Analyse the Impact of Changes in the Global Economy on Australia’s Balance of Payments. Hsc

Australia’s Exports (in particular the international competitiveness) affects Australia’s continuous CAD alongside terms of trade, international borrowing, fluctuations in the exchange rate as well as foreign investment. The Balance of Payments is essentially all transactions that Australia has against the worlds trade over a given of time; showing the trade and financial flows in Australia’s Economy. Cyclical and structural factors are the main reasons of this balance position.
The greatest ramification on Australia’s Balance of Payments recently has been changes in Australia’s terms of trade. Terms of Trade (which shows the relationship between the prices Australia receives for its exports and prices it pays for its imports), in the last decade has increased dramatically. This is considered much to the impact of the global commodities boom. Rise of China and other low-cost emerging economies have also flooded world markets with low-cost manufactured goods, reducing import prices and further increasing Australia’s terms of trade, essentially proving the balance of goods and services deficit.
Fluctuations in Australia’s exchange rate will have a significant affect the Balance of Payments. Particularly (portfolio investments). Australia’s current account deficits have been financed by foreign capital attracted to relatively high domestic interest rates. This goes on that because Australia has relatively high interest rates compared to other economies, overseas investors are more likely to invest in Australia which is shown as a credit on the financial account, portfolio investment. However this will worsen the CAD as the refturns from the investment are going back overseas and this is shown as a debit on the current account, net primary income. However, growth in foreign investment in Australia has been strong and successive and Australian governments have encouraged the inflow of foreign investment in order to improve Australia’s economic performance. As a...