Download Economic Issues In The Australian Economy

ECONOMIC ISSUES IN THE AUSTRALIAN ECONOMY – NOTES
Economic Growth
Economic growth refers to the increasing capacity of the economy to satisfy the needs and wants of its
members over time. It is usually measured by annual changes in real GDP, (takes into account inflation)
X 100
Measure – Real GDP yr 2 – Real GDP yr 1
Real GDP yr 1
● Aggregate Demand and Its Components Y=C+I+G+X-M
○ Aggregate income (Y) is the total amount received by all households in payment for the
services of factors of production. In an economy, aggregate income will equal aggregate
demand.
●
Injections and Withdrawals (I+G+X; S+T+M)
○ Expenditure that adds to the circular flow of expenditure and income are referred to as
injections. Examples – Investment expenditure by firms (I), government expenditure (G) and
exports (X) are injections.
○ Income that is not spent on domestically produced goods and services is referred to as
withdrawals, or leakages. Examples – Savings (S), taxes (T) and imports (M).
○ An economy is in equilibrium when I + G + X = S + T + M.
●
The Simple Multiplier; k=1/(1-MPC)
○ Multiplier effect – refers to the impact of a change in autonomous spending, (usually
investment) on the equilibrium level of national income. As autonomous components of
aggregate demand increase, there is a greater or multiplied increase in the equilibrium level
of national income.
○ As expenditure increases, demand for resources increases, consumption increases, causing
further increases in income, consumption and saving. This process of increased spending
and earning continues until Y=Y at some high level of equilibrium income. This is called the
multiplier process.
○ The number of times that the increase in income (Changes in GDP) exceeds the increase in
injections is known as the multiplier (k)
○ Occurs because when extra spending is injected into the economy it stimulates further
spending, and so on. The higher level of spending, the greater the multiplier effect;
therefore the value of the multiplier is dependent on the Marginal Propensity to Consume
(MPC).
○ The MPC refers to how much people will consume of any increase in their income and
therefore can be calculated by
C/
Y
○ The simple multiplier : k = 1/(1 – MPC)
○ Example – If the government increases spending by $100 million and the multiplier is equal
to 5, then this will cause a change in equilibrium of 5 x $100m = $500m
●
Measurement of growth through changes in real GDP.
○ Economic growth is measured by the increase in real GDP. A change in GDP results from the
effects of changes in prices and in the quantities of final goods and services produced. Real
GDP measures changes in the quantities of final goods and services produced by keeping
prices constant.
○ Real GDP = nominal GDP x (price index base year/price index in current year).
●
Sources and effects of economic growth in Australia.
○ According to demand-side economists like Keynesians (their mantra: what is spent is earnt)
changes in aggregate demand cause economic growth/ decline and consequently swings in
the business cycle. As national income rises, investment ‘accelerates’ causing further
increases in household consumption and income via the multiplier effect. These increases in
aggregate demand can be caused by:
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○
○
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An increase in the size of the labour force
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An increase in the stock of capital equipment
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Advances in technology
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A more efficient use of currently available resources.
Households and businesses expect the economy to expand; households are confident in
holding onto jobs so continue to expend, businesses are confident in household consumption
growth, so they continue to expand output and invest. The positive atmosphere becomes a
boom – living standards rise, cyclical unemployment falls and demand-pull inflationtionary
pressures increase.
MACROECONOMIC MODEL: Increases in Agg D causes:
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Increased real income/GDP
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Increased employment, (decreased cyclical unemployment)
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Demand pull inflation
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In Australia, increased CAD due to BOGS being cyclical.
But the Keynesian mantra; what is spent is earned, neatly already assumes that all markets
and business are as efficient as they can be and that consumers are rational
If we take the three sector model, where Y=AS=C+S and E=AD=C+I
Calculating income at equilibrium, Y=E, E=AD=500+0.75Y – rearrange for Y.
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Y=E at equilibrium (no tendency to change)
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AD = C + I
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C= 100 +0.8Y
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I = 100
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Therefore AD = 200 + 0.8Y
●
Assume in year 2, C2 = 100 + 0.8Y and I increases from 100 to 200.
■
○
The Y + E analysis diagram illustrates how a change in autonomous investment
causes a greater change in equilibrium income. Autonomous investment increases
from I=100 to I2 = 200, causing an increase in aggregate demand from AD = 200 +
0.8Y to AD2 = 300 + 0.8Y. As expenditure increases, demand for resources
increases, causing increased household incomes. As income increases, consumption
increases, causing further increases in income, consumption and saving. This is
called the multiplier effect.
Falls in cyclical unemployment – Increased aggregate demand causes the deflationary gap to
decrease, meaning that the economy is closer to achieving full employment.
○
Increase in demand-pull inflationary pressures – When increases in Agg D are not matched
by subsequent increases in Agg S, this means that too much money is chasing too few goods,
causing demand-pull inflation.
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Yfe indicates the nation’s maximum output. When Agg D increases from AD to AD2,
the economy is trying to operate at Y, but is unable to do so. At Yfe, AD is greater
than maximum output. This causes inflation to increase.
Supply-side model of economic growth, where changes in Agg. Supply cause changes in
income. Their mantra: what is produced determines income.
Agg supply changes due to:
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Increased supply of resources
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Improved technology
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Economies of scale.
Supply-side theory relies on the role of market prices to, allocate resources, distribute
incomes and ration goods and services. There is consequently no role for governments.
Problem with the model:
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Assumes worker efficiency and trusts the economy’s ability to react quickly to
shocks.
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Assumes there is effective Agg demand to buy output supplied to markets.
EFFECTS OF INCREASED GDP:
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Increases in real GDP cause increases in living standards since more goods and
services are available for consumption.
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Increased growth also means their are more funds for health care, the provision of
infrastructure, and environmental protection and regeneration.
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Unequal distribution of wealth – Benefits from increases in economic growth may
not be shared equally amongst people in a country.
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Faster economic growth also means that natural resources are depleted more
rapidly and environmental problems such as pollution can arise.
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Cyclical unemployment falls
■
Demand-pull inflationtionary pressures increase.
Business cycle – trends
○ Despite decreases during some years during the century there has been an upward tendency
in the rate of real GDP shown.
○ During the early 1990s the Australian economy has experienced an expansionary phase in
the business cycle, peaking in 1994-95. This is usually accompanied by:
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Reduced unemployment
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Rising prices, and
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(possibly) an increasing CAD
○ A contraction in the economy was experienced in the late 1980s, with a trough in 1990-91.
This phase was associated with high unemployment.
○ A continued contraction in the business cycle can result in a recession, such as in 1990-91. A
recession occurs when an economy experiences two consecutive periods of negative growth
in real GDP. A very severe depression is known as a recession, as occurred during the early
1930s.
○ When describing the business cycle – upswing, downswing, boom, depression, recession
Unemployment
Measurement – refers to workers who are actively seeking work and willing to accept the current
wage rate, but are unable to obtain work.
○ Labour force – unemployed + employed persons
○ Unemployment rate – (number unemployed/labour force) x 100
○ Participation rate – (labour force/working age population) x 100
● Trends in unemployment – The unemployment rate is closely related to the business cycle. Usually
when there is a contraction in the economy the unemployment rate will increase, while an expansion
in the business cycle will result in a fall in unemployment.
● Types and causes
Cyclical
Insufficient aggregate demand, ie. Deflationary
gap (see diagram above)
Structural
Changes in the pattern of demand products
and/or technonlogy cause changes in demand
for skills; those whose skills are no longer
required become structurally unemployed.
Hardcore
People who for whatever reason are unable to
maintain employment, (usually psychological)
Hidden
Discouraged workers drop out of the labour
market during a recession – can be equivalent
to official unemployment.
Under employment
Part=time workers who seek greater work
hours.
Seasonal
Workers who lose their jobs due to changing
season eg/ fruit pickers
Frictional
The period of unemployment ‘between’ jobs.
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Causes of unemployment –
○ Microeconomic (supply side)
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Labour market explanations of unemployment concentrate on the inflexibility of wages. The
above diagram illustrates a situation where wage flexibility is limited by a wage floor,
(minimum wage). At W1 QS > QD meaning their is a surplus of labour seeking work. The
government would seek to deregulate the labour market.
Macroeconomic (insufficient aggregate demand – deflationary gap).
The economy is at Y1 which is lower than full employment level of national income (Yfe). At
Yfe there is a deflationary gap which indicates the lack of spending required to maintain full
employment. To solve this, the government could decrease interest rates or increase the
budget deficit.
Labour productivity – output per worker per unit of time. Two consequences:
1. Microeconomic effect - Less demand for labour – fewer workers are needed.
2. Macroeconomic effect - Increased output causes increased GDP, which leads to
increased spending and increased employment.
OKUN’S LAW – Mathematical formula connecting unemployment with economic growth, labour
productivity and labour force growth.
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For unemployment to fall:
Economic growth > Labour productivity growth + labour force growth
Natural rate of unemployment – Full employment occurs when all unemployment is frictional,
structural or hardcore and there is no cyclical unemployment. At full employment, the
unemployment rate is called the natural rate of unemployment. At the natural unemployment rate
there should be a non-accelerating inflation rate: that is, the inflation rate should not increase.
Main groups affected by unemployment – People most affected by long-term unemployment are
people under the age of 24, non-English speaking migrants, Aboriginal people and Torres Strait
Islanders, workers over the age of 54 and the disabled. Women often suffer from high rates of hidden
unemployment. Geographic location can also be an important determinant of unemployment.
Economic and social effects of unemployment –
○ Unemployment in Australia has significant effects, as labour, a scarce resource, is not being
utilised fully and therefore economic growth is not at its optimum level. As a result, people
are not enjoying the highest standard of living the economy has to offer.
○ The government will have less revenue from income tax.
○ Government spending will rise through increased social security payouts etc.
○ As unemployment increases there will be a fall in demand for goods and services, resulting in
smaller company profits, lower investment and further unemployment.
○ Unemployed person will experience low self-esteem and could become demoralised.
○ As unemployment increases, the inequality of incomes within society widens. This can lead
to greater social problems such as increased crime, a higher suicide rate and family violence.
Why is the unemployment rate a lag indicator?
○ Falls in hidden unemployment■
High cyclical unemployment during recession
discouraged worker effect
increased hidden unemployment.
○ Workers shifting between full time and part time employment■
Recession shift from f/t to p/t employment underemployment.
○ Changes in labour productivity■
Recession increased labour productivity as worker’s try to hold on to jobs. If new
levels of labour productivity are maintained during a recovery there will be a slower
increase in demand for labour smaller changes in unemployment rate.
○ Surplus capacity■
Recession surplus productive capacity, as employees are maintained on f/t income
for p/t work.
■
Recovery allows for employment of surplus capacity without affecting official
measures of unemployment.
○ Sticky wages■
Inflexibility in the labour market prevents the price of labour from adjusting to
changes in supply and demand conditions.
Inflation
Inflation – refers to a period of time which there is an increase in the general level of prices. That is, the
purchasing power of money is declining. RBA target: 2-3%
● Measurement – The Australian Bureau of Statistics uses the changes of CPI to determine the inflation
rate. The Consumer Price Index measures the quarterly changes in a ‘basket’ of goods seen as being
representative of consumption patterns. Each item is given a weighting to reflect its relative
importance to the average household.
○ Calculating inflation – change in the CPI over time.
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Inflation rate = ((CPI Year 2 – CPI Year 1)/CPI Year 1) x 100
■
MUST INCLUDE Per Annum
● Trends in inflation – During the 1970s and 1980s Australia had high levels of inflation, especially when
compared to our major trading partners. During the recession of 1991-92 the inflation rate was
brought down to very low levels. It appeared that the inflation rate was beginning to rise in 2000-01.
● Types/Causes of Inflation
TYPE
CAUSE
Demand Pull Inflation
Agg D > Agg Supply Yfe (inflationary gap)
The economy is attempting to operate at Y1, but does
not have the resources and/or technology to do so.
Yfe represents the maximum level of output. At Yfe,
Agg D is greater than Agg S, causing an inflationary gap.
Too much money is chasing too few goods.
Cost-push inflation
Increasing costs of production increases in prices
Imported inflation
Changes in import prices and/or exchange rates
change in cost of imports change in CPI measure of
inflation. Imported inflation can be caused by: changes
in the exchange rate and/or changes in inflation in a
trading partner.
Increases in the money supply (Faster than GDP)
excess of money in circulation increases in prices
Inflationary expectations can result in inflation
because people will build up expectations into their
current behaviour. For example, trade unions may
argue for a wage increased based on anticipated
inflation rather than on the current inflation rate; this
will cause a rise in cost push inflation.
Monetary inflation
■
Effects of inflation –
○ Households – decreased purchasing power of incomes, especially those on fixed incomes like
pension; some will benefit and some will lose as income and wealth is redistributed; possible
tendency to ‘buy now’ to avoid future price increases; erodes the value of savings and
decreases the value of liquid savings, thereby encourages asset buying.
○ Business – Unclear signals on where to direct investment; cost-push inflation, especially due
to wage increases, may lead to a wage-prices spiral in some industries lost international
competitiveness if foreign inflation is lower; impact on international competitiveness may be
complicated by how inflation could affect exchange rates; some businesses may seek capital
gain rather than profits from producing goods and services; may encourage borrowing to
acquire assets.
○
Governments – Increased tax revenue from GST and income tax, increased government
spending due to higher prices, pressure to increase social security payments.
PHILLIPS CURVE
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■
PC illustrates the inverse relationship between inflation and unemployment.
NAIRU (non-accelerating inflation rate of unemployment) – the lowest level of unemployment that
can be sustained without massive increases in inflation.
■ If the economy is at point A, any increase in government fiscal stimulus will lead to lower
unemployment initially, (point B), but as government spending crowds out private sector investment,
the unemployment rate remains at the NAIRU, but inflation has increased (point B).
■ Any further stimulus adds to inflationary expectations, increased interest rates and lower private
sector investment causing the ‘path’ seen in the diagram.
Environmental Management
Microeconomic Methodology
● PROBLEM... Public Good Free rider lower cost of production lower prices Increased demand
increased production Ecologically unsustainable use of resources.
● SOLUTION... Policy Effect on costs of production Effect on prices Effect on demand Effect on
production
Effect on demand for resources and resource allocation
Effect on ecologically
sustainable development.
Ecologically sustainable development
● Been suggested as a means of ongoing economic growth.
● Defined as ‘development that meets the needs of the present generation without compromising the
ability of the future generations to meet their own needs.’
● Three common elements:
○ Equity, both intergenerational (ie. Between different generations) and intra-generational (ie.
Within the same generation).
○ Quality of the environment and the ability to continue supporting the community at a certain
(non-declining) level.
○ Concepts of quality of life and human needs satisfaction.
Private and social costs and benefits – Market failure
● Market failure occurs primarily because of the differences between private and social costs and
benefits. These two ‘costs’ are different because of externalities.
● Externality cost – Where someone is adversely affected who was outside the contract or not part of
the initial transaction. A cost borne by neither the producer or the consumer, but by the people.
● Externality benefit – One that accrues to people other than the buyer of the good. When an
externality benefit is associated with a good then the quantity of the good provided will be less than
the efficient level.
● Market failure can be shown graphically...
●
At price P1 and output Q1, the market fails to account for the social costs of production. At price P1
consumer demand is at Q1, which is higher than the ecologically sustainable level of output Q2. More
resources are allocated to satisfy this ecologically unsustainable level of demand, leading to resource
depletion and/or pollution. Externalities are not accounted fro because access to public goods is non-
excludable and non-rival, leading to market failure, (tragedy of the commons). That is, the free
market mechanism is not able to, or has no incentive to, factor in social costs. Therefore P1/Q1 is not
ecologically sustainable because social costs of production are not covered by market prices.
Public and Private goods – free riders
● Private good – good with well-defined property rights that define the owner’s rights, privileges and
limitations for use of the resource. There is an incentive to produce private goods because these can
be sold for a profit. This is not the case with public goods.
● Public goods have 2 important features:
○ It is a non-rival, or collective good – one person’s consumption does not reduce the amount
available to everyone else.
○ They are non-excludable - fully accessible to everyone.
● Free riding – It is often too costly, relative to the values people attach to the good, to exclude nonpayers from consuming public goods. This results in ‘free-riding’ which refers to obtaining the
benefits of the good without paying a corresponding share of the costs of obtaining those benefits.
Environmental Issues
● Preservation of the natural environment
○ Humans and the economy are dependent on it.
○ Living organisms satisfy human needs in two ways:
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They have specific properties that supply people’s consumption needs and
productions needs.
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Organisms interacting in ecosystems are an essential component of humankind’s
natural life-support systems now and in the future.
● Pollution control
○ The current level of pollution in the world is occurring because of market failure.
○ Emissions charges – applied to companies that create pollution as part of their productive
processes. Emission charges should reflect the true cost of the pollution.
○ Transferrable emissions permits – refer to licenses that are bought and sold and allow the
holder to emit certain levels of pollution. A regulatory body determines what level of
emission is efficient for a certain type of pollution and then issues the transferable permit.
This means that the market will determine the ‘value’ of pollution.
● Externalities
○ Can be overcome by instituting property rights over the environmental asset, or by imposing
charges and taxes on the entity that is causing the external costs
○ In the situation where the external benefits occur, the government can provide subsidies to
ensure there is a greater level of production of the good.
● Depletion of renewable and non-renewable resources.
○ Renewable – resources that can be used for an unlimited period given that they have
sufficient time to regenerate. The issue for governments is to ensure that renewable
resources are used in a sustainable manner.
○ Non-renewable – fixed in an overall quantity, so that an use of it in a given time period
means that there will be less of it available for other periods. As non-renewable resources
are increasingly depleted, their price will increase which stimulates technological progress.
The issue for governments is to ensure fair allocation of the non-renewable resources for
current and future generations.
Policy Solution – Carbon tax
● Policy Effect on costs of production Effect on price Effect on demand Effect on output Effect
on pollution.
● Government taxes carbon emissions which causes an increase in costs on costs of production
determined by carbon emissions.
● Firms that have higher emissions have higher cost increases causing shift in the relative costs of
production.
● Changes in relative prices changes in the pattern of consumer demand.
● Consumers will increase consumption of relatively low priced goods that produce less carbon. This
will affect firms’ respective output, reallocating resources and reducing resource use per unit of
output.
●
●
This effectively reduces the harvesting of finite resources leading to more ecologically sustainable
development.
Distribution of Income
Measurement – Lorenz curve and Gini coefficient
○ Lorenz curve (diagram below)
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Gini Coefficient = Area A/Area A+B
Gini Coefficient of zero = perfect equality
Gini Coefficient of 1 = perfect inequality
●
Sources of income as a percentage of household income
○ Income refers to the flow of funds, goods or services received by an individual or a family
over a given period of time. Income is a flow.
○ GDP refers to the total value of all goods and services produced in a country during one year.
One method of determining GDP is to total all the income earned by the factors of
production.
○ Principal sources of income in Australia (as a % of household incomes 2003-04) from 4 basic
sources:
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Wages (and salaries) from the sale of labour (human effort) – 57.5%
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Rent (or return from land), interest and dividends (return for investment) – 8.2%
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Profit (from entrepreneurial skill/risk-taking) in unincorporated business – 6%
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Social welfare (transfer payment) – payments received by some members of society
from the government - 27.7%
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Sources of wealth
○ Wealth refers to the stock of assets owned by an individual or family, such as physical goods
and assets, financial assets and personal skills.
○ There are four main sources of wealth
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Inheritance – This helps to ensure the perpetuation of inequality
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Income inequality – People with higher incomes can save more and build up their
wealth.
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Different propensities to save – People who save a higher proportion of their
income will increase their wealth.
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Entrepreneurial and investment talent/luck – Some people are successful in
investing their wealth and increasing its size.
●
Dimensions and trends, according to gender, age, occupation, ethnic background and family
structure.
○ PRINCIPAL SOURCE OF INCOME
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High income households – wages and salaries
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Middle income households – wages and salaries
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Low income households – government benefits
●
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Average household disposable income - $811 per week
○ Top 10% - $1360 per week
○ Bottom 10% $317 per week
○ (Disposable income = market income – tax + gov’t benefits)
The dimensions and trends in the distribution of income and wealth in Australia vary
significantly according to various factors. Income distribution is a crucial factor in
determining the level of inequality in the economy. (Remember that the Lorenz curve and
the Gini coefficient are measures of inequality within a society.
○
Age
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In terms of age, young males and females earn less income than for all other male
and female groups.
In 2008, the average weekly earnings for young males was $506 and $487 for young
females.
In comparison, the AWE for adult males was $1280 and $1062 for females.
Income for males and females tends to be maximum in the 35 to 54 year age group.
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○ Gender
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Males on average earn considerably more than females.
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In 2008, average male earnings were $1331 per week, compared to $1080 for
females.
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Such inequity can be attributed to:
● Women are more likely to work part-time – caring for children etc.
● Women are over-represented in the ‘caring’ professions – education,
health, childcare – these tend to be ‘not for profit’, therefore wages are
less.
● Maternity leave – can take women out of the workforce.
● Women tend to work in jobs that are less unionised.
● Women tend to rely more on award wages and the minimum wage rather
than collective bargaining.
● Women tend to be less qualified overall
● Glass elevator and glass ceiling.
○ Occupation
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Occupation is linked to educational attainment since higher paid professions require
higher levels of training and education.
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Highly skilled occupations – managers, administrators and professionals earnt an
average of $1700 per week in 2008.
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Lower skilled occupations – labourers, clerks and salespersons whose average
weekly wage varied between $718 and $983 in 2008.
○ Ethnic background
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Non-English speaking migrants and Aboriginal and Torres Strait Islanders receive
substantially lower incomes than others in the Australian community.
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Persons born overseas generally earn higher incomes than those born in Australia.
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The period of residence of migrants impacts the level of income, with those residing
in Australia for longer periods of time earning higher incomes than those residing
for a shorter period of time.
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The country of origin of migrants is also correlated with income. Migrants from
Britain, USA, New Zealand etc. Earn more than migrants from China, Vietnam and
Lebanon.
■
Indigenous Australians are amongst the lowest income earners in the Australian
community, many being reliant on government welfare.
○ Family structure
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Households range from young single people just out of school, to couples with
dependent children, couples without children, single parents with children, elderly
couples and elderly single people.
Household
Lowest
2nd quintile 3rd quintile 4th quintile Highest
Mean
characteristics
20%
20%
weekly
income
Couple
with 12.9
20.8
24.9
23.4
18.1
$659
dependent
children
Couple without 23.6
17.6
14.0
17.3
27.4
$704
dependent
children
One parent family 40.4
30.0
16.7
8.0
4.8
$446
Lone person
●
●
43.8
■
13.5
14.0
13.2
15.5
$535
Households in the lowest quintile were mostly lone persons, single parents with
children and elderly couples without dependent children.
■
In comparison, households in the highest quintile tended to be couples with or
without dependent children. Most of these couple households had two income
earners, with the principal source of income being wages and salaries.
Economic and social costs and benefits of inequality
ECONOMIC
○ Lower aggregate utility of society
■
The marginal utility of the last unit of consumption of the high income earner < the
marginal utility of the last unit of consumption of the low income earner.
■
THEREFORE Unequal income distribution lower total utility in society.
■
Allocative efficiency or the social optimum occurs when the aggregate utility of all
members of society is maximised. Technically this occurs when the marginal utility
of the last unit of consumption is zero.
■
According to the law of diminishing marginal utility, the more that is consumed the
less satisfaction is gained. If consumer A is consuming $90 worth of goods and
consumer B is consuming only $10 of worth, then the 90 th dollar of consumption by
consumer A is likely to generate less utility than the 11 th dollar of consumption by
consumer B. This becomes the purely economic justification for income
redistribution through a progressive tax system and government expenditure.
○ Lower aggregate demand
■
Higher income earners save more.
■
Redistribution of income
increased consumption by lower income earners
increased aggregate demand.
○ Lower productivity of labour
■
Lower income lower spending on education lower productivity lower income.
■
Poverty causes a vicious cycle of poverty.
SOCIAL
○ Poverty (relative poverty line 0.4 of average weekly male earnings).
■ Increased drug and alcohol abuse
■ Poor diet
■ Increased divorce: main cause of divorce is financial problems
■ Increased involvement in petty and violent crimes.
■ Poorer health: obesity, lower life expectancy, increased incidence of heart disease and
diabetes etc.
■ Social isolation – usually a consequence of unemployment.
○ Political divisions
○ Social class
External stability
Measurement
○ CAD as a percentage of GDP
■
In 2008-09 Australia finally saw a long-awaited reduction in the CAD which shrank to
-3% of GDP. However, as the global economy recovers, Australia is likely to see a
return to the larger CADs it experienced over the late 2000s. By the December
quarter of 2009, the CAD had expanded to -5.4% of GDP.
○ Net Foreign Debt as a percentage of GDP
■
Australia’s net international position can also be a good indicator of external
stability. This is determined by adding together net foreign debt and net foreign
equity.
■
Net foreign debt movements indicate the level of foreign borrowing done by
Australians.
○ Net foreign liabilities as a percentage of GDP
■
Is equal to net foreign debt and net foreign equity.
■
Net foreign equity is equivalent to overseas ownership of Australian companies, less
Australian ownership of overseas companies.
■
■
●
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Net foreign liabilities have increased significantly since the early 1980s because of
the rapid increase in net foreign debt and the gradual increase in net foreign equity.
In early 2000 Australia’s net foreign equity as a percentage of GDP was 20.9%, and
net foreign liabilities as a percentage of GDP was 62.7%.
Trends
○ The CAD tends to move in a cyclical pattern, with the BOGS tending to fluctuate between a
small surplus and a deficit of -3% while the Income account tends to remain in a stable deficit
between -3% and -4% of GDP.
○ Between 03-04 and 07-08, the CAD averaged -5.7% of GDP – the longest string of large CADs
on record.
○ However in 08-09 the CAD improved dramatically. The BOGS reached its highest surplus
since the dollar was floated at +0.5% of GDP in 08-09. The Income account also narrowed
slightly, falling to -3.4% of GDP in 08-09. Unfortunately, these improvements in the CAD are
unlikely to last: they reflect a reversal in the cyclical factors driving the CAD. As the global
economy recovers, these favourable cyclical factors will disappear and Australia is likely to
once again see the CAD expand.
Causes and Effects
○ See previous notes and essay plans