World Library  
Flag as Inappropriate
Email this Article

Balance of payments of Australia

Article Id: WHEBN0010447738
Reproduction Date:

Title: Balance of payments of Australia  
Author: World Heritage Encyclopedia
Language: English
Subject: Economy of Australia, Manufacturing in Australia
Collection: Economy of Australia, Foreign Trade by Country
Publisher: World Heritage Encyclopedia
Publication
Date:
 

Balance of payments of Australia

Australia's current account (in $Millions) since 1959.
The contribution of goods and services to Australia's current account (in $Millions) since 1959.

In trade terms, the Australian economy has had persistently large current account deficits for more than 50 years.[1] One single factor that undermines balance of payments is Australia's narrow export base.

Dependent upon commodities, the Australian government has endeavoured to redevelop the Australian manufacturing sector. This initiative, also known as microeconomic reform, has helped Australian manufacturing to grow from 10.1% in 1983-1984 to 17.8% in 2003-2004.[2]

There are other factors that have contributed to the extremely high current account deficit that Australia has today. Lack of international competitiveness and heavy reliance on capital goods from overseas might increase Australia's current account deficit in the future.

Low levels of national savings also contribute to high current account deficits. This is because excessive expenditure will force a lot of businesses to seek funds overseas. At the same time, when governments run constant budget deficits, they meet their monetary requirements by borrowing from the domestic sector. Economists refer to the ‘crowding out effect’ to explain this economic situation. When governments borrow from the domestic sector, they force the private sector to ‘crowd out’.

Since there aren't enough funds available within the domestic economy, the private sector is forced to borrow funds from overseas. The borrowing of funds is simply typed into the borrowers account at interest to the lender, no real paper money is lent and the fractional reserve banking system kicks in via compueterised lendings. Borrowing from overseas causes Australia’s current account deficit to increase, leading to a major increase in credit debt expansion. On the other hand, there is nothing wrong with the debt growing if Gross Domestic Product grows at the same time. That is, current account deficit has to stay within a range of 4-5% in order to meet regular interest repayments on foreign debt whilst maintaining perpetual servitude of the borrower and interest repayments to the lender.

However, excessive current account deficit, combined with low investor confidence and the possibility of a currency crisis, will force the central bank to implement contractionary macroeconomic policies to restrict economic growth. When economic growth or activity is being restricted, low investment and low levels of expenditure will generally restrain the current account from growing. Nevertheless, Australia’s current account deficit needs a long term solution in order to secure the Australian economy's viability.

Many economists, notably John Pitchford, argued that choices whether to borrow or lend are dealt with between private or ‘consenting adults’ and in consequence no governmental intervention is necessary. There are also other experts who argue that Australia’s high current account deficit will undermine the Australian dollar and that it might experience a similar crisis experienced by the Thai currency that foreshadowed major economic crisis.

Effects on wider economy

There are multiple complications that result if countries have a high sustained current account deficit and high foreign debt. While sustainable foreign debt is not a major problem, an unsustainable current account deficit can have serious repercussions for the Australian economy. In December 2007, Australia's deficit hit $23.3 billion which was an 18 per cent increase than three months earlier.[3]

See also

References

  1. ^ Downwonder Economist.com, 29 March 2007
  2. ^ Leading Edge, R: "Australia in the Global Economy", Tim Dixon and John O'Mahomy, page 133 .
  3. ^ Record deficit blow-out 5 March 2008
This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and USA.gov, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for USA.gov and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.
 
Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.
 
By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.
 


Copyright © World Library Foundation. All rights reserved. eBooks from Project Gutenberg are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.