The balance of payments is the sum of all transactions that Australia has with the rest of the world. It shows the trade and financial flows in and out of the Australia economy. It is split up into two parts, the current account and the capital and financial account.
The current account is made up of 4 parts; Net goods and Net services. The total of net goods is calculated by the difference between what Australia pays for its exports and what it receives from its imports. The total of net services is calculated between the services that Australia sells (e.g transport, travel, communications and the services that we buy. Net primary income includes investments, rent profits and dividends. Net secondary income, which is when products or financial resources are provided without any product provided in return.
The capital and financial account involves money that flows from international borrowing; financial assets and liabilities. The main feature about capital and financial accounts is that these transactions are reversible. The two main parts of Capital Accounts are foreign aid and non-financial assets. Financial accounts are categorized by 4 main types; Direct investment, portfolio investment, derivatives, reserve assets. Cyclical factors such as exchange rates make the BOGS unstable. The Australian dollar, which currently equates to approximately 1.03 US dollars, is currently one of the highest currencies in the world. Having a high dollar can make imports cheaper to buy, but it also makes exports harder to sell, therefore reducing the amount of net profit. For example, China has one of the biggest export bases. Their successful export base is due to their low dollar (1 Yuan = 0.16 US Dollar), low cost of labour and a large amount of factories. Their low dollar allows more exports to be sold due to the cheaper cost of manufacturing.
The Terms of Trade (TOT) is another cyclical factor that makes the BOGS inconsistent. The Terms of Trade shows the ratio of the export price index to the import price index. It is calculated by 100% x...