Balance of Payments A record of country’s transactions with the rest of the world over a period of time BOP has two accounts - Current Account (non-reversible.

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Presentation transcript:

Balance of Payments A record of country’s transactions with the rest of the world over a period of time BOP has two accounts - Current Account (non-reversible transactions eg ) - Capital & Financial Account (reversible transactions eg )

Terms – Debit = money leaving a country - = debit Credit = money coming into a country + = credit Net = sum of debits and credits

Current Account Components- Balance of Goods (X-M) are visible Net Services (insurance, tourism, transport, education) are invisible Net income flows and transfers (rent, interest, profit, dividends)

Year 1Year 2Year 3 Exports120b140b170b Imports105b130b170b Net Services 0-1b-5b Trade Balance Net income -19b Current Account -40b

Australia’s CAD Draw a graph of Australia’s CAD and balance on goods and services Why does the CAD fluctuate so much? Outline the main trends in the Australia’s CAD over the last 10 years.

Causes and consequences (pages ) 1.Outline how trade imbalances can cause a CAD. 2.Is this the reason why Australia experiences a CAD? 3.Outline the consequences of a CAD. 4.Discuss the policy options the government has to deal with a CAD