Table of Contents
- Factors influencing Australia's Current Account Deficit
- Price for an Essay
- Ecomonic growth and consumer spending
- Exchange rate
- Flow of capital
- Factors that affect the current Australian exchange rates
- Interest rate differentials
- Current account deficit
- Public debt
- Trade terms
- Australian economic policies
- Related Free Economics Essays
Factors influencing Australia's Current Account Deficit
A country's total account deficit occurs when the total of the national imported goods and services as well as the transfers is greater than the national sum of its exports on goods, and services that it produces and transfers (Mitchell, 2009, 127- 1268). According to Menon, (2006, pp. 22-28, a country account deficit makes a nation be a net debtor to the other nations of the world. Experts though argue that when the deficit is substantial, it is not a bad thing more so for the developing nations that runs the current deficit on its account in the short term for increasing its local productions and exports in the long-term perspective. Australia is a developed country and does not take such an approach. The country meanwhile is experiencing an account deficit, which is attributed to various factors.
From Mitchell, (2009, 123- 126), Australian account deficit is meant to measure the balance of the trade in goods and services in addition to the net current income such as the income from the international investments and transfer payments. The factor of net equilibrium of trade in goods and services is the biggest determinant of the Australian current account. In Australian economy, a deficit on the current account result to a surplus on financials to cater for the net withdrawals (Menon, 2006, pp. 43-48). The Australian current account is affected by both short and long-term economical factors. The Australian current account since year, 2004 represented by 1 to year 2011 shown by 8 is shown follows:
Y axis represents the Balance Of Trade in goods and services
X axis represents the number of years ( from 2004 to 2011)
The factors that affect the Australian current account include;
Ecomonic growth and consumer spending
A duration of having the customer led economic intensification accrues to a deteroriation in the current account. This is because, the rise in the consumer spending leads to a rise in the government spending on the imports. The current account deficit in australia is thus attributed to the growth in consumer spending (Menon, 2006, pp. 43-48). The same if happens in china for instance, it would not accrue to current account defict based on the fact that, china growth would be led by the export of the country manufuctured goods and services.
In case there is a depreciation in the exchange rate, the currency becomes comparatively more competitive. A depreciation in exchange rate has hit Australia and this is one the factors that have led to the current account deficit of the country's economy.The depreciation has made the exports more competitive and the imports into Australia more expensive to undertake. Experts however argue that this should have improved the national current account but it is necessary that the export versus imports demand be relatively price elastic which is not the case in Australia.
The relative competitiveness of the Australian industrial production should in the long run, influence the current account.The country has in recent years become less competitive, a thing that has seen the decline of the export as opposed to the county's imports. The relative competitiveness of a nation depends on wages and the labour productivity as well as the infrustructure standards amongst many more variables.
Flow of capital
The current account size is too dependant on the attractiveness of a country to resources flow. The number that is likely to be attracted to the country affect the curent account significantly. For example, USA is able to run at a persistent 5%current account defict of GDP because the foriegn investors are more willing to invest in dollar assets. The demand of these dollar assets is what has sustained the USA current account and, without which the current account defict of USA could experience a reduction in size. The unattractiveness of Australia to investers is one of the causes of the current account defict.
The invetment and the curent Australian account looks as follows:
According to Lu¡s & Huw, (2011, pp. 88-102), the effect of the causes of the current account deficit include the instance where the economy accumulates less capital. This leads to a slow growth of economy leading to poor pay of the workers average wages.The capital inflow from abroad does on partial aspect fill the gap and allows the domestic speculation to surpass cutback.They do on the other hand create a trade deficit , which does allow the domestic consumption and the investment to go beyond domestic manufacturing.
Factors that affect the current Australian exchange rates
From Edwards, (2007, pp. 12-18), in economics sense, a country that experienes lower inflation rates in a consistent manner, depict a rise in the currency values. This is due to the fact that, the rising results to an increment in the purchasing power againist other nations.
Interest rate differentials
The changes in interest rates do affect the curency value and cause impacts on inflation. A higher interest rate does offer a higher return to an economy when compared to other economies.
Current account deficit
Such a defict shows that the country is spending more on international trade than it is actually in receipt of. It does as well communicate that the affected economy is borrowing from the foriegn sources, capital that it uses to finance the deficit. This excess demand for the foreign currency lowers the national currency exchange rate. This means that domestic products are too cheap for the foriegners and the foriegn assets are too expensive to breed domestic interest sales.
Huge public debts lower the national currency exchange rates.
An increase in terms of trade means that the countrys exports are in high demand. This instead results to a rise in exchange rates. Economic performance and political instability. Positive attribute economically and politically results to attracttiveness of a nation to investers. Turmoil on the other hand, is likely to lead to a loss in currency confidence, which affects the exchange rates.
A change in exchange rates, such as a decline, lowers the income purchasing supremacy. It as well results to a decline in the capital gains that are derived from any returns. These factors; interest rates, inflation and capital gains which are traceable from domestic secuities are influenced by exchange rates.
Australian economic policies
As a result of the current rise in inflation presures, the economic policies have been formulated to make the economy stronger.These inlcude. The policy on improvement and development of education system : This is a long-term policy that is supposed to ensure all Australians are familiarized on economic undertaking to curb any future inflation. Secondly, there is the Labour supply policy; which is a policy to increse the Australian labour supply. In addition, the reorganization of the industrial relations and the domestic product markets is another policy set to improve the Australian economy. Further More, Infrustructure and water management policy exists in Australia. From O'keefe, & Crase, (2011, pp. 42-46), this is a policy that is set to ensure that respective infrustructure is in place in Australia and it is well managed to the economic benefit . The water management policy also works under the same scope and it is set to ensure that , the water issues are well taken care off in Australia.
The Australian economic policies are set to ensure that all that the currency has in recent years experienced is dealt with to curn further inflation. These policies are set to ensure that the country will become competitive and able to attract foreign investments which will growth the economy significantly.