Australia's Place in the Global Economy HELP

[chuckiecheese]

I'm having a lot of trouble with the second topic, the 'Australia's Place in the Global Economy' topic. It actually baffles me.

My teacher has set a few essay questions already, and I am drowning.

These are just two of them:

1. Discuss the reasons for Australia’s persistent current account deficit
2. Discuss the significance of the current account deficit for Australia’s foreign debt

Any help any of you guys could lend would be great!

[xsharkninja]

What specific concepts don't you understand? It will be easier to help you if there's some sort of starting place.

[tasiakuz]

Hi! I was just wondering if anyone could help me with an essay question I have: Analyse the impact of changes in the global economy on Australia's balance of Payments. I understand the Balance of Payments but could anyone help explain the changes in the global economy - I'm guessing this constitutes the CAD and the international business cycle -(china in downturn) but what else could I talk about? Thanks 

[chuckiecheese]

hey tasiakuz,

I think that if you discuss the cyclical factors and their impact on the BOPs:
e.g. Global demand for commodities affects demand for Australia’s exports.
Domestic demand for imports affected by the domestic business cycle
The terms of trade affects the price of Australia’s exports and imports.
An appreciation of the exchange rate will reduce export competitiveness
Higher global interest rates increasing income payments on Australia's net foreign debt

That's all I can really think of at the moment (it may not be right!)

[tasiakuz]

Thank-you! Definitely going to incorporate some of that in

[brenden]

What specific concepts don't you understand? It will be easier to help you if there's some sort of starting place.

hey tasiakuz,

I think that if you discuss the cyclical factors and their impact on the BOPs:
e.g. Global demand for commodities affects demand for Australia’s exports.
Domestic demand for imports affected by the domestic business cycle
The terms of trade affects the price of Australia’s exports and imports.
An appreciation of the exchange rate will reduce export competitiveness
Higher global interest rates increasing income payments on Australia's net foreign debt

That's all I can really think of at the moment (it may not be right!)

I just wanted to say thanks heaps guys - it's super helpful to see new users coming through helping each other out. You guys are champions

[Spencerr]

Just some info off the top of my head.

1. Discuss the reasons for Australia’s persistent current account deficit
The persistent current account deficit is caused by structural problems as opposed to cyclical so it would be ok to give lip service to things such as ToT, exchange rate, IBC etc. but the biggest things will be the structural causes.

Savings investment gap- Australia is a net importer of capital i.e. it needs to borrow in order to finance all the investment opportunities that are available. Remember we have a small population and a significant land endowment. When we borrow money from overseas or use overseas funds to finance investment, we have to pay foreign investors back with interest, dividends etc. This outflow of money is the main reason why our CAD is always in a deficit.

Lack of international competitiveness + narrow export base- Our comparative advantage is in resource exports and in agriculture however these two goods (they make up around 50% of our exports) and they subject to volatility in prices and have low added value. Our manufacturing sector has declined dramatically because we can't compete against China due to the high costs of labour. These reasons plus the fact that we import alot (we import alot of manufactured goods because we don't domestically produce them) causes the BOGS to remain in deficit.

Consecutive government deficits
When the government runs consecutive deficits like our current gov. it contributes to worsening out CAD because they draw upon private sector savings which would otherwise we used to fund domestic investment. Hence the private sector goes overseas to draw funds increasing net foreign liabilities.



2. Discuss the significance of the current account deficit for Australia’s foreign debt

Off the top of my head
- Large CAD increases foreign debt due to the servicing costs which add on
- CAD can cause investor confidence to decline leading to capital flight which leads to a sharp depreciation of the Australian currency, which would increase the size of Australia's foreign debt hence it is within Australia's interest to maintain a low or sustainable CAD