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pt 2 Chapter 3: Balance of Payments - Coggle Diagram
pt 2 Chapter 3: Balance of Payments
current account
balance & saving-investment gap
CAB= S-I
referred
as 'Saving - Investment' gap
CURRENT ACCOUNT SURPLUS
(financial account deficit) will occur when
total saving is greater than Investment
CURRENT ACCOUNT DEFICIT
(financial account surplus) occur when
total saving is less than Investment
ALWAYS Deficit bc primary Y is deficit
(and is part of CA) reason bc we are
NET BORROWERS
SAVING-INVESTMENT GAP
Savings are low in relation to Investment-
> S are low
bc of Aus small pop meaning small pool of S & I need to be higher
as AUs rich in natural resource ->
requires capital equipment need investment therefore increase I and causes S/I gap
This gap is filled w foreign Investment using
non residents saving
when FI comes into Aus, its
recorded un the Financial account, it take capital & financial account with surpluses (money comes in)
THIS FI
has to be serviced by payment of Interest, profit, & dividend,
this causes an
outflow in Primary Y sections of the current account, therefore current account deficit
(money goes out)
reason for Aus CA balance in terms of the factors influencing the trade balance & Y balance
factors influencing trade balance
An increase in COMMODITY PRICES will increase trade balance
Aus
X are 71% made of commodities
both rural & mining
if
global demand increase, $ increase and increases the value of Aus commodity X
2033 &2023 was a trade surplus due to high demand
AN EXPANSION in the world's major economies. such as China, U.S, Jap will increase trade balance
Trade balance
determined by change in both X & M
D for Aus X
is determined by other countries eg China, Jap
IF these economies
expand-> increase D of Aus X
which will increase trade balance and such CA
Opposite will happen if they contract, less demand of X, decrease trade balance
AN increase in domestic economic activity will increase M & decrease the trade balance
by affecting D for M
when domestic activity increase,
demand of M increase
bc
both I & C, increases
increase I requires to M capital goods eg machinery
increase in national Y, (from increase eco activity)
will increase HH C, increase D for M consumer g+s
faster eco growth in Aus norm decrease trade balance
when eco contracts, net export increase bc M falls
evident w covid 2019-21, Aus eco contacted & experience recession
A deprecation of the AUD will increase net exports
movement in the exchange rate can affect the trade balance by changing price of X&M
IF
AUD falls relative to other exchange rates
-> referred to as depreciation
if AUS
g+s become cheaper for foreign buyers
at same time,
foreign g+s will become more expensive for AUS buyers
so deprecation of AUD, tend to
increase trade balance bc X likely to increase & M falls
appreciation will have opposite affect, leads to decrease in trade balance
A decrease in Aus inflation rate will increase net exports
eg if
AUS inflation is higher
than our trading partner the
AUS g+s becomes less competitive
therefore
decrease net exports,
the opposite will happen & increase net exports
TRADE BALANCE can
FLUCTUATE between DEFICIT & SURPLUS
factors influencing Y balance
why its always deficit
bc:
AUS
relies on inflow of financial capital to supplement domestic savings
Inflow of foreign I helps develop grows more industry
The
TRADE OFF for FI used to supplement Y and therefore saving to AUS resident
is payments
of INTEREST & DIVIDENDS to the foreign INVESTOR
IF Aus eco performs well
company profits increases
therefore there is an
increase in payment towards the foreign Investors, causing Y deficit to widen
DURING COVID *
Aus
eco contracted decreased foreign I, large fall in Y deficit & contributed to AUS CA surplus
rare
INCOME BALANCE IS
ALWAYS DEFICIT!!!
AUS CURRENT ACCOUNT is normally a deficit
why???
CURRENT ACCOUNT SURPLUS:
occur if nations X & Y received from oversea exceed value of it M+ Y paid to overseas
not the case for AUS, as
Aus needs a larger supply of savings, meaning it must pay for FI therefore always deficit