Economic Goal 4: External Stability Balance of Payments

Balance of Payments The balance of payments account is an annual statistical record of the money value of both current, and capital and financial transactions between Australia and the rest of the world. Money received by Australians is recorded as a credit Money paid by us to overseas countries is recorded as a debit.

Balance of Payments The balance of payments is an accounting record of the money value of different types of transactions between Australia and the rest of the world. Money received by Australians is recorded as a credit Money paid by us to overseas countries is recorded as a debit.

The Current Account The current account records transactions between Australia and the rest of the world involving exports and imports of goods and services, income and transfers. A current account deficit occurs when the total value of current payments (debits) for goods, services, incomes and current transfers exceeds the total value of receipts (credits) This is typically the situation for Australia.

Sections in the Current Account 1.Net Goods (aka merchandise trade): records the value of credits for goods exported overseas such as minerals, wool, beef minus the value of debits for goods imported from overseas such as oil, electronics, machinery. Net goods = Goods credits – Goods debits

Sections in the Current Account 2. Net Services: records the value of credits for services exported overseas such as overseas tourists travelling to Aust, overseas students studying in Aust, financial, transportation minus the value of debits for services imported from overseas such as Australians travelling o/s, Australians studying o/s Net service= Service credits – Service debits

Sections in the Current Account 3. Net Income: records the value of credits for income earned from o/s such as interest received on money lent, dividends received from o/s shares, wages earned minus the value of debits for income paid o/s such as interest paid on foreign debt, dividends paid to o/s shareholders, wages paid to Australians living o/s Net income = Income credits – Income debits

Sections in the Current Account 4. Net Current transfers: records the one-way movement between Australian and other countries of resources including: gifts, taxes, pensions and foreign aid. Net current transfers = current transfer credits – current transfer debits

Balance on Current Account The balance on the current account = net goods + net services + net income + net current transfers. If the balance on the current account is a negative number we have a current account deficit If the balance on the current account is a positive number we have a current account surplus

Capital and Financial Accounts The balance on the capital and financial accounts are made up to two parts: 1. Balance on Capital account: records the credits minus the debits of movements of capital transfers including ownership of copyrights, patents and trademarks and movement of bank account money of immigrants. 2. Balance on financial account: records the credits minus the debits for transactions involving the movements of money capital or investment, as well as the dealings of the Reserve Bank of Australia.

Financial Account There are three main types of investments recorded in the financial account: ◦ Direct investment: involves the purchase of shares of >10% ◦ Portfolio investment: involves the purchase of shares of < 10% ◦ Other investment: involves loans and deposits The financial account also includes Net Reserve Assets which involves RBA and government transactions involving foreign currencies and gold