortages

Reduces costs of production for businesses

Cheaper and higher quality goods and services may be produced in Australia, as it improves human capital

Brain gain

Trade protection

Involves efforts by the Government to protect local import-competing producers from the threat of imports and involves the imposition of trade barriers such as:

Tariffs

Quotas

Subsidies

Parallel Import Restrictions

Local Content Rules

Preferential Treatment of local producers

Non tariff customs barriers and administrative restrictions