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Australia's Economic Challenges

The Australian balance of payments (BOP) represents all transactions between Australia and the rest of the world, and is made up of the current account (CA) and the capital and financial account (KAFA). The CA includes exports, imports, income from investments, and transfers, while the KAFA involves transactions such as direct investment, portfolio investment, and reserve assets. Australia has experienced an ongoing balance problem due to a growing current account deficit (CAD) as a percentage of GDP. A high and sustained CAD poses major risks to Australia's economy through increased debt levels, a reduction in investor confidence, constrained future growth, and vulnerability to sudden shifts in market sentiment.

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157 views1 page

Australia's Economic Challenges

The Australian balance of payments (BOP) represents all transactions between Australia and the rest of the world, and is made up of the current account (CA) and the capital and financial account (KAFA). The CA includes exports, imports, income from investments, and transfers, while the KAFA involves transactions such as direct investment, portfolio investment, and reserve assets. Australia has experienced an ongoing balance problem due to a growing current account deficit (CAD) as a percentage of GDP. A high and sustained CAD poses major risks to Australia's economy through increased debt levels, a reduction in investor confidence, constrained future growth, and vulnerability to sudden shifts in market sentiment.

Uploaded by

Andrew T
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Essay Plan Balance of Payments

The Australian BOP is made up of the CA and the KAFA, and ultimately represents all transactions of
Australia with the rest of the world. Within these accounts, they can be divided into credits, money coming
into Australia as receipts, and debits, money leaving Australia as investment revenue. The BOP is an
international indication of Australia’s external economic performance and can be used to represent the
external issues and problems faced by Australia. It can be witnessed that Aus suffers from ongoing balance
problems due to a growing CAD.

Current Account, Net Trade, export and import revenue


Net Current Transfers, goods provided for no return
Net Income, income from various investment
Net Services, exchange of services
Balance CA = (exports – imports) + net income + net current transfers + net services

KAFA, made up of two accounts, all transactions are reversible, money from borrowing, lending and
purchasing
Capital Account, 1. Property from immigration, 2. funds to build new infrastructure, 3. intellectual property
rights
Financial Account,
1. direct investment, money to build new projects
2. portfolio investment, trading of financial assets
3. derivative investment, complex financial assets
4. reserve investment, bonds from monetary
5. other, unclassifiable

BOP = CA + KAKA + Net Errors Omissions


Explanation Paragraph

Supply of $S = Demand of $A
Explanation Paragraph

Australia has sustained growing CADs. Averaged 2.7% of GDP in 1980s, now it is 4.0% average. Moves in
cyclical patterns reached 6.2% in 1992, rises if Global growth is strong.

NFD, NFD to GDP has grown during period of Globalisation. 1980 6.3%, 1990 42.3% and 08/09 it was
52.9%, there is risk of Debt Trap
Debt Trap, Increase CAD, Increase NFD, Increase Serv. Cost, Increase NID

NFD leads to increase in NFL. NFL 725bill, 633bill NFD. Reluctance to invest in Australia and asking for
risk premium.

Reduction of investor confidence reduces demand for currency. Reduces short term growth

BOP restraint, restraint on Future Growth.

Government may feel threatened, Further Action encouraged. Tight Macro, Fast Micro. Further slowdown
and unemployment

Vulnerable to shifts in sentiment, sudden loss of confidence.

From these consequences noted it becomes apparent that Australia’s high CAD poses as a major risk to the
welfare of the economy. Whilst some believe that AUS CAD reflects financial market’s willingess to accept
external imbalances in a time of Globalisation, it is clear to see that a CAD is still a risk. This can be reflected
by the concerns raised by the 1997 Thailand crisis where a sudden loss of investor confidence crippled the
Thai economy. It is up the Australian government to recognise the imposing risks of a CAD on the economy
and address it as a problem.

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