This website uses cookies to ensure you have the best experience. Learn more

Why The Balance Of Payments And The Current Account Deficit Are So Important.

899 words - 4 pages

Why Is the Balance of Payments and the CAD So ImportantThe balance of payments is a summary of all Australia's transactions with the rest of the world. The balance of payments may give an explanation for, as an example, why the value of the Australian dollar has appreciated. A current account deficit occurs when the current account does not balance but is negative. The reason Australia has a current account deficit is because of greater levels of debits than credits on goods, services, incomes and unrequited transfers. A CAD is also due to a greater part of our investment coming from overseas savings.Foreign investment will increase foreign debt. This may not necessarily be a bad thing as it will increase a country's productivity leading to greater technological advancements and higher levels of employment and growth. Australia is still a young country with a potential for development. The only problem is that domestic households and firms are never likely to save enough to finance all the investment our country needs. Australia has always been a capital-importing country. This surplus on the capital account of the balance of payments has always caused Australia to run a deficit on the current account.The balance of payments may give reasons for economic occurrences. As an example, if the Australian Dollar falls in value, the balance of payments may give an answer for why it has happened. This enables the Reserve Bank of Australia to manage this macroeconomic objective of external balance by using reserve assets of other currencies to influence the FOREX market.The strong domestic economy, the drought and the weak global economy explain why the CAD is now so high. Recent blowouts in the balance of trade in goods and services are the main cause of the CAD's highs. By far the biggest part of the CAD is the net income deficit. The CAD follows the business cycle. Australia's high marginal propensity to import is clearly shown during a boom as imports greatly increase and decrease during a recession. This also applies to investment as there is more during high times of certainty but during a recession firms may disinvest. The government can then decide how to manage the economy based on the information received. The Reserve Bank of Australia can decide to slow the economy down through forces of contractionary monetary policy in the cash rate and local interest rates. The problem with high interest rates is that it encourages international firms to invest in Australia, due to the result of a higher return.The balance of payments may indicate the economy is nearing a recession. It is important managing the economy because of this...

Find Another Essay On Why the balance of payments and the current account deficit are so important.

An overview of “The U.S. Current Account Deficit”

2276 words - 10 pages Introduction: Since in the 1980’s, one of the most persistent challenges to The United States’ economy and her policy makers has been the deficit of the U.S. current account. A current account is made up of four separate categories, the combined balance of which results in a surplus or deficit. The four categories are: The Merchandise Trade Account, Services, Factor Income, and Unilateral Transfers. Each account either has a surplus or a

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 our mining companies are foreign owned and the huge profits earned from the commodity boom are shifted offshore to their foreign shareholders. This is the main reason why our increasing Terms of Trade (ratio of export to import) hasn't improved our current account. The other main reason is that the increased income we receive from our exports is being spent on imports. This is due to Australia's sustained economic growth and the need to import IT

An explaination of the 1st admendment and why it is so important

570 words - 2 pages Public demonstrators lock arms, hold up signs, and chant. They are protesting any number of issues that seem to plague our nation. They cry out that our government is corrupt, that we should do away with it. In many other countries, government officials would have arrested and thrown these mere protesters in jail. Yet, it the land of the free, and home of the brave, they are allowed to continue so long as they are peaceful and cause no harm to

Does Australia have a current account deficit?

3451 words - 14 pages public sector." After the net capital inflow, there is a surplus in capital account which is correct as the Balance of Payments system, which stated that when there is a deficit in current account, the capital account must be in surplus.However, the excess of expenditures for foreign goods and services over the incomes is not the only factor bringing the nation current account deficit. There are two more factors, which are the excess of

Current Account Deficit Challenges India's Economy

2080 words - 8 pages % oil out of its total imports. Its domestic demand of 85% is met by imports. International prices of gold have gone up by more than 50%. So this results in lot of deficit and hence widen the gap of current account. • India have a lot of affection towards gold and 2% of total imports are consisting of gold. International prices of gold is also increasing which again led to increase in the deficit of current account. • Net transfers from abroad was

Why was the church so important in the medieval times?

673 words - 3 pages The medieval church was very important in the medieval era. It had a big effect on society and it influenced many people’s lives. There were many various reasons why the church was very important. People didn’t just go there to pray, but also for social gatherings and meetings. The majority religion was Christianity. The Christians were in an area called Christendom, which is now called Europe. People used to center their lives around the

Bill of Rights Why they are the most important rights

553 words - 2 pages most important rights protected by the U.S. Bill of Rights are contained in the 1st Amendment. It provides that Congress shall make no law respecting an establishment of religion or prohibiting its free exercise, or abridging freedom of speech or press or the right to assemble and petition for redress of grievances. These rights are the core rights protected by the system of ordered liberty established by the Bill of Rights.The 2d and 3d

'Why is it so important for academics and marketing managers to understand the impact of external influences on consumer behaviour?'

2157 words - 9 pages to divide the market into segments, so that they can examine certain areas more closely. It has been claimed that there are five main determinants of external influences: situation, family, culture, social class and personal influence. This essay will try to assess the reasoning behind why these factors need to be considered by academics when investigating consumer behaviour.Marketers are looking for quick easy solutions for finding marketing

Why is the resurrection so important to christian faith

1013 words - 4 pages Question: Why is the resurrection so important to Christian faith?Even now, 2000 years after his death Jesus Christ is followed and looked up to. But perhaps more important than what he said was what he did. His actions were amazing, superhuman even, but eventually led to his crucifixion. It was after his death that Jesus performed his most amazing deed. He was put in his tomb on Friday, on Sunday three female friends went to embalm him... and

Current & NonCurrent Assets Paper What are current & non-current assets? What differs b/w current & non-current assets? What is the order of liquidity? How does the order of liquidity apply to the...

836 words - 3 pages . Retrieved from http://financial-dictionary.thefreedictionary.com/Noncurrent+AssetGreat job with defining liquidity and how it applies to the balance sheet. Why is liquidity important? Who uses this information? Liquidity can represent that ability for a company can pay its short term obligations. Investors, loan officers, etc. are using this type of information regularly when dealing with customers.

Why is the ability to exploit economies of scale so important in mature industries?

2009 words - 8 pages improving their customer service and introducing new products.Economies of ScaleEconomies of scale are important methods when achieving inner firm cost differences especially in capital intensive industries or where advertising, distribution, or new product development are important parts of total cost.Economies of scale are closely linked with the concept of increasing returns to scale and are present when the output of a specific good increases with

Similar Essays

The Current Account Deficit Essay

3032 words - 12 pages as compared to investment in any other economy. Consequences of Current Account Deficit 1) Loss of foreign reserves Foreign reserves are very crucial for the economy as they give the central bank to intervene in the foreign exchange market and stabilize the exchange rate. So running a current account deficit leads to loss of precious foreign reserves and at the same time the interest that accumulates on the foreign debt also needs

The Causes Of Current Account Deficit

974 words - 4 pages current-account deficit to 2.4% and 2.8% of GDP. Analysts are predicting the deterioration of the current-account deficit could be larger if Australia's competitiveness proves less durable than they have assumed. Fundamentally, speaking the Australian Dollar is on a downhill slide with its highest point being in August of 2001.Economic policyIn a fixed exchange rate administration need to manage the balance of payments it often constitute difficult

Balance Of Payments Deficit Or Surplus

3265 words - 13 pages exchange rate fluctuates, this can cause great uncertainty for traders and can damage international trade and economic growth. (John Solman, Essentials of Economics, page 251-252)IntroductionWhen all the components such as current account, capital account, financial account of the balance of payments account are taken together, the balance of payments should exactly balance: credits should equal debits. If they are not equal, the rate of

The United States Current Account Deficit

1417 words - 6 pages shifts in confidence, the United States must strive to minimize the deficit by formulating a strategic plan to prioritize expenses and avoid perpetual damage. The United States’ current account deficit is a result of the nation importing more than it is exporting or consuming more than it is producing (Ott, n.d.). The current account is a subaccount of the balance of payments, which is a method of tracking economic interactions with other