The Balance of Bayments and CAD

Essay by coolio12High School, 12th gradeA+, August 2006

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4. Analyze the relationship between Australia's persistent CAD and high level of net foreign liabilities. In your answer discuss the main components of Australia's CAD and the factors affecting the size of the current account deficit over time (20 Marks)

The current account shows all the transactions involved from money being received (income) and money being spent (expenditure) for exports and imports of goods, services, incomes and transfers. Over the last decade, Australia has had a persistent Current Account Deficit, meaning that Australia has imported more goods, and services than it has exported. This has been caused by both cyclical and structural factors, where from the period of 1996-2005, Australia's CAD has tripled due to these two main factors Due to Australia's persistent Current Account Deficit, this means that it must be financed by a surplus in the capital and financial account through debt and equity borrowings, which make up Australia's net foreign liabilities.

Australia's Current account balance has four major items. These items include:

* Goods Balance- referring to exports (goods credits) and imports (goods debits) of merchandise

* Services- including such things as tourism, education, insurance, transport, shipping and finance

* Net Income, referring to the income received from Australian owned assets minus the payment of income for foreign owned assets in Australia

* Net current Transfers, referring to the receipts less payments for foreign aid, migrants funds and pensions

The causes of Australia's ongoing current Account deficit are both cyclical and structural in nature. In cyclical terms, Australia's domestic economy has tended to grow faster than that of the world economy, where import demand tends to outstrip export demand, causing a deficit in the goods balance and subsequently an increase in the Current Account Deficit. This cause of Australia's CAD can be seen...