Balance of Payments TCE Economics
Terms in this set (14)
Balance of Payments
A record of a country's transactions with the rest of the world.
A summary of non-reversible transactions such as trade in goods and services, income on investments and transfers.
Capital and Financial Accounts
A summary of reversible transactions such as sale of assets (which can be re-sold) and loans (which must be repaid)
Balance of Goods and Services
AKA trade balance, the BOGS is a summary of credits (exports) and debits (imports) of both goods and services. In Australia this account is often in deficit but is occasionally in surplus
Net Primary Income Account
This account measures the overall balance on income earned from foreign investments and income due to foreign investors. Income may be interest on loans or dividends from profits. In Australia this account has been in deficit since the 1970s. A major component of the Current Account.
Net Secondary Income Account
A summary of transfers. Transfers are unearned, such as money sent to overseas relatives or pensions received from another country. In Australia this account is relatively small and unimportant.
Current Account Deficit (CAD)
When the BoGS and net primary and secondary income accounts add up to a negative amount. Note that some of the components of the current account may be in surplus. Australia's current account has been in deficit so persistently that we refer to Australia's CAD rather than our current acc. balance.
Links between the BoP elements
A deficit on the current account must be funded by a surplus on the capital/financial accounts. This may be in the form of asset sales to foreigners or foreign loans, which create a future foreign liability. This liability will be recorded in a future net primary income account, further increasing the CAD unless other elements (such as BOGS) are in surplus.
Deficit and debt
A deficit measures the difference between inflows and outflows of money over a given time period. It may be financed by previous surpluses or by selling assets or borrowing from overseas. A foreign debt will result from an accumulation of previous borrowings and related interest liabilities.
Consequences of a high CAD
• Growth of foreign liabilities- lenders may be reluctant to lend if liabilities too high
• Increased servicing costs on foreign debts
• Increase volatility for exchange rate- risk of sharp depreciation if foreign exchange inflows reduce
•Restraint on economic growth (if govt uses contractionary policies to reduce demand for imports)
Problems leading to a high CAD
An excess of imports over exports over a sustained period of time. Could be caused by a lack of international competitiveness. Another problem could be insufficient domestic savings, requiring foreign investment for development projects.
Impact on exhange rates
A high CAD will tend to result in a depreciation if this results in foreign investors reducing their demand for $A. Impact could be sudden and large if investor sentiment changes quickly.
Methods to address CAD
Improve international competitiveness through microeconomic reform, infrastructure, education and training. While the government can do other things to address a CAD (contractionary macro policies), these have negative domestic consequences and are not part of TASC Econs course.
CAD as a % of GDP
While a net primary income deficit can result in a widening CAD in $ terms, the more important measure is the CAD as a proportion of GDP, which better represents a country's capacity to service foreign liabilities
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