Balance of Payments (1 Viewer)

[tessery]

hey i was just looking for an answer to a question I have on the BOP, it may seem kind of stupid but i am just doing and assignment on the CAD and have never understood something.

If the current account and the capital/financial account have to equal zero, like they will always balance out, why is it a problem that we have a defcit on the current account? if we got rid of it wouldn;t we just have a deficit on the captial/financial account?

Or, is the problem not that we have a current account deficit, but that it is so large? is the size of it the problem? but even then, if it will all balance out then why is it a problem. Also, why does it balance out in the first place? i know it has something do with exchange rates, and the link between the capital/financial account and the net income account, but its just really confusing.

if anyone could help me out that would be great! thanks

 

[redom]

Well starting from the beginning, the Balance of Payments shows transactions of all flows between australia and the rest of the world. It has two accounts the current account and the cap&financial account. The current account shows all flows of goods and services, income and current transfers.

if your having problems understind why we have a defecit on the current account and not on the financial account, just simply think of it as two lists where some things (ie the flows of goods n services, income and current transfers) is shown on one list and also where our financial assets and liabilities is shown on the other(the capital n financial account).

The reason why the CAD is a problem is because of the consequences on the economy associated with it. The debt servicing costs involved with all the money flows into our economy are slowing taking up an increasing proportion of our GDP. The net income component takes up 2/3rds of our CAD, and is therefore a larger issue. However if the investment flows coming in are used to fund growth and help our economy expand, which it has been doing for the last twenty odd years, then the CAD isnt an issue for concern. Some economists dont think theres anything to worry about, whilst others worry about our future and whether it will pose another balance of payments constraint ( i think that happened in the 1991 recession)....

now the two accounts balance because of the exchange rates....(i think, not soo sure about this so id get someone more intelligent to clear this up)....that under a floating exchange rate system, the demand for australian dollar and the supply of the australian dollar will be equal, at equilibrium. Umm ...now im totally lost:S...

i think i need help myself!! well hope watever i blahed on about will help. Good Luck!

 

[tessery]

hey thanks heaps, that combined with what my teacher said makes it a whole lot clearer. good luck with economics!

 

[sk8ie_boi]

Firstly, they don't always balance lol ... and umm generally the problems of a high current account deficit is that we are borrowing money from other countries (capital account). But then the problem arises as we need to pay back this loan with INTEREST! lol already it's around 5-6% of the GDP, if it get anymore, do you think we can pay it back?? Now, eventually other countries wouldn't want to lend you anymore money and then what are you going to do? How are you going to finance those imports? So you turn to domestic production, but then your exchange rate would appreciate. Therefore, Net Export goes down... Therefore, Aggregate Expenditure goes down. And also, another thing that would influence the AE is that govt' need to have surplus budget to pay back the loan which means down in govt' spending. Oh oh and and ... to increase you exchange rate, you'd need to increase your domestic interest rate in comparison to foreign interest rate. So as you see, all those factors would influence a slower growth and therefore put an economy into a recession. This situation is not aviodable, but it can be minimised. And oh ... this is also happening in the U.S. It's not matter of whether it will happen or not, just when? I'm saying around 3-5 years time?

 

[sooper]

hey sorry, but this thread is kinda in line with wat im doing atm.

was wondering if anybody knows "consequences of high CAD" or if anybody knows where i can source some info on it as i tried looking all over for it but theres none to be found.

any help is much appreciated.

 

[sooper]

thanks alot.

also.. what are the interrelations between current account and BOP. is it just the fact that current account is a component of BOP or are there more info on how they are interrelated?

cheers.

 

[sk8ie_boi]

thanks alot.

also.. what are the interrelations between current account and BOP. is it just the fact that current account is a component of BOP or are there more info on how they are interrelated?

cheers.

Yeah, current account is just a component of BOP just like financial and capital account. Make it simple, current account is a flow and financial and capital account is a stock.

 

[sooper]

ta =].

but if anybody noes any other ways they are interrelated pls.. do post it.!

thanks. cheers

 

[テリー]

The biki covers this here.

This sites is very useful!! thx Without Wings

 

[jeniii]

now the two accounts balance because of the exchange rates....(i think, not soo sure about this so id get someone more intelligent to clear this up)....that under a floating exchange rate system, the demand for australian dollar and the supply of the australian dollar will be equal, at equilibrium. Umm ...now im totally lost:S...

thats the point where im stuck... can someone explain the whole floating exchange rate.. equilibirum .. supply of A$ = demand for A$ works?

"in theory the floating Australian dollar plays the key role of ensuring that there is a balance in the BOP." ....

but HOW?

im also confused about how CAD = KAS. why is it always like this. is it just simply... how a deficit needs funds ... and funds is presented in the KAS as credit ... which is why its a surplus.. but then servicing costs of this surplus appears in CAD in the net income?? .. that all?

 

[Itike]

Yeah, current account is just a component of BOP just like financial and capital account. Make it simple, current account is a flow and financial and capital account is a stock.

Sorry this will sound dumb but we hav been doing this for the last 5 weeks and i still dont know what CAD and financial and capital account are. So in simple terms current account is money flowing in and out and financial and capital account is the goods and services???? ARGH SO CONFUSED!!!

 

[Itike]

That was really helpfull im pretty sure i understand it now. Thanks for the help.

 

[redom]

Well they balance because....well take this example

IF Australia increases the volume of imported gooods into australia, and exports remain unchanged, this results in higher CAD and raises the supply of the australian dollar as we sell the $AUD to purchase foreign currency to pay for the imports. This rise in supply means a depreciation in the exchange rate.

Equally, this depreciation means the same inflow of funds in the australian economy would buy more A$, recorded on the cap and financial account.

hence, the increase in the CAD is combated with an increase in the CAPital and financial account, and ignoring statistical erors these add to zero!

 

[ilovecommunism]

回复: Re: Balance of Payments

but, well, just one thing I think it's important to be noticed... the balancing act on the BOP, might not always appear in NICs or other economically developing nations, such as China. For example, in China, during the 1990s, both of the current account and the combined capital and financial account exhibited surplus. That was because (from info I'd read) the country's productive industries supported a high growth of the country's exports (surplus in net goods account, or maybe net services), while the number of direct investment took a major part of the country's capital and financial inflow (net income deficit). As we know, the direct investment sometimes can increase the number of production lines constructed in the country. Therefore, it might stimulate the country's production and exports (since many of the foreign products produced in China, are not to be sold in the local market, but would be exported to other countries, and China will receive some revenue for producing and exporting these items). Or in other words, during 1990's, the country's economy merged further into the global economy based on the specialization of production. That means, the revenue from net goods and services accounts could largely cover the deficit in the net income account. However, at that moment, China's Capital and Financial account was not entirely libralized (even until now), therefore, probably the money outflow recorded on the net income account didn't have much influence on the economy. Another thing is, tariffs and quotas played an essential role in the Chinese economy at that time.

well, this phenomenon appeared in China I think is just a special case, even some Chinese economists said that it was a special case... unusual... lol

I wish my interpretation is correct...xD