Exam Definitions

Define the Balance of Payments

The Balance of Payments (BOP) refers to a summary of Australia’s financial transactions with the global economy, and consists of the current account (CA) and the capital account and financial account (KAFA).

What is the Current Account

Australia’s current account records non-refundable, non-reversible transactions of the balance on goods and services (BOGS), net primary income (NPY), and net secondary income (NSY) between Australia and the rest of the world.

What is the Capital and Financial Account

The KAFA records the reversible, transactions between Australia and the global economy, including the borrowing, lending, sales and purchases of assets.

What is a credit transaction

A credit transaction is a financial inflow INTO Australia from another economy

What is a debit transaction

A debit transaction is a financial OUTFLOW from Australia to another economy

What is double entry bookkeeping and how does it affect the BOP

Double entry bookkeeping is the accounting principle by which every international transaction between Australia and the global economy generates two offsetting entries.

What are the different components of the BOP

The CA, KAFA, and Net errors and omissions

What are the sub-accounts under the CA

Balance on Goods and Services (BOGS), Net primary income (NPY), and Net secondary income (NSY)

What is the BOGS account

The balance on goods and services calculates the net trade balance by finding the difference between a nation's total export earnings and import spending

What is the NPY account

The NPY records returns on the four factors of production (LLCE), which are rent, wages, interest/dividends, and profit.

What is the NSY account

The NSY records transactions derived from sources of primary income e.g. workers’ remittance is secondary to wages. This account also records ‘unconditional’ foreign loans, such as foreign aid.

What are the sub-accounts under the KA

Net acquisition/disposal of non-produced/non-financial assets, and then the capital transfers sub-account.

What is the Net acquisition/disposal of non-produced/non-financial assets sub account

This sub account records the purchase or sale of intellectual property such as patents, copyrights, trademarks, and franchises.

What is the current transfers sub account

The current transfers sub-account records the movement of capital in the form of ‘conditional’ foreign aid grants and debt forgiveness. This includes foreign loans that are required to be paid back.

The Cash Rate

The cash rate refers to the overnight interest rate on unsecured loans between banks.

What is the TWI

The trade weighted index (TWI) refers to a weighted measure of the value of the Australian dollar(AUD) against a basket of foreign currencies consisting of Australia's major trading partners. The TWI is weighted according to each partner’s share of Australia’s total two way trade and expressed relative to a base period (May 1970 for Australia - 100 TWI.)