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10) Fluctuations in the CAD are not a bad thing

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10) Fluctuations in the CAD are not a bad thing

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There is no optimal or correct size for a current account balance. Over the past 30 years, Australia's CAD has averaged around 4.5% of GDP. This also means that the capital and financial account surplus has also averaged around 4.5% of GDP. Is it better to have a current account deficit or a current account surplus? The answer is neither - whether the current (or financial) account is in deficit or surplus depends on a number of factors, including the growth rate of the economy, the relationship between a country's saving and investment and the level of economic development. Countries that rely more on foreign investment to will have a current account deficit. Countries that have an excess savings to tend to other countries will have a current account surplus. If a country's current account balance increases, this does not necessarily mean that it represents a weakness in the economy - it is a response to changes in the world economy, to changes in the pattern of trade and to changes in the national savings and investment.

- yew & dom

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8) What are the Structural Reasons for Australia's CAD?

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8) What are the Structural Reasons for Australia's CAD?

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There exists both structural and cyclical causes for Australia's current account deficit. Structural factor are associated with the income balance. They generally changes gradually over time and have a more permanent effect. The structural factors mainly affecting the income balance include the investment savings gap, foreign investment and foreign debt. As these three factors contribute to the income balance deficit, it results causes an Australia's current account deficit. The income balance is far more stable than the trade balance however, fluctuating between -4% and -2% of GDP and thus is always in deficit.

According to the world bank, Australia's national saving is at 23.1% of GDP while national investment  is greater at 27.8% of GDP. Tie data reveals that australia spends Krone money than saves, resulting in an investment savings gap. This  feuere an income deficit which which australia has possessed for the past 11 years, demonstrating  the "permanent" aspect of structural causes.

Australia relies heavily on foreign investments (net capital flow) in order to fund the investment savings gap. Throughout Australia's history the nation has been an importer of financial capital to develop ie industries. When using the savings of foreign countries, interest payments and dividends must be paid, again contributing to the income balance deficit while ultimately lead to a current account deficit.

-Elish & Riley-

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7.) What factors can lead to a rise in the current account balance (deficit)? 

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7.) What factors can lead to a rise in the current account balance (deficit)? 

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As the current account deficit can be affected by both structural and cyclical changes, it is thus affected by changes in the business cycle. Where there are high levels of economic activity, the economy is said to be in a boom phase. During said phase, consumer and producer confidence rises, thus investment rises, as do both imports and exports. A rise in investment directly increases the CAD through a rise in the primary income deficit. Investment in Australia will always lead to a substantial rise in foreign investment and loans from overseas countries. This means that dividends, profits and interest on loans will increase, and thus an outflow of cash, called debits, will occur. When debits rise by a greater ammount than credits there is said to be a  rise in the current account deficit.

•Sam and Matt

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How is the Current account balance affected by Australia's rate of economic growth?

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How is the Current account balance affected by Australia's rate of economic growth?

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Here are two examples to explain the affect of economic growth on the current account balance:

If Australia had high economic growth, the current account balance would decrease, as a result of an increase in the current account deficit.  Where there's high economic growth in the economy, it means that there will be a higher level of employment, and thus a higher level of disposable income.  This means, that consumers have a higher amount of money to spend on durable goods and on investments.  In times of high economic growth, consumers are confident, because of the high strength of the economy, and thus they will spend more of their money on investment, instead of putting their money into savings and fixed term deposits.  Due to higher expenditure, this will lead to higher demand for imports, meaning that the level of imports into Australia will increase.  This demonstrates a debit in the goods component, as money is flowing out of the domestic economy.   Domestic producers will invest more in capital equipment, in order to increase domestic production.  By investing more, it means the levels of borrowing will increase.  However, the money in savings isn't enough to lend out to investors, as consumers will be spending more of their money, thus banks turn to overseas banks in order to borrow the money they need.  This poses an extra debit, as interest payments need to be paid on this borrowed money, thus money flows out of the economy - it's a debit in the primary income component.  Overall, the gap between the level of investment and savings increases, thus, the capital account deficit increases.  The levels of debit are much greater than the levels of credit, and thus there's a decrease in the current account balance.

If Australia had low economic growth, the current account balance would increase, as a result of a decrease in the current account deficit.  Where there's low economic growth in the economy, it means there will be a lower level of employment, and thus a lower level of disposable income.  This means, that consumers have a lower amount of money to spend on durable goods and on investments.  In times of low economic growth, consumers are not confident, because of the low strength of the economy, and thus they will spend less of their money on investment, and put more of their money into savings and fixed term deposits.  Due to lower expenditure, this will lead to lower demand for imports, meaning that the level of imports into Australia will decrease.  Domestic producers will invest less in capital equipment, due to lack of confidence in the domestic economy.  By investing less, it means the levels of borrowing will decrease.  This poses a decrease in debit of the primary component of the current account, because less money will be flowing out of the economy, and thus more money in savings can be used to lend out, and be used to cover debts in borrowed money by domestic banks from overseas banks.  Overall, the gap between the level of investment and savings decreases, thus, the capital account deficit decreases.  The gap between credits and debits will decrease, and thus there's an increase in the current account balance.

By Dimitrie and Ryan

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Explain how events in the world economy can affect Australia's current account balance. Trey, Nicolina

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Explain how events in the world economy can affect Australia's current account balance. Trey, Nicolina

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Example 1) Cad gets bigger (made up scenario)
The Chinese economy is booming.
Goods and services component:
The Chinese economy is booming, therefore increased demand for Australian exports while Australian imports also increases due to the growth of Australian economy which is guided by the growth of Chinese economic growth. The trade balance deficit increases, resulting in an overall increase in the capital account deficit.
balance of goods and services 2016: -10000
Balance of goods and services 2017: -20000

Primary income component:
Less savings as consumers are more confident and therefore invest more while producers also invest more in capital equipment which are imported from foreign producers. Foreign investment and borrowing also increases resulting in a greater savings-investment gap. As more foreign investment and borrowing occurs, Australia has to pay more debits on dividends, profits, and interest payments. Therefore a greater primary income deficit is  greater cad is achieved.
primary income deficit 2016: -30000
Primary income deficit 2017: -50000

Overall from 2016 to 2017 the balance on current account deficit increased from -40000 to -70000

Example 2) Cad gets smaller (real life scenario)
Global financial crisis is an example of a world event affecting the Australian CAD.
Goods and services component:
GFC occurred = Aus $ depreciates = increased international competitiveness of Aus goods and services. = increased exports. As the Aus $ decreases overseas goods are more expensive so Australian consumers decrease spending on imports; Imports fall. As exports > imports a trade surplus is created. As balance of trade has increased to a surplus the overall CAD decreases.
balance of goods and services 2008: -30634 which increases to a...
Balance of goods and services 2009: 1283

Primary income component:
Consumers increase savings as they are less confident and have built up debt in booming economy. While producers have decreased investment resulting in a smaller savings-investment gap. As a result less foreign investment and borrowing is needed, thus less interest payments, divide ends and profits are payed to overseas. Therefore decreasing the primary income deficit. Resulting in a smaller CAD.
2008 -47858 primary income deficit which decreases in 2009 to...
2009 -43655 primary income deficit

Overall from 2008 to 2009 the balance on current account decreases from -78651 to -42983

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Explain which category in the current account is more volatile - the trade balance or the primary income balance 

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Explain which category in the current account is more volatile - the trade balance or the primary income balance 

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The trade balance is more volatile then the primary income balance due to the composition of Australia's imports and exports that are largely influenced by both the Australian business cycle and the world business cycle. Australia's exports are subject to wide fluctuations in price due to world climatic conditions, for example if there was a shortage of wheat due to bad conditions in Russia the world price would increase. Australia is also a price taker as we are too small to influence world prices. Demand for our exports is inelastic as a fall in price does not result in a large increase in demand, therefore a fall in price will result in a fall in the value of our exports. When the trade balance was in surplus in 2000-2001 the current account deficit decreased from $30 billion to only $16 billion. Also, when there has been an increase in the trade balance deficit there has been a increase in the current account deficit. However, the income balance remains far more stable then the trade balance. while the trade balance changes from deficit to surplus the income balance is always in deficit. This is due to Australia's reliance on foreign investment to fund the investment-savings gap which is more structural whereas the trade balance changes is due to cyclical fluctuations. Hence, if the income balance does not fluctuate widely any changes in the current account deficit must be due to the fluctuations in the trade balance.

Maharny and Sarika

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Explain why the current account balance follows a cyclical pattern? 

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Explain why the current account balance follows a cyclical pattern? 

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Cyclical means that the CAD is affected by changes in the business cycle. Cyclical factors are only temporary and and subject to frequent changes. The component of the CAD that is most cyclical is the trade balance. This is because the demand for our exports is dependent on overseas economic growth and the deman for our imports is dependent on the strength of our economy. Both of shich follow the business cycle. For example, when our economy is experiencing a boom with very strong economic growth the current account balance as a peoplrtion of GDP reached a peak (7%) in 2007-2008. The global exonomy also fluctuates amd follows the business cycle have a major impact on Australias trade and current account balance. If the Chinese economy expands the world commodity prices (iron ore and coal) rise which will boost Australias export income and increase the trade and current account balance. Factors that affect Australias level of international competitiveness such as relative wage levels, inflation rate and exchange rates are also important in causing cyclical changes in the current account balance.

Ayesha and Ashleigh

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Is there an optimal size for Australia's current account deficit 

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Is there an optimal size for Australia's current account deficit 

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There is no optimal or correct size for the current account deficit. A current account deficit does not always represent a weakness in the economy, it could be due to cyclical factors or changes in national savings and investments. For example, an increase in economic growth could contribute to an increased level of investment causing a current account deficit. Increased investment contributes to a higher level of output which is beneficial to the economy. However, if the current account deficit is due to a decline in competitiveness this could be a concern.

Q12)
Explain how a fall in productivity that reduces our international competitiveness would impact on Australia's current account deficit.

A fall in Australia's productivity would cause a decrease in Australia's comparative advantage decreasing competitiveness. Due to the decreased level of output, the demand for exports decreases whereas imports increase which is a debit to the trade balance. This leads to an increase in the current account deficit. The decline in competitiveness and increase in current account deficit  is a concern as the economy is in a major slowdown and is not due to an increase in investment.

Nic and Cameron

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Why is Australia's primary income balance always negative?

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Why is Australia's primary income balance always negative?

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Primary income is the biggest component of Australis current account deficit. The primary income is always negative due to our reliance on borrowing and investment from overseas as Australian stocks tend to invest more than they save. Australia relies on investment income to supplement domestic savings in order to fund our investment needs. These large amounts of foreign investment in Australian economy requires interest payments and large profits and dividends being paid to overseas investors, resulting in th primary income always being in deficit.

Jeremy and Ethan

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Explain how the financial account is linked to the current account.

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Explain how the financial account is linked to the current account.

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The financial account shows transactions that involve investment coming in or out of Australia. It involves borrowings and investment.

The current account has the primary income component which refers to income received from Australian residents less any payments of income to overseas residents. These include interest payments, profits and dividends.

The two accounts are linked because if there is a credit within the financial account, then a debit will occur in the net income component.

Eg. If an Australian firm were to borrow money from an overseas bank. There would be a credit in the financial account. But as the money must be paid back with the addition of interest, it would be a debit transaction in the primary income component of the current account as money is going out of Australia.

Vincent and Shaun

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What Impact did the GFC on the Australian Current account balance? Nick P and Jonathan 

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What Impact did the GFC on the Australian Current account balance? Nick P and Jonathan 

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The GFC in 2008-2009 had the following impacts on Australia's Current Account deficit:
- The Current account deficit fell from $78 billion to $42 billion during this crisis

- Slowing of the domestic economy due to the creation of a surplus on the balance of goods and services and a fall in the net income component.

- Less confidence which lead to less investment and therefore less interest payments, dividends and profit payments overseas.

- Deprciaition of the Australian dollar from 0.97 USD in July 2008 to 0.64 USD in March 2009, ceterus paribus this increased demand for our exports as they are relatively cheaper and decreases demand for imports as they are relatively expensive.

- Australian exports remained steady due to China, one of Australia's major trading partner not being greatly effected by the GFC. This enabled them to continue to demand more of our exports.

Q12) Explain how a fall in Australia's productivity that reduces our international competitiveness would impact on Australia's CAD?

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Questions

1.) Why is Australia's primary income balance always negative? Jeremy, Ethan

2.) Explain how events in the world economy can affect Australia's current account balance. Trey, Nicolina

3.) How is the current account balance affected by Australia's rate of economic growth? Dimitrie, Ryan

4.) Is there an optimal size for Australia's current account deficit? Nick K, Cameron

5.) Explain why the current account balance follows a cyclical pattern? Ayesha, Ashleigh

6.) Explain which category in the current account is more volatile - the trade balance or the primary income balance. Maharny, Sarika

7.) What factors can lead to a rise in the current account balance? Matthew, Sam

8.) What are the structural reasons for Australia's CAD? Riley, Elish

9.) Explain how the financial account is linked to the current account? Vincent, Shaun

10.) 'Fluctuations in the CAD are not a bad thing' . Explain this statement. (See news extract p. 87) Domenico, Yew

11.) What impact did the GFC have on Australia's current account balance? NIck P, Jonathon

12.) Explain how a fall in Australia's productivity that reduces our international competitiveness would impact on Australia's CAD? Everyone

Steps

1.) Have a quick chat. Active listening. Be your best self. What's your favourite food?

2.) Check out how quick their reflexes are.

3.) Discuss the question.

4.) Take some notes to answer the question - Try and be specific. Use chain of reasoning, Refer to the data. Show the full depth of your understanding.

5.) Share your response - verbally.

6.) Share your response on Padlet - due: Monday.