CAD = 6% GDP and Foreign Liabilities = 65%...HOW?! (1 Viewer)

[nono]

Hey guys I need some help as this doesn't make sense to me:

How come CAD as a percentage of GDP is 6% when foreign liabilities is 63% of GDP...how can it be more than the CAD??

Is it because the actual loan (minus the servicing costs) is recorded in the Captial and Financial Account?? But I thought the K & F A was always in surplus??

I'm so confused right now....

Please help..

 

[Freaky]

i *think* It has somthing to do with if we were to repay all our foreign liabilities back in one year, we would have to pay 63% of our GDP.. in the 1 year.

Where as 6% of our GDP is being sent oversease PER-YEAR...

...hmm, that prolly makes no sense, and is prolly wrong.
*waits for someone who is good at eco. to respond*

 

[natwarren]

Our Foriegn Liabilities equating to 65% indicates the TOTAL amount of money we owe to OS (Equity + Debt). The CAD is due to a number of factors including the ongoing structural issue of the NET INCOME DEFICIT. Which indicates the total servicing costs of this debt in 05-06. So part of the 6% of GDP goes to SERVICING foreign debt.

Your right being confused about the CAFA. Under a floating exchange rate the BOPS must equal 0 and therefore when there is a CAD the CAFA must be insurplus to match this deficit. SO as a CAD continues to be sustained i.e. we continue to borrow from OS to service our trade and incomes deficits, our foreign liabilities increase. It is a cycle which can get out of hand and is referred to as the "debt trap".

Hope this helps...good luck in the exams

 

[nono]

err...

what i gather from the replies is:

the 6% is the servicing debt that we owe to foreigners (ie. all the interest we must repay)

and the 63% is the total amount of foreign liabilities MINUS the servicing debt (ie. the actual loan or share etc.)

is this right...

 

[natwarren]

Kinda....the 6% CAD contains the servicing costs....the 63% FL is the total amount of debt.

 

[underthebridge]

The capital and financial account records the debt and equity activities over the past 12 months, where as net foreign liabilities is accumulated over all time. Every capital and financial account surplus we get is adding onto our net foreign liabilities.