General essay I just founding whilst digging through stuff. lol it was a different world back then. Basically copied bits and pieces from the text book and shoved them together
This essay suppose to help you, I take no responsibility if you get caught plagurising.
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The current account shows the money flows from all exports & imports of goods, services, income and current transfers for a period of one year, these transfers are no reversible however. Australia’s CAD comprises of two major areas, both of which saw double digit negatives in recent years, the goods and services account and the capital and financial account. In the recent years, Australia has experienced high levels of current account deficit (CAD), amongst the highest of the OCED countries. This means Australia has more money flowing out than coming in, there are a number of causes of this and can result into a potential problem for the economy, as well as making it more volatile. This has prompted government to implement both macroeconomic and microeconomic policies to deal with the problem, which has shown some promising results.
Firstly, the goods and services account is the net goods and the net income account. The net goods deal with the balance of exports and imports whilst net income deals with the earnings on investment. The net goods area has blown to – 18.2 million, meaning that we import a lot more than we export. This has been due to the recent drought which saw billions of agriculture exports lost. Our export base is also quite narrow and is subjected to high levels of competitiveness in the international market; this is heavily relied on the world business cycle. The short-term cyclical factors saw most of the world’s leading economies drop into recession, meaning that countries are less eager to buy our exports thereby helping our CAD.
Australia also don’t have a broad production base, meaning that Australia cannot provide goods and services which are demanded by the consumers, prompting them to import them instead. Globalisation has resulted in the reduction of many trade barriers, as more goods are available at a lower price, consumers are prompted to spend more on imports. Australia has also experienced high levels of economic growth whilst the world plunged into an economic downturn, resulting in high amounts of spending on imports as prices drop around the world. The rising of prices of fuel has also been a main culprit. The net goods and services account stands at -19.7 billion with 18.2 billion from net goods, services however is at -1.5 billion
Perhaps the biggest part of our CAD is the net income sector, it covers the payments on borrowings and returns on foreign investment, and it reflects Australia’s foreign liabilities which are derived from the capital and financial account. It is at 22.6 billion or 5.7% of GDP. As more capital and financial inflows comes into Australia, more and more Australia assets would be owned by foreigners, our foreign liability current stands at 359 billion or nearly 60% of GDP.
The main factors contributing to our high levels of negative net income is interest and exchange rates. Since almost 60% of our foreign liabilities are in form of foreign currencies, a decrease or increase in our exchange, an increase or decrease in our exchange rates would see a lowering of our CAD, however our exports would suffer and consumers would import more. Australia’s relatively high interest rates have made Australia very attractive due to higher returns during the world recession since 9/11. Other factors include our national savings; Australians have one of the lowest in the OCED countries, resulting in many institutions relying on foreign savings to finance their projects.
In the long term, the growth of Australia’s foreign debt can lead to debt sustainability which means that it becomes increasingly difficult to service the debt. Debt rises faster than the increase in GDP, than the interest repayments take up an increasing proportion of Australia’s GDP, reducing both overall standard of living and economic growth, however this has not happened to the lowering of global interest rates in the 1990s. A high level of foreign liability can result in a vicious debt a high CAD requires more capital and financial inflows to repay it back (because BOP = O). This would lead to a higher CAD as net income has increased, this would continuously repeat itself, and this presents a big problem. A high level of foreign liabilities may also reduce Australia’s credit rating which reflects the confidence in the potential of an economy, thus increasing the volatility of the economy, should confidence drop and all investors pull funds out, it may cause an economic disaster.
The threat posed to the Australian economy by high levels of CAD has seen the Australian government take up both macroeconomic policies and structural microeconomic policies. It has focused to attend to 3 main areas, the increase Australia’s international competitiveness, increase national savings and diversifying Australia’s export base as well as many other policies. The government can do very little to address the issue of our net income, as it is mostly conducted through the private sector.
The use tightening monetary and fiscal policy, in the late 80’s it was introduced to reduce consumption and investment, reducing CAD and lowering inflation. The implementation of micro-economic reform policies aimed at lifting efficiency and international competitiveness of domestic firms. The aim of the Howard government in maintaining fiscal balance over the medium and long term to ensure savings would not be drained by public usage through surpluses, thus lowering CAD.
Australia’s export base is heavily weighted towards primary industry commodities, around 60% of Australia’s products are from agriculture and minerals, very unusual and dangerous for an AIE. During the long term, in the wake of globalisation and technology, the prices for these products would fall as demand shifts to more sophisticated goods, as well as that, the prices and levels of demand for primary industry fluctuate year to year. Australia is trying to change this by promoting and lending assistance to infant manufacturing industries. Current progress shows that Australia had some success; however overall, sophisticated manufacturing remains a small area of Australian exports. This would not only boost exports, but also reduce imports.
In the increase of Australia’s international competitiveness would also help our exports, this would be mostly done by reducing input costs through many microeconomic and structural reforms. Firstly, pegging wages to productivity, it has ensured no radical pay rises, thus keeping the cost of labour factor of production under control. It has also introduced many policies to reduce inflation, which successfully saw inflation drop to the 2-3% range, this done through the RBA’s pre-emptive monetary policies, by taking actions before inflation occurs. The more efficient allocation of resources prompted by globalisation has also seen a higher level of productivity, the policies introduced during the late 1970s and early 1980s has changed work practices and production methods and reduced input costs has been widely successful at increasing our export competitiveness.
Although Australia has recently seen high levels of CAD, most of the problems are being in fixed by microeconomic policies, whilst some cannot be fixed. In terms of goods and services, the drought and globalisation has seen Australia be less competitive, prompting the government to implement microeconomic policies to increase competitiveness and export base to boost exports. The current account however is a more complex problem to fix as it mostly accumulated from the private sector. Though it represents a problem, some might say that the inflows are necessary to develop our economy. In the end, though our CAD still remains a problem, many structural reforms are already underway to fix these problems, some have been quite successful.
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