Hey!
I am wondering if someone was able to summarise the Balance of Payments because I am not really grasping the whole concept of it all.
Thanks in advance!
Okay, so the Balance of Payments comprises of two accounts. The two accounts are the current account, and the capital and financial account. The current account consists of the balance of goods and services (otherwise known as BOGS), the net primary income, and the net secondary income. The BOGS part is basically just looking at net exports (stuff you bring out of the country) minus net imports (stuff you bring into the country). The BOGS is usually in fluctuation (either in deficit or in surplus)
The net primary income is basically just returns on investment from credits -debits. Credits is money going into the country. Debits is money going out of the country. Because Australia spends more and saves less, it has very low domestic savings, hence net primary income is usually deficit. Also remember that a lot of countries choose to invest into Australia because Australia has relatively high interest rates as compared to other countries. This means that there will be a greater return on investment. Hence, there is more money going out of the account (which is a debit by the way) to pay the foreign countries back, hence there is a deficit.
The net secondary income is basically just credits- debits for government transfers (aka stuff that is not directly related to investment or exports). this can be stuff like Australia giving out foreign aid to different countries, migrants transfering money back to their home country, that sort of thing. Again, there is a lot of fluctuation with it being either a deficit or surplus. It just depends.
So the current account is basically the NPI (net primary income), NSI (net secondary income) and BOGS (balance of goods and services). The capital and financial account is literally just the capital account and financial account (two separate accounts). For all intents and purposes, we just say that those two accounts are together.
Capital Account basically records credits and debits for the acquisition or disposal of non-produced & non-financial assets such as foreign aid and net capital brought into Australia by migrants. The Financial Account records credits and debits associated with direct investment, portfolio investment, other investment and changes in the level of reserves held by the RBA.
That is pretty much it. Hope that helps! Again it is a quick summary. Feel free to research and go into more detail.