Australia's Trade and Financial Flows

8/10/2019 Australia's Trade and Financial Flows

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Australias Trade and Financial Flows

*On size, the Australian economy ranks 14thin the world, but

is relatively small compared to the global giants such as USA, hina,

!apan etc" * #n $%%&, Australia ranked $ndin the world according to the

human development inde'

Trends in Australias Trade Patterns

Australia(s resources are in demand across the world, and since

Australia has a small population, it has needed to trade these

resources in order to obtain the money to develop" Australia only

produces $) o global economic output" +'ports are around oproduction, and imports are around o consumption"

Changing direction of trade-

#n recent decades, !apan and hina have become Australia(s ma.or

e'port buyers" /his is because growth rates o Asian economies

have increased considerably, and geographically their markets are

easier or Australia to access than +uropean or American markets,

especially since the advent o trading blocs such as the +uropeanUnion 0+U and 2orth American 3ree /rade Agreement 02A3/A" /he

Asia aci5c region is now by ar the most important destination or

Australian e'ports"

#n $%%6 hina became Australia(s largest trading partner with

e'ports 16) and imports 14"7) in $%%7"

Changing composition of trade:

rimary industries have always been the main ocus o Australia(s

e'ports since Australia has the greatest comparative advantage in

commodity goods" Australia has e'ported high volumes o

agricultural products such as bee, wheat and wool and also

minerals such as coal, iron ore, gold and bau'ite" Australia is

generally less competitive in manuacturing" Australia imports a

large amount o capital goods, transport e8uipment9 industrial

supples and manuactured consumer goods"


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#mports: apital goods unchanged at around 17) o imports,

intermediate goods and services imports have declined, due to the

reduction and phasing out o protection in Australia" onsumer

goods as a proportion o imports have steadily increased, at around$;) in $%%7 rom 1ural

e'ports have declined signi5cantly over the years, rom ;$) in

1&7% to 1;) in $%%7" Agricultural sector has declined but the

mining and resources sector has boomed" ?owever, mineral e'ports

@uctuate in demand according to trends o the international

business cycle, e"g" the lobal 3inancial risis in $%%7 dimmed

demand or resources worldwide, but hina(s strong growth and

demand or resources ensured that Australia did not lose out on a

ma.or e'port buyer" Australia has e'perienced a decline in its

agricultural e'ports due to @uctuations in world prices and also

protectionist policies o other economies" Bining and >esources are


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/here has been a change in the composition o 5nancial @ows rom

direct to portolio investment"

Eirect investment includes the purchase o companies, 5rms and

the purchase o a substantial proportion o shares in a company0F1%)" Ghen a business undertakes direct investment it is

generally considered to be a longer term investment and the

investor normally intends to play a role in the management o the

business" /his is diHerent rom portolio investment which includes

loans, other orms o securities and smaller shareholding in

companies" Iusinesses and individuals undertaking portolio

investment generally do not intend to play a role in the

management o the business" ortolio investment has largely

increased ater 5nancial deregulation, consistent to the stats above"

overnments preerred direct investment, because it brought the

bene5ts o .ob creation and technological transer" Unortunately the

increase in portolio investment has pushed up share prices and

increased speculation"

Australia(s investment overseas is more than


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/he urrent Account- is the part o the balance o payments that

shows the receipts and payments or trade in goods and services,

transer payments and income @ows between Australia and the rest

o the world in a given time period" /hese are non reversibletransactions" #t comprises o 2et oods, 2et Services, 2et income

and 2et urrent /ransers"

/he apital and 3inancial Account- records the borrowing, lending,

sales and purchases o assets between Australia and the rest o the

world" 3inancial in@ow has the immediate eHect o increasing the

supply o oreign e'change to Australia while 5nancial out@ow

reduces it" /hese transactions are reversible: borrowings can be

repaid, and assets bought can be sold again" #t comprises o the

apital account and the 3inancial account 0Eirect investment,

ortolio investment, 3inancial Eerivatives, Other investment and

>eserve assets"

/he overall balance o the capital and 5nancial account is

determined by adding the categories together" /he outcome should

be appro'imately e8ual to the de5cit on the current account"

urrent account J apital and 3inancial account J 2et errors and

omissions K %

?owever, this is true only under a @oating e'change rate system"

/he supply o DA is represented by-

: ayments or imports o goods and services 0B

: #ncomeLtransers overseas 0M debits

: apital and 3inancial out@ow 0N out@ow

/he demand or DA is represented by-

: >eceipts or e'ports o goods and services 0

: #ncomeLtransers overseas 0M credits

: apital and 3inancial in@ow 0N in@ow

Under a reely @oating e'change rate, these should be e8ual"

B J M debits J N out@ow K J M credits J N in@ow

B = J M debits = M credits K N in@ow = N out@ow


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Ee5cit on the urrent Account K Surplus on the apital and

3inancial Account

3inancial in@ows can create debits on the income category o the

urrent Account in two ways9 3oreign 5nancial in@ows- overseas debt re8uires interest

repayments" /hese paymentsLservicing costs are not recorded

on the apital and 3inancial Account and are recorded on the

net income part o the urrent Account" /he most signi5cant

reason or the ongoing AE is the servicing cost o oreign

debt"

3oreign 5nancial in@ows- e8uity will re8uire returns on thee8uity investment" +8uity 5nancial in@ow can be related to the

oreign purchase o Australian land, shares or companies"

3oreign owners o land receive rent, owners o shares receive

dividends and owners o companies receive pro5ts" /his is also

in the net income part o the AE"

Over time, high NA3AS will result in a widening AE because o the

servicing cost associated with the increased oreign liabilities" /hiscan lead to PEebt /rapQ scenario"

urrent account de5cit DR$ billion Barch $%1%

AE 0) o E 4"&) Barch $%1%

#t is a danger sign i AE as ) o E e'ceeds


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recent times, but in times such as during the lobal 3inancial risis,

there is potential or Australia(s e'ports to signi5cantly drop" rices

o some commodity items especially in agriculture have seen a long

term decline as global trade has shited to sophisticatedmanuactured goods and services" Agricultural commodities are also

sub.ect to high levels o protection which can make diCcult or

Australia to sell these e'ports"

/alk about how narrow e'port base is good when commodity prices

are high and can improve the AE, but i e'port base is broadened

to include elaborately transormed manuactures 0+/Bs then

Australia is less prone to the @uctuations o the international

business cycle"

Services are the single astest growing area o global trade and this

is accelerated by new technology such as the internet" Service

industries dominate the Australian economy, employing around o

working Australians, but only a small portion o Australia(s services

are e'ported" +'pansion o service e'ports is essential to improving

Australia(s trade perormance" urrently service e'ports are

narrowly based with hal o Australia(s service e'ports coming rom

tourism" /he ne't largest service e'port is education, and is about

1L; o service e'ports"

Documents

Australia's Trade and Financial Flows