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confused on some terms (1 Viewer)
- Thread starter wgy182
- Start date
This won't be the best explanation and I'd appreciate it as well if someone replied to this post since it's something I struggle understanding as well, but this is what I've been able to kind of settle on so far. I'd love it if people pointed out where the mistakes are.
Liability means a sort of obligation or debt that you have, so in terms of economic sense it is when you have a debt you are required to pay off.
Due to a small population alongside a small household saving ratio Australia as an economy always runs on a current account deficit since we can't raise enough capital from our own population and we require loans. These net external debt and equity borrowings add up to make our Net Foreign Liabilities. (Essentially what we have borrowed and are now liable for.)
Net Foreign Liabilities are made up of Gross Foreign Liabilities - Gross Foreign Assets.
Pretty much imagine the Net Foreign Liabilities to be the REAL amount that you are required to pay back whilst the Gross Foreign Liabilities is the TOTAL amount, Now the reason you don't pay back the total amount is because the borrowed money was an investment which was used to purchase assets, something you're not liable for, so from the the Gross Amount of Liabilities you subtract the amount of Gross Foreign Assets and you're left with the REAL amount you are required to pay back.
Liability means a sort of obligation or debt that you have, so in terms of economic sense it is when you have a debt you are required to pay off.
Due to a small population alongside a small household saving ratio Australia as an economy always runs on a current account deficit since we can't raise enough capital from our own population and we require loans. These net external debt and equity borrowings add up to make our Net Foreign Liabilities. (Essentially what we have borrowed and are now liable for.)
Net Foreign Liabilities are made up of Gross Foreign Liabilities - Gross Foreign Assets.
Pretty much imagine the Net Foreign Liabilities to be the REAL amount that you are required to pay back whilst the Gross Foreign Liabilities is the TOTAL amount, Now the reason you don't pay back the total amount is because the borrowed money was an investment which was used to purchase assets, something you're not liable for, so from the the Gross Amount of Liabilities you subtract the amount of Gross Foreign Assets and you're left with the REAL amount you are required to pay back.
The size of our population is not especially relevant when it comes to whether we are a borrowing or saving nation. It is true though that we are a borrowing nation who have accumulated a high volume of net foreign liabilities (both in terms of debt and equity) because we like to invest big and save small. Hence there is an inherent savings-investment gap that therefore must be bridged by borrowing from overseas. This is sustainable however if the money we borrow from overseas is used for investment purposes, which creates significant returns which cover or more than cover the debt servicing costs.
To answer the question, gross foreign liabilities are all the debt liabilities + equity liabilities that a country has in a given point in time. Debt liabilities are things like loans from overseas, while equity liabilities are things like foreign investors buying properties and companies within Australia. Likewise, gross foreign assets are all debt assets (e.g. loans we lend overseas) and equity assets (e.g. companies we own overseas).
The term net can be thought of as the difference between the two gross terms. (gross liabilities - gross assets = net liabilities)
Thanks
That actually helped clear up a few things.