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Home > Economics > Australia's place in the global economy > Australia's balance of payments

Outcomes
Overview
Content
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Outcomes

HSC topic: Australia’s Place in the Global Economy is covered in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 34-36. The specific outcomes for this tutorial are:

H1	demonstrates understanding of economic terms, concepts and relationships
H3	explains the role of markets within the global economy
H4	analyses the impact of global markets on the Australian and global economies
H7	evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H8	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts
H11	applies mathematical concepts in economic contexts.

Overview

The balance of payments is a record of all economic transactions between Australia and the rest of the world in one year. The current account records transactions such as exports and imports of goods and services, income and transfers. The capital and financial account records transactions relating to portfolio and direct investment. The balance of payments is an important indicator of the health of the Australian economy as it illustrates our international trade and investment performance.

Being up to date and aware of contemporary issues

This tutorial is based on 2008 Balance of Payments information and this should be kept in mind as you read it. Students of Economics need to be aware of what is happening in the Australian Economy today and should, for instance, know about Australia's current balance of payments situation. Students should peruse the data in the light of the explanations and can, for example, use the formulas to practice calculations with the data.

After completing this tutorial you may wish to do some research on the current situation for Australia by scrolling down to the section 'MORE' at the bottom of this page and visiting the websites such as that of the Australian Government Department of Foreign Affairs and Trade.

Content

Australia’s balance of payments

The balance of payments consists of two basic accounts, the current account and the capital and financial account.

1. The current account
   
   

   The current account records all transactions between Australia and the rest of the world over a financial period. The current account records the money flows of trade in goods and services, and income flows such as interest repayments on loans and profits of foreign owned companies transferred overseas.

   Money flows coming into Australia are credits, for example the sale of coal to Japan. Australian funds sent overseas by Australian residents are debits. For example, when a consumer purchases a new Toyota from a local dealer, the dealer is required to send money overseas to pay the company in Japan – this is recorded as a debit on the current account.

   Table 1 Current account components

   	1999-2000	2000-2001	2007-2008
   	$millions	$millions	$millions
   Goods
   Exports (Credits)	97 655	120 302	182 816
   Imports (Debits)	-110 610	-120 120	-205 089
   Net Goods	-12 955	182	-22 273
   Services
   Credits	28 317	32 796	51 019
   Debits	-29 713	-31 769	-50 254
   Net Services	-1 396	1 027	765
   Balance on goods and services	-14 351	1 209	-21 508
   Credits	12 802	15 484	42 022
   Debits	-32 148	-35 234	-90 802
   Net income	-19 346	-19 750	-48 780
   Current transfers
   Credits	4 625	4 453	5 264
   Debits	-4 407	-4 408	-5 608
   	218	45	-344
   Balance on current Account	-33 479	-18 496	-70 632

   
   The major items in the current account are:
   
   
   1. Goods balance This refers to the difference between what Australia receives for exports (credits, or receipts for goods sold overseas) and what is paid for imports (debits, payments for goods we purchased from overseas). When export credits are more than import debits a surplus exists, or, if export credits are less than import debits, a deficit occurs.
      
      
   2. Services balance This involves the balance of service exports and imports such as tourism, education, insurance, shipping and finance. Services imported are debits and services exported are credits.
      
      
   3. The Balance on goods and services
      Adding together the goods balance and the services balance gives the balance on goods and services.
      
      Balance on goods and services = goods balance + services balance
      
      
   4. Net income Net income refers to the income received from Australian owned assets overseas (credits) less any payment of income to overseas on foreign owned assets in Australia (debits). These include interest payments on borrowings of the private (companies), and public (government) sectors and the return on investments in the form of rent, profits and dividends.
      
      The net income deficit is the major factor behind the current account deficits Australia has experienced over the years.
      
      
   Net current transfers Net current transfers refer to unearned payments and receipts of money used for short-term purposes. A net current transfer occurs when no specific good or service has been supplied. This includes foreign aid to developing countries in the form of money for food or famine relief (if these funds are being used for capital investment they will be included in the capital and financial account), insurance claims and pensions.
   
   Balance on current account
   The balance on current account is calculated using the following relationship.
   
   Balance on current account = balance on goods and services + net income + net current transfers
   
   
2. The capital and financial account
   
   This is a record of all international borrowing and lending transactions of Australia’s public and private sectors.
   
   Table 2 Capital and financial account components
   

   	1999 - 2000	2000 - 2001	2007 - 2008
   Capital account
   Capital transfers
   Credits	2 335	2 442	3 382
   Debits	-1 199	-1 260	-2 214
   Plus
   Net acquisition/disposal of non-produced, non-financial assets	-83	-107	-1
   Total capital account	1 053	1 075	2 167
   Direct investment	9 767	-1 912	26 349
   Abroad	-1 935	-12 482	-33 436
   In Australia	11 702	10 570	59 785
   Portfolio investment	13 882	24 010	-5 186
   Financial derivatives	362	-272	-9 157
   Other investments	12 205	4 131	10 929
   Reserve assets	-2 622	-8 880	44 292
   Net errors and omissions	-1 118	344	1 238
   Financial account	33 544	17 077	67 227
   Capital and financial account	34 597	18 152	69 394

   
   The capital account contains the following components.
   Capital transfers brought in by permanent migrants coming to Australia.
   
   Capital transfers of foreign aid to help build developing countries infrastructure, such as roads and clean water. The aid given to East Timor is an example.
   
   Entries for the purchase and sale of non-produced, non-financial assets such as the sale of patents, copyrights, trademarks, intellectual property rights and franchises (eg.from American companies such as Burger King).
   
   The financial account shows transactions in foreign financial assets and liabilities.
   
   The major items in the financial account are outlined as follows:
   
   Direct investment includes the purchase or sale of assets or the takeover of companies (more than 10% of share acquisition) overseas and in Australia.
   
   Portfolio Investment is the purchase and sale of land, shares, debentures and other securities between Australian and foreign individuals and companies. This is the largest item in the capital and financial account.
   
   Financial derivatives such as futures contracts and forward contracts (as outlined and discussed in topic one tutorials).
   
   Other investments, including non-tradable loans and deposits with banks, and trade credit provided by businesses to their customers.
   
   Reserve assets include the Reserve Bank of Australia’s (RBA’s) holdings of foreign currencies, gold and special drawing Rights (SDRs) position with the International Monetary Fund.
   
   Net errors and omissions refer to statistical adjustments to allow the capital and financial account, and the current account to total under a floating exchange rate system.
   
   Balance on capital and financial accounts
   
   The balance on capital and financial accounts is then the sum of all the individual categories.
   
   Balance on capital and financial accounts = capital account + financial account
   
   Balance of Payments
   
   The balance of payments, then, is the sum of the balance on current account and the balance on capital and financial account. It is important to understand that the deficit indicated by the current account is financed through activities recorded on the capital and financial account. The deficit on the current account must be exactly offset by the surplus on the capital and financial account (if it is not, net errors and omissions will correct it). This means then that the sum of the current account and the capital and financial account is equal to zero:
   
   Balance of payments = Current Account + Capital and Financial Account = 0

Review exercise 1

For each of the financial flows ,indicate whether they are recorded as debits or credits, and the section of the current account to which they belong.

Note

1. The export of lamb to the United States.
   Answer
   
   
2. Financial aid (food and clothing) to a developing country such as Bangladesh.
   Answer
   
   
3. Dividend payment on overseas investments to an Australian company.
   Answer
   
   
4. Interest paid on loans by the Federal government to a foreign bank.
   Answer
   
   
5. Income from Australian swimmers competing overseas.
   Answer
   
   
6. UK citizens living in Australia who receive pensions from the British government.
   Answer
   
   
7. The payment by an Australian company for computers imported from China.
   Answer
   
   
8. A Japanese tourist company paying for a cruise on the Great Barrier Reef.
   Answer
   
   
9. Insurance of a new Australian cargo ship with Lloyds of London.
   Answer
   
   
10. The purchase of a bottle of Hunter Valley wine in Sydney.
    Answer
    
    

Review exercise 2

Consider the following information for a hypothetical economy with a floating exchange rate.

Components ($billions)
Goods credits	50
Goods debits	-70
Current transfers credits	10
Current transfers debit	-5
Service credits	15
Service debits	-10
Income credits	5
Income debits	-32
Capital transfers credits	20
Capital transfers debits	-15

1. According to these figures net goods and services has a:
   1. A surplus of $135 billion
   2. A deficit of $15 billion
   3. A surplus of $20 billion
   4. A deficit of $65 billion
   
   
   
2. The balance of payments on current account shows a:
   1. A deficit of $37 billion
   2. A surplus of $15 billion
   3. A deficit of $27 billion
   4. A surplus of $5 billion
   
   
   
3. From the information given the value of the financial account is:
   1. A surplus of $37 billion
   2. A deficit of $5 billion
   3. A deficit of $10 billion
   4. A surplus of $32 billion

Answers

View the full balance of payments information for this exercise.

Review exercise 3

1. What is a CAD?
   Answer
   
   
2. Outline some economic factors that may have contributed to the CAD.
   Answer
   
   
3. Explain why the GFC helped reduce Australia's CAD.
   Answer
   
   
4. Give an outline of the 'Pitchford thesis'.
   Answer

More

The Australian Bureau of Statistics and the Department of Foreign Affairs and Trade have feature articles and statistical information on balance of payments Issues.

The World Trade Organisation has information on balance of payments Issues relating to Australia and other countries.