Balance of Payment overview
Balance of Payment is a record of an economy’s transactions with the other countries over an economic period which is mainly one year. The records include trade transactions for both exports and imports of services and goods as well as financial transfers and financial capital. In that respect, the Balance of payment between America and Australia for the period 2006 – 2013 is a summary of transactions between the two economies over those economic periods.
- Current Account Balances
Among the key components of a balance of payment is the current account which records goods and services flow between the two economies. Further, with current account balances are a sum of the capital accounts and the change in official reserves for a country. For the America and Australia economies, the current account balances for the period to 2013 are as shown below.
Australia has had a deficit current account with a figure of –US$9,400 billion in 2013 from the 2012 –US$8,510 billion while the US has had a deficit of –US$474,490,000,000 in 2013. (Australian Bureau of Statistics, 2013)
In addition, a balance of payment can be favorable or unfavorable for a country depending on whether it reflects more inflow or outflow transactions. In that respect the current accounts deficits for both Australia and the US shows unfavorable status with more outflows than inflows. Among the factors that affect the status of a country’s current account is its competitiveness in the international market which determines the flow of goods and services as well as capital in and out of the country. In that respect, the current account balances for America and Australia shows relative low competitiveness in the international market compared to the other economies they transact with. (World Bank, 2013a)
- Portfolio Investment
The net inflows that come from debt and equity securities but not recorded as direct investments for a country comprise the portfolio investments. Such investments include depository receipts, stocks, shares and direct purchases of stocks by foreign investors. For the US, the value between the year 2008 and 2012 was $98,514,000,000. (Trading Economics, 2013)On the other hand the Australia’s value has been fluctuating over six years to 2011 with the figure being $23,762,820,000 in 2007 and $74,538,170,000 showing an increase hence a favorable position economically. Further, bilateral trade between Australia and America has grown rapidly from the US$32.6 billion figure in 2004 to US$61 billion in 2011. There has also been growth in the two way stock investments from the 2004’s US$66 billion to the 2011’s US$192 billion. (World Bank, 2013b)
- Foreign Direct Investment
Australia’s foreign direct investments have increased to double over five years to a figure of US$231 billion in 2012 compared to the US$104 billion in the previous five year period. The growth was marked by an increase in inflows into the developed countries including the America. (Kirchner, 2012)
The inflow to US grew by 40% as compared to a 60% growth for inflows to China. This has been a reflection of the country’s improving competitiveness in the international market. (Australian Trade Commission, 2013)
- Exchange Rate Regimes
Exchange rate is the price of a local currency in terms of a foreign currency which acts as the measure of the value of the local currency in an international market. In that respect, the value of an economies currency is dependent on its economy’s performance relative to the other countries. (Benetrix & Lane, 2013) Thus, the international trade which involves export and imports as well as other transfers, the demand and supply of the foreign currency involved tend to determine the exchange rate resulting to fluctuations as the market and economies change. In that consideration, there are different systems applied by different countries in determining the exchange rate with some leaving the market forces to determine the rate in a flexible exchange rate regime while other adapt a fixed regime where the exchange rate is determined by the country’s economic institutions mainly the central bank and only adjusted upon review of the country’s economic situation. (Barron & Lynch, 1989)
In addition, a country’s exchange rate regime determines its Balance of Payment with its trade partners since it determines whether the value of the transactions between the two countries is left to market or authorities’ determination. In respect to the BOP between America and US, it has been subject to the Flexible regime that is applied by the two countries with the Australia’s regime having evolved from fixed regime to a flexible regime in 1983 when all exchange controls were done away with. (Frank & Bernanke, 2001)
- Official Monetary Reserves
Official reserve asset changes reflect the sales and purchases of the foreign exchange by a country’s central bank as well as the foreign securities earnings and valuation effects with the change in the value of the foreign currency value. For the Australia and US economies, The Australian economy had US$ 48,067.62 million official assets by 2013. (Reserve Bank of Australia, 2013) On the other hand, the US had US$ 148,354.22 million which shows a strong position for the US economy compared to Australia. (International Monetary Fund, 2013)
Australian Bureau of Statistics, 2013. Balance of Payments and International Investment
Position, Australia, June 2013. [Online] Available at: <http://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0eptember> [Accessed 06 September 2013].
Australian Trade Commission, 2013. Investors Updates: Australia’s FDI doubles over five
years to 2012. [Online] Available at: < http://www.austrade.gov.au/Invest/Investor-Updates/2013/Australias-FDI-doubles-over-five-years-to-2012> [Accessed 06 September 2013].
Barron, J., & Lynch, G., 1989. Economics. London: Richard D. Irwin Inc.
Benetrix, A., & Lane, P., 2013. Fiscal Shocks and Real Exchange rate. International Journal
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International Monetary Fund, 2013. Australia: International Reserves and Foreign Currency
Liquidity. [Online] Available at: <http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/aus/eng/curaus.htm> [Accessed 06 September 2013].
Kirchner, S. 2012. Foreign Direct Investment in Australia Following the Australia–US Free
Trade Agreement, Australian Economic Review, 45(4), pp. 410 – 421
Reserve Bank of Australia, 2013. Exchange rates. [Online] Available at:
<http://www.rba.gov.au/statistics/frequency/exchange-rates.html> [Accessed 06
Trading Economics, 2013. Imports of goods and services in Australia. [Online] Available at:
< http://www.tradingeconomics.com/australia/imports-of-goods-and-services-bop-us-dollar-wb-data.html> [Accessed 06 September 2013]
World Bank, 2013a. Current account Balance. [Online] Available at:
<http://data.worldbank.org/indicator/BN.CAB.XOKA.CD> [Accessed 06 September 2013].
World Bank, 2013b. Portfolio equity, net inflows (Bop, current US$) [Online] Available at:
<http://data.worldbank.org/indicator/BX.PEF.TOTL.CD.WD> [Accessed 06 September 2013].