2. Balance of Payments A record of Australia’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 )

3. Terms – Debit = money leaving Australia - = debit Credit = money coming into Australia + = credit Net = sum of debits and credits

4. Current Account Components- page111 Balance of Goods (X-M) Net Services (insurance, tourism, transport, education) Net Primary income (rent, interest, profit, dividends) Net Secondary income (pensions, aid, paid insurance claims)

5. Year 1Year 2Year 3 Exports120b140b170b Imports105b130b170b Net Services 0-1b-5b Net Primary income -19b Net Secondary income -1b-5b Current Account -30b-40b

6. CAD trends Draw a graph of Australia’s CAD and balance on goods and services (page 117) Why does the CAD fluctuate so much? Outline the main trends in the CAD over the last 10 years.

7. What do you think? 1.Why does Australia have a CAD? 2.Why is net primary income considered the structural component of the CAD? 3.Why is the BOGS considered the cyclical component of the CAD? 4.Is there a solution to the CAD problem?

8. Capital and Financial Account- page 112 Capital Account (migrants, capital aid) Financial Account (debt and equity) -Direct Investment (new investment or 10% of shares in an existing company) -Portfolio Investment (purchase of land, shares, bonds, foreign savings) -Derivatives (futures) -Other Investment (miscellaneous I) -Reserve Assets (RBA transactions) * Errors and omissions

9. Links between the accounts What link is there between the Current Account and the Capital & Financial Account? Why does the Current Account Deficit= Capital & Financial Account Surplus? What is the role of the exchange rate? Explain the debt-trap scenario.