Ecos Topic 2

• Comparative advantage


  Australia has a comparative advantage in: 1. Commodities (iron ore, natural gas, gold, approx. 30% of exports) 2. Agricultural products (wheat, beef & wool) 3. Services (tertiary education & inbound tourism)
• Value of exports and imports has increased significantly since the 1970s due to reduction in tariffs (increase in imports) and impacts of globalisation & industrialisation impacting commodity exports
• On a net basis (exports - imports), Australia mostly had a trade deficit (imports > exports)
• Exports & imports of goods as a % of GDP has risen from 12% in the mid-1980s to 21% by 2016-17 -> Australia recorded a large surplus in the goods balance of $13,918m in 2016-17
• Composition changes in Australia's exports


  • Significant increase in minerals & metals as a % of exports
  • Reduction in share of rural exports
  • Following the depreciation of the AUD in 2012, a recovery & growth in services & rural exports. However, covid has impaired services exports since March 2020
• Composition changes in Australia's imports


  • Major change has been intermediate goods & services declined as a result of covid border closures
• Since the 1960s, Australia has seen a major shift in the direction of its trade pattern away from British & European markets -> Asian & Pacific markets (76.5% of exports in 2016-17)
• The EU only accounts for 4.4% of Australia's exports & 18.4% of its imports
• China is Australia's #1 export market with 29.5% of total exports & 22.5% of imports in 2016-17
• APEC accounts for 77.7% of Australia's exports & 71.6% of its imports
• Structural factors affecting Australia's trade


  • High labour rates in Australia make manufacturing less internationally competitive -> increase in imports
  • Abundant natural resources of high quality & high labour rates -> narrow export base (few types of goods -> increased volatility)
  • Quality labour force, tourism location & educational institutions attract visitors & students
• Cyclical factors affecting Australia's trade


  • China growth rate has very significant impact on commodity prices & export values
  • Global growth rate impacts export markets
  • Exchange rate impacts non-mining exports & imports
  • Domestic & global weather events impact agricultural exports & imports
  • Domestic growth, wage growth, unemployment impacts imports
  • UK joining EU (1973) -> imposed trade barriers on Australia exports -> decrease in exports
• International Financial Flows


  Include debt & equity borrowings, foreign exchange, & derivatives trading across national boundaries
• Types of International Financial Flows


  • Debt Flows: making/repayment of loans
  • Equity Flows: purchase/sale of ownership interest
• Net Foreign Debt (NFD)


  Borrowing by Australia - lending from Australia
• Net Foreign Equity (NFE)


  Foreign assets in Australia - assets owned by Australians overseas
• Net Foreign Liabilities (NFL)


  Net Foreign Debt + Net Foreign Equity
• Foreign Investment in Australia: stock of foreign liabilities owed by Australian residents to non-residents
• The mining boom facilitated growth in foreign direct investment & portfolio investment in Australia
• Foreign investment in Australia has increased from $326,980m in 1991-92 to $3,237,904m in 2016-17
• Growth in investment into Australia has averaged 5.4% per annum over the last 5 years
• Advantages of foreign direct investment into Australia


  • Transfer of technology & management skills, access to foreign exchange, employment opportunities
• Disadvantages of foreign direct investment into Australia


  • Loss of ownership & control of resources, cost of servicing overseas debt & equity borrowings, volatile nature of speculative portfolio investment impacting on the exchange rate -> Foreign Investment Review Board (1976)
• Foreign Investment Abroad: stock of foreign financial assets owned by Australian residents
• Foreign investment abroad grew significantly from 1990-2017, up from -$107,940 to -$2,237,641, due to increased offshore interest of major Australian companies
• Net International Investment Position (NIIP)


  Total foreign liabilities owed - total foreign assets owned
• Total foreign assets grew from -$2,177,279m in 2015-16 to -$2,237,641m in 2016-17
• Total foreign liabilities increased from $3,213,138 in 2015-16 to $3,237,904 in 2016-17
• The floating of the Australian dollar -> increased integration with global capital markets -> growth in foreign exchange turnover
• Structural factors affecting Australia's financial flows

  • Australia's savings-investment gap -> net capital importer (foreign direct investment in Australia > investment abroad) -> increased inbound capital flows & increased outbound interest & dividend flows
  • Quality agricultural & mining assets & educated labour force -> attractive to foreign investment -> increased foreign direct investment
• Cyclical factors affecting Australia's financial flows

  • Domestic & global interest rates
  • Exchange rates, appreciation -> decreased attractiveness for foreigners purchasing Australian assets, vice versa for depreciation
  • Domestic & global growth rates -> increased investment opportunities & need for loan funds
  • Domestic & global inflation
• Balance of Payments (BOP)


  Record of all financial transactions between Australian residents & the rest of the world – reflects features of the structure of the economy & imbalances in the relationships between Australia & the world

  
• Credit


  Money that flows into Australia (positive), demand for Australian dollar
• Debit


  Money that flows out of Australia (negative), supply of Australian dollar
• Net Balance of Payments

  Credit - Debit
• Components of the Balance of Payments


  • Current Account
  • Capital & Financial Account
  • Net Errors & Omissions
• Double-entry accounting framework of the Balance of Payments


  • Every transaction has two sides: economic value is provided = credit entry, economic value is received = debit entry
  • Total Balance of Payments should be 0 (if not, Net Errors & Omissions is introduced)
• Current Account


  Records all transactions of a current nature such as exports (credits) & imports (debits) of goods & services, net primary income & net secondary income
• Balance on Current Account

  Balance on goods & services + net primary income + net secondary income
• Balance on Goods & Services (BOGS)


  Net goods (exports - imports) + net services (service exports - service imports)