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Australia’s balance of payments

This tutorial was written by
Ken Edge
Head Teacher Social Science
Cardiff High School

Outcomes
Overview
Content
Review exercises
More

Outcomes

HSC topic: Australia’s Place in the Global Economy is covered in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 34-36. The specific outcomes for this tutorial are:

H1	demonstrates understanding of economic terms, concepts and relationships
H3	explains the role of markets within the global economy
H4	analyses the impact of global markets on the Australian and global economies
H7	evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H8	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts
H11	applies mathematical concepts in economic contexts.

Overview

The balance of payments is a record of all economic transactions between Australia and the rest of the world in one year. The current account records transactions such as exports and imports of goods and services, income and transfers. The capital and financial account records transaction relating to portfolio and direct investment.

Being up to date and aware of contemporary issues

This tutorial is based on 2002 Current Account information and this should be kept in mind as you read it. Students of Economics need to be aware of what is happening in the Australian Economy today and should, for instance, know about Australia's current balance of payments situation.

After completing this tutorial you may wish to do some research on the current situation for Australia by scrolling down to the section 'MORE' at the bottom of this page and visiting the websites such as that of the Australian Government Department of Foreign Affairs and Trade.

Content

Australia’s balance of payments

The balance of payments consists of two basic accounts, the current account and the capital and financial account.

The current account

The current account records all transactions between Australia and the rest of the world over a financial period. The balance of payments records the money flows of trade in goods and services, interest repayments on loans and profits of foreign owned companies transferred overseas.

Money flows involving income coming into Australia are credit transfers, for example the sale of coal to Japan. Australian funds sent overseas by Australian residents are debit transfers. For example, when a consumer purchases a new Toyota from a local dealer, the dealer is required to send money overseas to pay the company in Japan.

Table 1 Current account components

	1999-2000	2000-2001
	$millions	$millions
Goods
Exports (Credits)	97 655	120 302
Imports (Debits)	-110 610	-120 120
Net Goods	-12 955	182
Services
Credits	28 317	32 796
Debits	-29 713	-31 769
Net Services	-1 396	1 027
Balance on goods and services	-14 351	1 209
Income
Credits	12 802	15 484
Debits	-32 148	-35 234
Net income	-19 346	-19 750
Current transfers
Credits	4 625	4 453
Debits	-4 407	-4 408
	218	45
Balance on current Account	-33 479	-18 496

The major items in the current account are:

Goods balance This refers to the difference between what Australia receives for exports (credits, or receipts for goods sold overseas) and what is paid for imports (debits, payments for goods we purchased from overseas). When export credits are more than import debits a surplus exits, or, if export credits are less than import debits, a deficit occurs.
Services balance This involves the balance of service exports and imports such as tourism, education, insurance, shipping and finance. Services imported are debits and services exported are credits.
The Balance on goods and services
Adding together the goods balance and the services balance gives the balance on goods and services.

Balance on goods and services = goods
Net income Net income refers to the income received from Australian owned assets overseas (credits) less any payment of income of foreign owned assets in Australia (debits). These include interest payments on borrowings of the private (companies), and public sectors (government) and the return on investments in the form of rent, profits and dividends.

The net income deficit is the major factor behind the current account deficits Australia has experienced over the years.
Net current transfers Net current transfers refer to unearned payments and receipts. A net current transfer occurs when no specific good or service has been supplied. This includes foreign aid to developing countries (if these funds are being used for capital investment they will be included in the capital and financial account), insurance claims, pensions and funds brought into Australia by migrants.
Balance on current account
The balance on current account is calculated using the following relationship.

Balance on current account = balance on goods and services + net income + current transfers

Using the information from table 1 it is possible to calculate the balance on current account for 2000-2001
-$18 496 = $1 209 + (-$19 750) + $45

(figures are in $millions)

Review exercises

Review exercise 1

From the information in balance of payments (table 1) determine if the following statements are true or false.

Questions	Answers
1. The balance on current account had a deficit of $18 496 million in 2000 - 01. This was an improvement over 1999 - 00 with a deficit of $33 479 million.	True	False
2. The goods balance in 1999 - 00 had a deficit of $12 955 million and a deficit of $182 million in 2000 - 01.	True	False
3. The services balance for 1999 - 00 was $1 396 million in deficit and in 2000 - 01 Australia had a surplus of $1 027 million.	True	False
4. The balance on goods and services had a surplus of $14 351 million in 1999 - 00 and a surplus of $1 209 million in 2000 - 01.	True	False
5. Australia had a net income deficit of $19 346 million in 1999 - 00 and $19 750 billion in 2000 - 01.	True	False

Check your answers

The capital and financial account

The capital and financial account is a record of all international borrowing and lending transactions of Australia’s public and private sectors.

Table 2 Capital and financial account components

	1999 - 2000	2000 - 2001
Capital account
Capital transfers
Credits	2 335	2 442
Debits	-1 199	-1 260
Plus
Net acquisition/disposal of non-produced, non-financial assets	-83	-107
Total capital account	1 053	1 075
Direct investment	9 767	-1 912
Abroad	-1 935	-12 482
In Australia	11 702	10 570
Portfolio investment	13 882	24 010
Financial derivatives	362	-272
Other investments	12 205	4 131
Reserve assets	-2 622	-8 880
Net errors and omissions	-1 118	344
Financial account	33 544	17 077
Capital and financial account	34 597	18 152

The capital account contains the following components. Capital transfers brought in by permanent migrants coming to Australia.

Capital transfers of foreign aid to help build developing countries infrastructure, such as roads and clean water. The aid given to East Timor is an example.

Entries for the purchase and sale of non-produced, non-financial assets such as the sale of patents, copyrights, trademarks, intellectual property rights and franchises (from American companies such as McDonalds and Burger King).

Table 2 indicates a surplus on the capital account of $1 075 million for the 2000 - 01.
The financial account shows transactions in foreign financial assets and liabilities.

Direct investment includes the purchase or sale of assets or the takeover of companies (more than 10% of share acquisition) overseas and in Australia.

For example, the American company Campbells’ Soups purchased Arnotts’ Biscuits to expand their operations into the Asia Pacific region or the purchase of Tooheys and XXXX by New Zealand brewing company Lion Nathan.

Table 2 shows a deficit for direct investment in 2000-01 of $1 912 million.

Portfolio Investment is the purchase of land, shares, debentures and other securities in existing Australian companies by domestic and foreign individuals and companies. This is the largest item in the capital and financial account.

Financial derivatives (as outlined and discussed in topic one tutorials)

Table 2 indicates a $24 010 million surplus in 2000-01.

Other investments, including deposits, loans RBA currency.

Table 2 indicates a $4 131 million surplus in 2000-01.

Reserve assets include the Reserve Bank of Australia’s (RBA’s) holdings of foreign currencies, gold and special drawing Rrghts (SDRs) position with the International Monetary Fund.

Net errors and omissions refer to statistical adjustments to allow the capital and financial account, and the current account to total under a floating exchange rate system.

Table 2 indicates a $8 880 million deficit in 2000-01.
Balance on capital and financial accounts

The balance on capital and financial accounts is then the sum of all the individual categories.

Balance on capital and financial accounts = capital account + direct Investment + other Investments + reserve assets

Table 2 indicates a surplus of $18 152 million for 2000 - 01.

Under a floating exchange rate the following relationship will exist for 2000 - 2001.

Balance on capital and financial accounts + current account deficit + net errors = 0

$18 152 + (-$18 496) + $344 = 0

Review exercise 2

For each of the financial flows ,indicate whether they are recorded as debits or credits, and the section of the current account to which they belong.

Note

The export of lamb to the United States.
Answer
Financial aid (food and clothing) to a developing country such as Bangladesh.
Answer
Dividend payment on overseas investments to an Australian company.
Answer
Interest paid on loans by the Federal government to a foreign bank.
Answer
Income from Australian swimmers competing overseas.
Answer
Migrants bringing money with them when they arrive in Australia.
Answer
The payment by an Australian company for computers imported from China.
Answer
A Japanese tourist company paying for a cruise on the Great Barrier Reef.
Answer
Insurance of a new Australian cargo ship with Lloyds of London.
Answer
The purchase of a bottle of Hunter Valley wine in Sydney.
Answer

Review exercise 3

Consider the following information for a hypothetical economy with a floating exchange rate.

Components ($billions)
Goods credits	50
Goods debits	-70
Current transfers credits	10
Current transfers debit	-5
Service credits	15
Service debits	-10
Income credits	5
Income debits	-32
Capital transfers credits	20
Capital transfers debits	-15

According to these figures net goods and services has a:
1. A surplus of $135 billion
2. A deficit of $15 billion
3. A surplus of $20 billion
4. A deficit of $65 billion
The balance of payments on current account shows a:
1. A deficit of $37 billion
2. A surplus of $15 billion
3. A deficit of $27 billion
4. A surplus of $5 billion
From the information given the value of the financial account is:
1. A surplus of $37 billion
2. A deficit of $5 billion
3. A deficit of $10 billion
4. A surplus of $32 billion

Answers

View the full balance of payments information for this exercise.

Review exercise 4

Australia’s current account

Historically Australia has recorded large current account deficits (CAD) which have had implications for foreign investors. Australia has averaged a CAD of around 4.5 per cent of GDP over the past two decades. The CAD in 1999-2000 averaged 5.4 per cent of GDP reducing to 2.8% in 2000-01. With the Government’s budget in surplus, the current account deficit is now largely the outcome of private sector transactions. These include private investment and borrowings, which in turn are now more soundly based following extensive structural and taxation reforms.

What is the CAD?
Answer
Outline some economic factors that may have contributed to the CAD?
Answer
What are structural reforms?
Answer
Describe the main components of the financial account of the balance of payments.
Answer

The Australian Bureau of Statistics and the Department of Foreign Affairs and Trade have feature articles and statistical information on balance of payments Issues.

The World Trade Organisation has information on balance of payments Issues relating to Australia and other countries.