Trends in Australia’s balance of payments

• TODO summarise 4.5 up to (including) p120 🔼 📅 2024-02-15
• TODO finish notes on rest of 4.5 ⏫ 📅 2024-02-21

missing outlines/details on Australia's recent trends with said factors

consult textbook Ch: 4.5

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The balance on goods and services (BOGS)

• sometimes referred to as the trade balance
• it’s the combination of goods and services on the Current account
  • where exports of G&S is positive (money entering Australia)
  • and imports of G&S is negative (money leaving Australia)
• whether the BOGS is positive or negative and by how much determines the balance of money entering/leaving Australia from goods & services
• the overall BOGS is affected by Cyclical and Structural factors

Cyclical factors (BOGS)

• factors that affect the (BOGS) that vary with the level of economic activity within Australia.

Exchange rate

• Movements in the exchange rate affect:
  • the international competitiveness of Australia’s exports
  • and the relative price of the goods & services that Australia imports

Terms of trade

• Terms of trade measures :: the relative movements in the prices of an economy’s imports and exports over a period of time.

  • the greatest influence on Australia’s (BOGS) in recent years

• essentially: higher ToT means that Australia is pricing its exports higher than what Australia pays for its imports

• The terms of trade index is calculated of export (price index)/import (price index) x100

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Economic growth rates

• The level of ==domestic== economic growth influences (BOGS) balance by affecting the demand for imports
  • An upturn in Australia’s business cycle → + consumption → + imports
• Changes in the International business cycle impact the (BOGS) by affecting the demand for Australia’s exports
  • A slowdown in global economic growth
    (especially of Australia’s prominent trade partner economies)
    → - demand for Australia’s exports

Structural factors (BOGS)

• Factors that affect the (BOGS) do not vary with changes in economic activity
• underlying or persistent influences

Narrow export base

• an export base is the variety of Australia’s exports
• Australia has a narrow export base
  • as exports are heavily weighted towards a small number of commodities
  • As of the 21st century, Australia has high dependency on fossil fuel exports

Lack of international competitiveness

• Australia lacks international competitiveness in manufacturing
• and relies heavily on imports of value-added products (e.g. consumer goods)

The primary income account

• central role in the trends in Australia’s current account balance.
• composed mainly of payments of interest and dividends

Cyclical factors (Primary income acc):

Domestic economic growth

• when Australian businesses perform well, more money goes overseas in the form of dividends to overseas shareholders

Exchange rate

• Movements in exchange rates alter the $AUD value of debts denominated in foreign currencies
  • if exchange rates go up (value of AUD), Australians with debts in USD have to pay less
    • same vice versa

Changes in interest rates

• Australia’s overseas loans can be taken out with overseas interest rates (when borrowed in foreign currencies)
  • or an Australian interest rate (when borrowed in $AUD)
• interest rates change → cost of servicing foreign debt also changes

Structural factors (Primary income acc)

• The main reason for Australia’s long-term net primary income deficit is The structural savings gap
  • a shortfall of national savings in relation to domestic investment.
• A structural feature of the Australian economy:
  • relatively small economy
  • with a historically ==Low level of national savings==
  • at the same time, requires high levels of ==capital investment== for its economic growth