Foreign Borrowing (1 Viewer)

[sk8ie_boi]

What is the difference between foriegn borrowing and foreign equity borrowing??

"The current account was made worsen from the growth in foreign borrowings during the 1980s, but was switched back to foreign equity borrowings as a source of foreign capital in the 1990s."

 

[rn21]

foreign borrowings is loans etc which come with servicing costs in the form of interest
equity there is no interest paid on as its more dividends etc

 

[Haku]

both foreign equity borrowing and foreign borrowing both lead to money inflow in to australia. In foreign borrowing, ie bank loans. Money is borrowed directly from an international organisation, this needs to be repaid and the servicing cost create a negative in the Current account, negative income. This provides a surplus in the capital and financial account.

For foreign equity borrowing, money flows in, in the form of investment by foreign companies. Like FPI and FDI. This also create a surplus in the financial account. This form of borrowing do no generate servicing cost, but both FDI and FPI create negatives in the net income account. Where profits and wages go overseas and dividents paid to overseas investor respectively.

Both have there disadvantage and advantage.

 

[sk8ie_boi]

How does an increase in current account deficit provide a surplus in the capital and financial account? .. I know it's true, but I just don't understand why.

 

[vaniLLa_554]

so foreign borrowing is just foreign debt?

 

[sk8ie_boi]

Wait wait .. i got it .. umm when CAD needed to be funded .. it's investment from overseas, which is an increase in financial and capital account ..

And yeah foreign borrowing is foreign debt ..

 

[sunjet]

Investment into Aus needs to be paid back in the form of dividends or interest, which is a debit on CA.

 

[sk8ie_boi]

Ahh .. I understand now .. so dis is wat they call the balance of payments .. where current account equals capital and financail account

 

[sunjet]

Yes under a floating exchange rate as Supply for AUD = Demand for AUD.

 

[pete_mate]

this can be expressed algebraicly

demand for $A = Supply of $A

Ki + Ci + X = Ko + Co + M

(ki) = capital inflow, (Ci) = current inflow, (current transfer)

(rearrange it )

(X-M) + Ci - Co = Ko - Ki

Balance on Goods and Services + Current transfers = Capital Account Surplus

CAD = KAS

 

[Haku]

this can be expressed algebraicly

demand for $A = Supply of $A

Ki + Ci + X = Ko + Co + M

(ki) = capital inflow, (Ci) = current inflow, (current transfer)

(rearrange it )

(X-M) + Ci - Co = Ko - Ki

Balance on Goods and Services + Current transfers = Capital Account Surplus

CAD = KAS

hm.. never seen this before

 

[Haku]

Yes under a floating exchange rate as Supply for AUD = Demand for AUD.

can u explain how a floating exchange rate create a cushion for external shocks and stuff. i forgot that part,

 

[underthebridge]

Can create a cushion for external shocks? I'm not sure it has that ability as I remember writing about how a disadvantage of a floating exchange rate wasthat it exposes the economy more to external shocks and could have drastic consequences. Perhaps you are thinking of a managed floating exchange rate (also called a dirty float) where the RBA intervenes to avoid shock appreciations and depreciations.

 

[Haku]

i does, but i just can't remember how. its for the BOP i think it cushions.

 

[sk8ie_boi]

as the global economy slows down, the demand for australia dollar decreases which results in a depreciation... and making us more competitive in the global market and therefore still keeping wif the export demands .. hmmz .. don't fink i made much sense .. but i tried ..

 

[underthebridge]

Perhaps because under a floating exchange rate system the BoP doesn't affect the money supply and so does not have a direct impact on the level of aggregate demand?? I think to call this a cushion is a little sketchy.

 

[pete_mate]

jesus this thread makes me feel confident. guess its those crappy leading edge books.

the algebra thing might be university eco's but its true

the cushioning effect is this, an external shock (such as the asia financial crisis)
depreciates our currency cos ppl from asia are our exporters, plus there could be some negative speculation cos we're so close to them

as a result of this depreciation our international competitiveness improves, which improves our exports to other countries like america, = an increase in our exchange rate and other benefits of increased export earnings

 

[Haku]

hehe, thanks, now i remember.

and u dun need math for eco, maximum would be a total of 4marks for calculation and they are simple