HSC Topic Two Australia’s Place in the Global Economy

• Australia’s trade and financial flows

  Value, composition and direction of Australia’s trade and financial flows

  
  

  Direction of Financial Flows: (Where investments are invested in, where finance is directed)A country receiving funds from other countries in the form of investments
• Australia’s trade and financial flows

  Value, composition and direction of Australia’s trade and financial flows

  
  

  Composition of Financial Flows (Types of financial investments or assets invested in)

  Portfolio Investment: 10% less of a company. Provides short term wins

  
  

  Foreign Direct Investment: 10% or more of an organisation, Long term stable growth and wins

  
  

  Derivatives: A bet or contract indicating whether the price for asset goes up or down

  
  

  Currency exchange: Exchanging currency
• Australia’s trade and financial flows

  Value, composition and direction of Australia’s trade and financial flows

  
  

  Financial Flows is the transaction of investments, loans and currency. How money flows around through financial transactions

  
  

  Financial Flows is important as it is used to promote economic growth, employment and improve quality of life
• Australia’s trade and financial flows

  Value, composition and direction of Australia’s trade and financial flows

  
  

  Direction of trade flows refer to which countries trade, where the products (G+S) are being exported and imported 

  Countries that export and import with each other

  E.g Australia’s resources are exported to Asia and Asia products are imported into Australia.
• Australia’s trade and financial flows

  Value, composition and direction of Australia’s trade and financial flows

  
  

  Trade composition is what a country trades, the products (G+S) that are exported and imported

  E.g ETM’s and STM’s
• ●  Trends in financial flows – debt and equity

  
  

  Net Foreign Liabilities: Net Foreign Liabilities shows financial position of country in terms of international financial obligations

  
  

  FORMULA: Net Foreign Liabilities = Net Foreign Debt - Net Foreign Equity

  
  

  Foreign liabilities is made up:

  • Net foreign debt
  • Net foreign equity
• ●  Trends in financial flows – debt and equity

  
  

  Net Foreign Equity: Total value of foreign assets a country owns MINUS total value of assets owned by foreigners

  (Total Value of asset owned MINUS total asset owed by foreigner)

  E.g Land, Shares
• ●  Trends in financial flows – debt and equity

  
  

  Net Foreign Debt: Money Australia owes to countries overseas

  Australia total value of loan MINUS Value of loans owed by foreigners

  (AUS Loan - Foreigners Loan)

  
  

  This leads to current account deficit as interest payments constitute an outflow of funds on current account.
• Australia’s Balance of Payments

  
  

  The balance of payments is a monetary record of transactions that come in and out of Australia over a period of time.

  
  

  Money Flowing into Australia is called credit

  Money Flowing out of Australia is called debt

  
  

  Balance of payments is made up of two sections

  Current Account (CA)                              

  Capital Account and Financial Accountant (KAFA)

  
• Australia’s Balance of Payments

  Current Account

  
  

  Current Account measures the net income from international trade

  
  

  Current Account consist of:

  Balance of Goods and Services (BOGS)

  Primary Income

  Secondary Income
• Australia Balance of payments

  
  

  Current Account ~ Balance of Goods and Services

  
  

  Balance of Goods and Services (BOGS) shows the value of trade of goods and services identifying if we are in a trade surplus or deficit

  
  

  Net goods (credit - Debit)

  Net Services (Credit - Debit)

  
  

  Formula for Current Account = Net goods + Net services
• Australia Balance of payments

  
  

  Current Account ~ Balance of Goods and Services

  
  

  Net goods - Tangible or Physical Items imported and exported

  
  

  Goods Imports: consumption, capital or intermediate goods

  Goods Exported: agriculture, minerals, energy

  
  

  Goods Credit: Exporting Iron to ChinaGoods Debt: Purchasing consumption goods

  
  

  Formula for Net Goods: Goods Credit (Export) - Goods Debt (Import)
• Australia Balance of payments

  
  

  Current Account ~ Balance of Goods and Services

  
  

  Net Services - Intangible services that are imported and exported

  
  

  Net Services: Travel, Education, Insurance, Finance

  
  

  Credit (To remember identify as coming in): Exchange students coming in Australia

  Debit (Going out): Australians Traveling oversees

  
  

  Formula for Net Services: Service Credit (Export) - Service Debt (Import)
• Australia Balance of payments

  
  

  Current Account ~ Primary Income

  
  

  Primary Income refers to the income received from assets/investments overseas

  
  

  Sources of Primary Income:

  • Interest (Interest on loans)
  • Dividends (dividends from investment)
  • Rent (rent from property)
  • Profit (Biz sales- Biz expenses)

  Primary Credit - Receiving Dividends or Receiving interest payments from other countriesPrimary Debit - Paying dividends and interest loan borrowed from USA

  
  

  Formula for Primary Credit: Primary Credit - Primary debt
• Australia Balance of payments

  Current Account ~ Secondary Income 

  Secondary Income refers to providing/receiving products or finance to countries without expecting/ paying a return 

  • Pensions
  • Insurance Claims
  • United foreign aid

  Secondary Income Credit: A non resident recieves pensions from their home country

  Secondary Income Debit: Australia providing 10 million to Indonesia tsunami

  Formula: Secondary Credit - Secondary Debit
• Australia Balance of Payments

  Capital and Financial Account ~ Capital Account

  
  

  Capital Account

  • Patents
  • Trademarks
  • Copyright
  • Royalties
  • Franchise
  • Foreign Aid (Tied Aid specifically spent)
• Australia Balance of Payments

  Capital and Financial Account ~ Financial Account

  
  

  Financial Account

  • Portfolio Investment
  • Foreign Direct Investment
  • Derivatives
  • Reserve Assets
  • Other assets
  • Money transfer
• Australia Balance of Payments

  Capital and Financial Account ~ Net Omissions

  
  

  Net Omissions

  + or -

  CA + KAFA = 0
• Capital Account and Financial Account

  
  

  Capital Account

  Records the flow of capital in and out of Australia.

  
  

  Examples of Capital (refer to table)

  
  

  Patents

  Trademarks

  Copyrights

  Franchise

  Royalties

  Foreign Aid
• Capital Account and Financial Account

  
  

  Financial Account

  Records the financial transactions over time in Australia.

  
  

  Examples of Capital (refer to table)

  
  

  Portfolio Investment

  Foreign Direct Investment

  Reserve Assets

  Derivatives

  Money Transfer

  Other Assets
• Current Account

  
  

  Current Account measure the flows of goods, services and income in and out of Australia over a period of time.
• Net income or net direct investment etc means credit - debit already been worked out
• Trends affecting the BoP

  Terms of trade, International competitiveness, International Borrowing, Foreign investment

  
  

  Terms of trade (TOT) refers to the prices of imports and exports. 

  Terms of trade Formula: Export/ Import X 100/1

  Measuring the TOT

  • Favourable ToT when value is higher than 100
  • Unfavourable ToT when value is lower than 100 
  • Improving ToT - When ToT rises compared to previous Year

  Export price increase faster than import price

  • Deteriorating ToT When ToT decrease compared to previous Year

  Import price increase faster than export price
• Trends affecting the BoP

  Terms of trade, International competitiveness, International Borrowing, Foreign investment

  
  

  International competitiveness is about how well a country can sell its goods and compete with products from other countries.

  
  

  COST ISSUES:

  Increasing the cost of production can increase the price of G+S reducing international competitiveness

  
  

  Cost Issues:

  • Transport Cost (Distributing and moving G+S)
  • Tax (government imposed tax leading to less profits disrupting the international competitiveness)
  • Value of Currency (reflects the demand for a countries currency)