Balance of payments

Essay by JonorosieHigh School, 12th gradeA-, March 2004

download word file, 2 pages 4.0

Balance of Payments Essay

The balance of payments is a record of transactions between a country and the rest of the world. It is broken up into 2 different accounts - the current account and the capital and financial account.

The current account is record of all transactions australia has with other countries with regards to goods/services, the income balance and current transfers.

The income balance refers to profits earned by Australian companies overseas, dividends earned by Australians overseas - which are all credits and the debits are the same payments made to overseas residents in Australia. This is usually the biggest deficit in the current account.

Current transfers are one-way transfer of funds between Australia and rest of the world. Includes funds brought in by migrants, funds taken out by immigrants, foreign aid to developing countries.

The capital and financial account is a record of all borrowing and lending transactions.

Capital account is a very small part of the capital and financial account.

The financial account records all the transactions in assets and liabilities. 3 main section of financial account:

Direct investment includes the direct acquisition of whole firms.

Portfolio investment is foreign companies acquiring shares in Australian firms.

Reserve assets are the RBA's holdings of foreign currencies. If there is a loss of reserves (the RBA sells Aussie currencies) it shows up as a positive and vice versa.

Causes of CAD

Unfavourable terms of trade: over the last few years Australian primary products (exports) have been falling in price slower than imported manufacture goods. This causes a deficit in the balance of trade and therefore a deficit in the current account.

There has been a loss of international competitiveness due to Australia's high labour costs relative to other countries.

There has been an increase in domestic demand...