Discuss the main features of Australia's recent Balance of Payment performance & the impacts of a high current account deficit on the Australian economy.

Essay by davidw89High School, 12th gradeB, March 2007

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Australia's balance of payment is a record of all transaction between Australia & the rest of the world (over a period of one year). It consists of two account, the current account (which measures money flows from exports/imports, income and current transfers) and the Capital & Financial Account (Financial assets or liabilities). The BOP is an indicator on the health of the economy because it records financial transactions coming in and out of the economy. Trends in our financial transaction represent export (aggregate demand), debt (foreign liability) and our integration with the global economy as we become more trade intensive. As well as reflecting on the structure of our economy (i.e. a commodity base exporter and an intermediate/capital base importer); it also highlights our imbalances with the rest of the world (CAD).

The current account is a systematic measure of Australia's economic transaction with the rest of the world. Currently, Australia is running a deficit which reflects the fact that we pay more for import & income then what we have receive for our export.

The Net Income figure (how much we earn from our investment/assets oversea i.e. credit minus any payment to foreign owned assets in Australia i.e. debit) reflects this, and has since blown out from -6.9% in 1985 to -20.2% in 2001-02. Net goods and services (how much we receive for export relative to import) are also in a deficit. CAD as a % of GDP has since average 4.5% and has increase to 6.1% in the last financial year, mainly fueled by our dependence on foreign investment due to lack of domestic savings.

The cause of a large CAD lies in our structural and cyclical problem. The first structural problem lies in our lack of domestic savings which hasresulted in increased borrowing (and hence increases in...