Australia’s Balance of Payments

Current Account: shows the receipts &

Capital Account: records the borrowing,
payments for trade in G&S, transfer
lending, sales and purchases of assets
payments, income flows between Australia
between Australia and the world
and the world; non-reversible transactions

Net goods: difference between payments for Capital transfers: tied aid; debt forgiveness
exports and imports

Net services: services Australia sells = credit, Non-produced, non-financial assets:

services Australia buys = debit; transport, intellectual property rights; franchises
travel, tourism (bought rights to build a MacDonald’s)

BOGS: calculated by adding Net Goods and Net Financial Account: transactions in foreign
Services; often in deficit —> imports financial assets and liabilities

Net primary income: earnings on investments;
payments on foreign investment; dividend
payments to foreign investors = debit; to
Australians = credit; largest contributor to
CAD; linked to financial account
Net secondary income: non-market transfers,
i.e. when product or financial resources
provided without a specific good or service
provided in return, e.g. insurance claims,
workers’ remittances; untied aid; pensions
from foreign governments
Direct investment: FDI flows; establish a
company; previously super popular, now
replaced with portfolio investment
Portfolio investment: short-term, small-scale
purchase of land, shares, securities that are
easily sold, largest item on CAF
Financial derivatives: swaps, options, futures;
important role in global financial markets
Reserve assets: monetary gold (held by RBA);
special drawing rights; reserve position in
IMF; foreign exchange
Other: trade credits, loans

- links between key BOP categories:

1. CAD and CAF are equal and opposite, i.e. add to zero; floating of AUD ensures this balance;
2. a CAF surplus = Net Primary Income deficit; foreign financial inflows earn returns, recorded as
debits on Net Primary Income account;
3. low national savings means foreign funds must be borrowed, causing a high CAD
- trends in the size, composition of BOP: first emerged as a major economic concern in the
1980s; averaged 1.1% of GDP in 1970s —> 4.3% in 1980s; remained between 3-6% since
1980s, averaging 4.1% in 1990s; record level of 6.7% in 2007-08; lowest 3.2% in 2010-11;
international competitiveness increases if ToT improves; demand for cheaper exports
increases; ToT has doubled since 2007; sustained increase until 2011 (ignoring a drop in
2009 —> GFC); June 2014 figures 20% below 2011 peak; further falls expected; international
borrowing historically high because of persistent savings-investment gap
- effects of these trends on the BOP:
BOGS (cyclical causes):
1. exchange rates: a depreciation will result in an increase in exports and a decrease in imports,
as Australian goods are cheaper for overseas buyers and imports are more expensive for us; an
appreciation will result in a decrease in exports and an increase in imports
2. terms of trade: if ToT improves, export prices will rise relative to import prices, which is good
for the BOGS and will improve the CAD; if ToT worsens, export prices will fall relative to import
prices, which will worsen the CAD
3. domestic economic growth: increased growth leads to greater spending on imports, which
will worsen the CAD; a decline in growth will lead to less spending on imports, which will
actually improve the CAD
4. international business cycle: an upturn in the international business cycle will increase
foreign demand for Australian exports, which will improve the CAD; a downturn will decrease
demand for Australia’s exports, which will worsen the CAD
BOGS (structural causes):
1. structure of Australia’s export base: a narrow export base reliant on commodities increases
our vulnerability to price changes and could damage our international competitiveness,
worsening the CAD
2. capacity constraints: transport infrastructure and skills shortages have physically limited the
volume of goods Australia can export, worsening the CAD
3. upturn in prices for Australia’s agricultural exports: a growing global population has
increased demand for these exports, pushing prices up; rising incomes and natural disasters
have also contributed to an increase in prices for agricultural inputs; this benefits the CAD as a
large proportion of our exports are agricultural
4. need to diversify into ETMs/services sector: this will widen Australia’s export base and
improve our international competitiveness, which will improve the CAD
Net Primary Income Account (cyclical causes):
1. net servicing costs owed to overseas investors: these payments are subject to the valuation
effect —> an appreciation of the AUD makes payments cheaper and improves the CAD, while a
depreciation of the AUD makes exports more expensive and worsens the CAD
2. changes in domestic/global interest rates: a lower rate will translate to lower debt payments,
improving the CAD; a higher rate will increase debt payments, worsening the CAD
3. performance of domestic business cycle: if the business cycle is strong, investors will be
more attracted to investing in Australia, who will then have to pay more interest and debt
payments, worsening the CAD; during a downturn, investors will take their money out of
Australia to invest elsewhere, limiting our debt and equity obligations and improving the CAD
Net Primary Income Account (structural causes):
1. savings-investment gap: Australia has historically low savings but relies on minerals/
resources exports which require high levels of investment; the gap is then filled by funds
borrowed from overseas, which creates servicing obligations