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Discuss The Main Features Of Australia's Recent Balance Of Payment Performance & The Impacts Of A High Current Account Deficit On The Australian Economy.

1012 words - 4 pages

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 interest repayment)and has directly impacted on the CAD. This increase in foreignliability means that we are more likely to be impacted by external factor,such as the increase in official interest rates by the central banks (e.g.US/Europe), which has directly contributed to our increasing interest bill.Secondly, Australia lacks international competitiveness, in that we areunable to match world producers in terms of price and quality of its export.This reduces the income we receive for our export and hence affectsthe CAD. Another factor is that Australia's trade performance has been hitby high foreign protectionist policy (most noticeable in the agriculturalsector) which not only reduces our income directly but reduces the marketaccess for our g+s.Finally, Australia relies heavily on commodity product for its revenue.Commodity exports tend to be highly elastic, due to fluctuations in global demand and supply. Changes in world price for our commodity can directly affect our earnings, adding to the volatility of the CAD. Elaborately Transformed Manufactured (ETM) are inelastic, i.e. when export environment changes, there will less of a shift in our import.The first...

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