Analyze the Cause of Recent Trends in Autralia's Balance of Payments

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Analyze the Causes of the Recent Trends in the Performance of Australia’s Balance Of Payments.

The balance of Payments is a systematic record of all economic transactions that Australia has with the rest of the world over a set period of time. It consists of the Current Account and Capital/Financial Account. Whereas the current account reflects a nation’s net income, the capital/financial account reflects net change in national ownership of assets. Therefore, theoretically the BOP should be zero. Thus, the current account on one side and the capital and financial account on the other should balance each other out. The most distinctive trend in our Balance of Payments is our Current Account Deficit (CAD), which means debts on our current account are greater than credits therefore running a deficit. Australia has run a current account deficit (CAD) ever since it began trading. This means that Australia has paid out considerably more for goods, services, and other income and transfer payments than it has received. Australia’s CAD first emerged as a problem during the 1980s. While Australia had historically sustained a deficit averaging less than 3% of GDP, by the mid-1980s the CAD was double that amount. Currently it’s running at an average of 4-5% of GDP with a deficit of $33.6bn in 2010-11.The initial causes of the CAD can be analysed by studying the three components of the Current Account; net goods and services, net income and net current transfers. Net goods and services refer to the difference between what Australia receives for its exports and pays out for its imports (X-M). Australia has repeatedly recorded a deficit on the net goods and services, a trend that has only been lifted in recent years; where the 2010-11 Balance on goods and services were $20.8bn. In the past, the structural cause of our large deficit was our adverse terms of trade where Australia had a tendency to import more than we export (M > X), caused by many reasons, one in...
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