International Economics The Current Account Deficit Australia

This report will show an overview of the current state of the Australian economy and its management by the Federal government through examining economic indicators such as economic growth (GDP), unemployment, inflation and trade.

The figure obviously had not return to pre-crisis level. Moreover, recent commodity prices had fallen significantly which will affect Australia’s short and long term economy.

Although Australia remains geographically isolated from the world, international trade still remains a main factor that allows Australia’s economy to prosper. Australia’s long history of trade has created tight links and connections with other nations. Being a member of many worldwide organisations, Australia has produced many free trade agreements with countries around the world. However, recently Australia has seen a change in the composition and direction of its trade and has developed a strong trade link with the Asia-Pacific Region.

An increase on the debt will lead to an increase in interest payments, these interest payments constitute a large part of primary income debits that flow out on the current account, therefor todays foreign debt adds to future CADs.

Exchange rates fluctuate in response to a multitude of factors. Upswings and downswings in the exchange rate can have both positive and negative consequential effects. Depreciation drops the value of the dollar and permits owners of foreign currencies to purchase a greater amount of Australian goods. Hence, depreciation makes Australian exports cheaper and accordingly

Increased government revenue will be reallocated into infrastructure such as roads. This will lead to increased employment, which will help Australia achieve its economic objectives. Weaknesses of the deficit levy reside in the circular flow of income, reducing economic activity from higher income earners. An increase in leakages within the flow will decrease aggregate income and the general level of economic activity. Further cause risk of disequilibrium within the circular flow of income and disrupting economic growth.

The spread of globalisation especially since 1990 has introduced many new elements into the financial markets and what determines the value of a nation 's exchange rate. This does not just apply to Australia, but as we saw in the later half of the 1990 's, to many other nations in the world. Firstly, trade in goods and services makes up a much smaller proportion of the demand and supply for currency. In the world economy, payments for international trade only account for about 1% of foreign exchange transactions. The total foreign exchange requirements for exporting and importing of goods and services in Australia is less than 3% of the total use of the foreign exchange turnover in Australian dollars (Reserve Bank Bulletin, Table F7 and Australian National Accounts, 5206.0). The main purpose for foreign exchange trading is international financial transfers of

First we must look and account for the causes for the recent trends in balance of payments. This is very important as it reflects key features of the structure of the economy and highlights the imbalances in the relationship between Australia and the economy. In particular, we must inspect the current account deficit (CAD), which is when the debits are greater than the credits recorded as a percentage of GDP and is an accurate indicator of the economy’s current position.

China is one of the biggest countries along with Thailand and Japan who make goods for Australia. Being Australia’s third largest merchandise trading partner and seventh largest service export market in 2003, China might significantly affect the Australian economy through any changes made to its trade policies. A more liberal Chinese trade policy could increase Australia’s income in part through greater market access for its exports. Of every hundred dollars of national

Overall Exchange Rates change every day and depending on how it changes can affect inbound and domestic tourism.

Asia Pacific Economic Cooperation (APEC) is the pre-eminent economic rally in Australia’s region. APEC’s goal is to drive an extensive trade and investment liberalisation and facilitation agenda. It is focused on structural reform as a means of raising competitiveness and the efficiency of trade and investment flows. It has helped Australia with building and strengthening ties with other countries such as Brunei, Singapore, Philippines and other countries in the region. In 2009, 70% of Australia’s trade is with APEC countries.

The second key national interest of Australia is the economy. Australia’s capital, jobs, standards of living, technological innovations and social advances rely substantially on exports and commodity values within Southeast Asia and the Pacific (Department of Foreign Affairs and Trade 2016a). The stability of South East Asia and the Oceania

There are three major economic factors that have combined contribution to FMG’s growth over the past 5 years, including the strong AUD , the amazing export feature due to the Chinese boom which drives up the commodity price and the interest rate decision by RBA. Australia dollar has appeared strong for the past 5 years and maintained at $6-$6.8 level for AUD/CNY at most time. It promised a high level of foreign income for Australia exporter. In 2009, China demanded almost 60% of the world’s iron ore to produce 47% of world’s steel production. It contributes the most to the price rocket from $31.78 to $180.6 US cents/mts in 5 years time. In addition, Australia borrowing cost remains high over the past few years which may alter the finance decisions of FMG.

72% of Australia’s two-way trade is within the APEC countries. Like the G20, this trade relationship is quite significant. Australia’s single top import is personal travel services, however overall most of what Australia imports is petroleum products and motor vehicles. It’s appetite for refined petroleum increased by 12% over the past 5 years. Australia’s top exports are its natural resources, iron ores, coal and natural gas. (Australian Government: Department of Foreign Affairs and Trade, 2014)

To well address this concept, the current account and concepts related to it will be explained with the big deficits and surpluses issues that have arisen since 1990s.