Current Account Deficit in Australia - Causes, effects & recent trends (PLAN)

Essay by StephiHigh School, 12th gradeA+, May 2006

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Since mid 1980's, Australia has been experiencing persistently large current account deficits

The current account deficit (CAD) represents the excess of debits in the current account in comparison to the credits; that is, the excess of money going out to imports and income payments to abroad in comparison to the money coming in from exports and income payments from abroad

Each year Australia has been paying out considerably more for goods, services and other income/transfer payments that what has been received

These trends are associated with the short and long term domestic and external influences that impact on the balance of goods and services and the net income balance in Australia including the structure of Australia's export base, international competitiveness, structural change, terms of trade, foreign liabilities and servicing costs and the levels of national savings

Australia's high CAD has had several effects on the economy, including the growth of foreign liabilities, increased servicing costs, increase volatility in the exchange rate, constraints on future economic growth, more contractionary policies and the loss of international investor confidence.

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Firstly, there have been many changes in Australia's CAD over the past two decades

Australia has had a relatively high CAD overall, sustaining an average of 4% of the GDP in the past two decades, which has given Australia one of the highest CAD outcomes amongst advanced economies

Since the mid 1980's the current account has been a deficit, ranging from 3-6% of GDP over the past decade, resulting from a dramatic increase in Australia's foreign liabilities and higher servicing costs in the 1980's

However during the 1990's there was no further deterioration of the CAD, averaging 4.4% of GDP

The CAD increased to 6.3% in 1994-94, but reached its lowest level in two decades in 2000-01 at 2.7% of the GDP,