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Essay Plan Balance of Payments The Australian BOP is made up of the CA and the KAFA, and ultimately represents all transactions of Australia with the rest of the world. Within these accounts, they can be divided into credits, money coming into Australia as receipts, and debits, money leaving Australia as investment revenue. The BOP is an international indication of Australia’s external economic performance and can be used to represent the external issues and problems faced by Australia. It can be witnessed that Aus suffers from ongoing balance problems due to a growing CAD. Current Account, Net Trade, export and import revenue Net Current Transfers, goods provided for no return Net Income, income from various investment Net Services, exchange of services Balance CA = (exports – imports) + net income + net current transfers + net services KAFA, made up of two accounts, all transactions are reversible, money from borrowing, lending and purchasing Capital Account, 1. Property from immigration, 2. funds to build new infrastructure, 3. intellectual property rights Financial Account, 1. direct investment, money to build new projects 2. portfolio investment, trading of financial assets 3. derivative investment, complex financial assets 4. reserve investment, bonds from monetary 5. other, unclassifiable BOP = CA + KAKA + Net Errors Omissions Explanation Paragraph Supply of $S = Demand of $A Explanation Paragraph Australia has sustained growing CADs. Averaged 2.7% of GDP in 1980s, now it is 4.0% average. Moves in cyclical patterns reached 6.2% in 1992, rises if Global growth is strong. NFD, NFD to GDP has grown during period of Globalisation. 1980 6.3%, 1990 42.3% and 08/09 it was 52.9%, there is risk of Debt Trap Debt Trap, Increase CAD, Increase NFD, Increase Serv. Cost, Increase NID NFD leads to increase in NFL. NFL 725bill, 633bill NFD. Reluctance to invest in Australia and asking for risk premium. Reduction of investor confidence reduces demand for currency. Reduces short term growth BOP restraint, restraint on Future Growth. Government may feel threatened, Further Action encouraged. Tight Macro, Fast Micro. Further slowdown and unemployment Vulnerable to shifts in sentiment, sudden loss of confidence. From these consequences noted it becomes apparent that Australia’s high CAD poses as a major risk to the welfare of the economy. Whilst some believe that AUS CAD reflects financial market’s willingess to accept external imbalances in a time of Globalisation, it is clear to see that a CAD is still a risk. This can be reflected by the concerns raised by the 1997 Thailand crisis where a sudden loss of investor confidence crippled the Thai economy. It is up the Australian government to recognise the imposing risks of a CAD on the economy and address it as a problem.