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Australias Trade and Balance of Payments

What Does Australia Trade?

What does Australia Trade?


Australia had experienced balance of goods and services deficits most years since 2000.
The balance on goods and services in 2010-11 was a surplus of $21b, a turnaround on the deficit of $4b recorded in 200910. The balance on current account for 2009-10 was a deficit of $33.6b, a 37% decrease on the deficit of $53b recorded for 2009-10.

This is an decrease in the CAD from 4.1% of GDP in 2009-10 to 2.4% of GDP in 2010-11.
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What are Australias main Export trends?

To Whom does Australia Export?

What are Australias main Imports?

Where do we import goods from?

Source: Australian Bureau of Statistics.

Is This Trading Combination Good?


Australias exports are very heavily reliant on commodities (raw materials). Demand for these products does not grow quickly and are usually highly influenced by fluctuations in the world economy. The commodity price rise from 2003-2008 was not typical and the GFC has shown the weaknesses in Australias trading combination as commodity prices fell. Many of our imports are capital products. This means that whenever Australia wants to expand, it will increase imports of capital, thus worsening the trade 8 position.

What problems does Australia have in the Global Economy?

Global Challenges
The main challenge facing the Australian economy and the global economy is the Financial Crisis which began in the USA and has spread worldwide to not only financial markets but to economies as a whole. This has led to a fall in demand for our exports and falling commodity prices. In 2010 demand for Australias resource exports increased along with commodity prices. The rising Australian dollar may benefit us in some ways but also reduces our international competitiveness.
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Global Challenges
The Australian Governments main economic focus in recent years has been on reducing the size of the Current Account Deficit (CAD) and the Foreign Debt, and to stabilise the $A.
The CAD is part of Australias Balance of Payments (BOP). The BOP is a record of all financial transactions for a period of one year, between Australia and the rest of the world.
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Global Challenges
They are the Current Account, which in Australias case is generally a deficit, and the Capital and Financial Account, which has to be a surplus in order to finance and balance the Current Account. BOP = CAD + Capital & Fin. Acc Surplus = 0

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What makes up the Balance of Payments?


THE BALANCE OF PAYMENTS
CURRENT ACCOUNT CAPITAL AND FIN. ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT

GOODS

SERVICES

PRIMARY INCOME SECONDARY INCOME

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What is the Current Account?


The Current Account is made up of three parts. They are: 1. The Balance on GOODS AND SERVICES:
The difference between the goods and services Australia sells overseas (exports) and the goods and services purchased from overseas (imports). Australia tends to have a balance or a small surplus in the Merchandise Trade balance. Australia is only a small player in world trade, ranked about 20th, with only about 1% of world exports compared to Hong Kong, Taiwan, and South Korea, each with over 2%.
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Services
There is also income for services minus payments for overseas services. Australia used to have a large deficit on services but in recent years has moved towards a balance due to increased tourism and income from international students and computer information services. The Asian currency crisis did, however, push services back into a deficit. Australia achieved a small deficit balance for services in 2008-09 due to the GFC and lower global demand. This services deficit rose to $7billion in 2010-11 due to the high value of the $A.
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What is the Current Account?


2. Primary Income (Income Component): shows primary
income flows between resident and non-resident institutional units such as royalties, rent, dividends, and interest on money owed (foreign debt). 3. Secondary Income (Current Transfers): money transfers between countries eg. food aid, remittances from residents temporarily abroad, and remuneration received by international students undertaking university studies. In 2009-10 primary income equalled $48.6 billion compared to $1.7 billion for secondary income.
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Net Income
The income component, ie foreign firms transferring funds overseas and the interest on the foreign debt, has made up the largest part of the CAD in Australia in recent years. In some years the income component was larger than the CAD. It has tended to stabilise in recent years as a percentage of GDP. However, it will deteriorate if there is any major increase in the foreign debt.
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Australias CAD
The CAD, in the recent years in Australia, has been over $50 billion a year. In 2000-01 it fell to $ 18.2 billion, largely due to the fall in the Australian dollar The CAD has risen since 1980 but tends to fluctuate around 4 - 5% of GDP. In 2008-09 the CAD declined to 3.2% of GDP because of lower interest payments and an increase in net exports. In 2009-10 it rose again to 4.1% of GDP due to falling export demand due to the GFC. In 2010-11 the CAD declined to only 2.5% of GDP.
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How is the Current Account Deficit paid for?


The CAD is paid for by the Capital and Financial Account Surplus. 1. The Capital Account is comprised of: Transfers of assets, such as migrants bring their wealth to a country, the sale of patents, copyrights, and selling embassy land.

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How is the Current Account Deficit paid for?


The Financial Account is made up of: Government and Reserve Bank transactions with the rest of the world. Direct and Portfolio Investment, ie all other transactions, such as foreign investment and borrowing. These are mainly conducted by banks and businesses.
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How is the Current Account Deficit paid for?


The accumulation of borrowings from overseas makes up the Foreign Debt. The Net Foreign Debt was approx. $675 billion in June 2011. This is about 49.5% of GDP, down from 53.3% in 2009-10. There are two basic connections between the CAD and the Foreign Debt.
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What is the Foreign Debt?


There are two measurements of the Foreign or External Debt. They are: Gross Foreign Debt, ie the total borrowings by Australian residents from non-residents. Net Foreign Debt, ie the Gross Debt minus Australias holdings of foreign reserves, and gold, and lending Australian residents have made overseas. The Net foreign debt is the most accurate measure of our external debt.
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Is there a Connection between the CAD and the Foreign Debt?


Each year there is a CAD, this will increase the amount of borrowing needed to pay for it. This increases the Foreign Debt. As the Foreign Debt increases, this increase the interest bill on the debt. This increases the income deficit in the CAD. This increases the CAD and the cycle continues.
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The Blow-out in the Foreign Debt


70 60

% of GDP

50 40 30 20 10 0 1980

Gross External Debt

Net External Debt

1983

1986

1989

1992 Years

1995

1998

2001

2004

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WHERE DID AUSTRALIAS FOREIGN DEBT COME FROM ?

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Who borrowed all the money?


From 1982 to 1996 Australias Gross Foreign Debt increased by over 1100%.

The Net Foreign Debt since 1980 has risen from $15 billion to over $677 billion in 2011.
The main groups responsible for this growth in debt were:

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Who borrowed all the money?


The private sector businesses and especially the banks after financial deregulation in the middle of the 1980s. Federal and State Governments borrowing to finance budget deficits and public authorities for capital works.

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What Caused the Large CAD and Foreign Debt?


There are a number of causes of Australias CAD and Foreign. They include:

Narrow Export Base: 70% of Australias Exports of goods are mining and agricultural products. The demand for these products rises at a slower rate than for manufactured products (our main imports). Value added products earn greater export income.
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What Caused the Large CAD and Foreign Debt?


Declining Terms of Trade: The prices Australia receives for exports traditionally rise slower than the prices we pay for imports. This again is related to a slow growth in demand for our exports. The terms of trade for Australia has overall been in decline over the last 60 years, as a result Australia has to sell more exports to pay for the same quantity of imports. There has been a turn-around in the terms of trade since 2001 due to rising commodity prices and this is helping our export income, but this may not be sustainable. World Protection: The European Union, USA and Japan subsidise their farmers and have other forms of protection that 30 reduce Australian agricultural exports.

What Caused the Large CAD and Foreign Debt?


World Protection: The European Union, USA and Japan subsidise their farmers and have other forms of protection that reduce Australian agricultural exports. Financial Deregulation: Made it easy for banks and entrepreneurs to borrow from overseas. Budget Deficits: Twenty years of Budget Deficits lead to overseas borrowing and increasing foreign debt. Low Savings Ratio: Australias savings ratio has been declining since the 1970s. Australia does not save enough to provide for her own investment, so we borrow.
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What Caused the Large CAD and Foreign Debt?


Depreciation of the $A : The Australian dollar declined in value over 20%, after the Treasurers, Paul Keating, Banana Republic speech. This increased the level of the Foreign Debt. The 35% fall in the $A compared to the US currency in 2008 had a similar effect. Inefficient Australian Industries: Many Australian manufacturing industries were highly protected by Tariffs and Quotas. There was no incentive to be internationally competitive. Full scale phasing out of protection only began after 1988.
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What Caused the Large CAD and Foreign Debt?


High Inflation in the 1980s: 8% compared to an OECD average of 3-4%.

Overspending in the 1980s: Gross Domestic Expenditure exceeded GDP. This increased imports and the CAD. Global slowdowns in Asia from 1997-2000 and the USA and Europe from 2001-2005: This increased the gap between Australian exports and imports.
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The global financial crisis that began in 2008 has also had an impact.

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