'describe The Relationship Between The Two Components Of The Balance Of Payments'

964 words - 4 pages

The Balance of Payments is a summarized recording of all transactions between Australia and the rest of the world of a given period of time, essentially it illustrates the trade and money flows in and out of Australia's economy. For ease of identification and analysis, the Balance of Payments is separated into two separate components namely the, Current Account and the Capital and Financial account which deal separately with certain aspects of Australia's international public and private sector interactions. Resulting trends as a consequence of the calculation and analysis of the Balance of Payments such as the Current Account Deficit and the Terms of Trade become significant economic issues both in Australia and their effect can have profound impact on the Australian economy abroad and as a result become a great priority for the Government.The Current Account is a section of the Balance of Payments which summarises all international transactions involving goods, services, income (i.e. interest and dividends) and current transfers. Components of the Current Account include the goods balance, which is the difference between the value of exports and the value of imports (X-M) resulting in either a surplus or deficit and the services balance which is the balance of services exports and imports. Other components of the Current Account include the income balance which are the profits earned by Australian company's overseas and dividends earned by Australian investors overseas minus the same payments made overseas and also Current transfers which are funds brought into Australia by immigrants, funds taken out of Australian by emigrants and gifts and donations to and from Australians from and to overseas. The total of the Current Account section of the Balance of Payments is the net total of Goods and services plus net income plus goods and services.The Capital and Financial account section of the Balance of Payments is a summary of all capital transfers and international transactions involving financial assets and liabilities. As its name suggests, there are two components to this section of the Balance of Payments, firstly the capital account is a record of all money transfers or a capital nature. Secondly, the financial account is a record of all transactions in financial assets and liabilities including the following: Direct Investment which involves overseas acquisition of a significant degree of influence over a business, usually more than 10 percent; Portfolio investment on the other hand can be described as a speculative investment (i.e. share or debt securities that can be readily exchanged on financial markets.) and Reserve Assets which are RBA holdings in foreign currencies, this is one of the most important components of the financial account as it allows the Government to manipulate these assets or holding for reflective effects on the exchange rate. (i.e. the RBA can sell foreign currency to buy AUD; conversely it can sell...

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