Discuss the Economic Implcations for the Australian Economy of Australia's Continuing Current Account Deficits.

Topics: Economy of Australia, Australian dollar, Foreign exchange market Pages: 6 (2210 words) Published: March 5, 2013
Discuss the economic implications for the Australian economy of Australia’s continuing current account deficits Australia has a long history of large and persistent current account deficits. During the 1960s the current account deficit averaged the equivalent of 2 per cent of gross domestic product. The CAD rose considerably, due to the floating of the Australian dollar and the opening of the capital account in 1980s, and by 1990s CAD has sustained around an average of about 4.5 per cent of GDP. However, in recent years the deficit has been falling and in 2011 it was just 2.25 per cent. The decline in the CAD has been affected by what is happening to the nation’s levels of saving and investment. The level of Australia’s national investment has fallen as a share of GDP in the past year or two, dropping to 27 per cent in 2011. This is due to the falling of business investment despite the strong mining investment. Although public investment spending has recovered from its decline in earlier decades but it has dropped a bit recently. Households’ spending has also fallen back in recent years. On the other hand, the level of nation’s saving is just a bit under 25 per cent of national income (GDP), its highest since the 1980s. This is because saving by companies has been slowly trending up over the decades and at present it is at a record level of about 14 per cent of GDP. Government saving was very weak in the 1970s and 1980s but, following the deep recession of the early 1990s, strengthened to about 5 per cent of GDP. It is now back to zero as a consequence of the global financial crisis. The rate of household saving fell steadily through the 1970s to the 1990s, but began increasing sharply in the 2000s and is now back up to about 10 per cent of GDP. The decline in the CAD is therefore resulting from the decrease in the national investment and the increase in the national saving. ….

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...
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