BOP ESSAY

Topics: Macroeconomics, Economics, Investment Pages: 2 (1159 words) Published: July 20, 2015
External stability occurs when export income is sufficient finance import expenditure as well as meeting its entire short and long-term financial debt obligations to the rest of the world. This requires the Australia’s CA and the level of NFL to be sustainable and the exchange rate to be stable. Australia has had a persistent CAD for the past 30 years with the primary income deficit being the largest component due to the servicing costs of Australia’s high foreign liabilities. The impacts of a high current account deficit (CAD) will be predominately based on its sustainability in the long run, with particular emphasis on the economy’s ability to finance its market-based capital inflows and service its external obligations. The CA consists of the balance of goods and services (BOGS), primary and secondary income component. The CAD has usually fluctuated between 2.5% and 6% of GDP over the past decade. The primary income deficit is the largest component of the CAD due to the servicing costs of Australia’s foreign liabilities as Australia has received large inflows of foreign funds and is generally stable at between 3% and 4.5% of GDP. Australia’s frequent BOGS deficits, where X Y is less than M exp, also contributes to Australia’s CAD – the CAD has been the largest in the years of strong domestic demand relative to world demand and when terms of trade (TOT), the ratio of export to import prices, deteriorates, causing higher import expenditure and lower export income. For example, strong global demand for commodities from 2005 increased export Y, as Australia’s BOGS reached to -1% of GDP from 3% and the CAD fell to -6% from 7% in 2006-07. Australia has been a net recipient of capital inflows for the most of its history, meaning capital inflow has exceeded outflow and Australia’s NFL has increased from 20% to around 55% of GDP since the 1980s (ABS). The mining investment boom has caused high levels of resource investment and more recently, Australia’s AAA credit...
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