Application Exercise 8d: Analysing the current account
- Identify one possible credit and one possible debit transaction that may have contributed to each of the following totals during the period shown:
- Balance on goods and services
- Credit transaction: A Japanese factory owner buys natural gas from Australian exporter Woodside
- Debit transaction: An Australian retailer purchases Toyota cars from a Thai manufacturer
- Net primary income
- Credit transaction: An Australian investor receives dividends on their shares in Facebook (listed on the New York Stock Exchange)
- Debit transaction: A Chinese mining company receives the profits earned by the Australian branch of their operations
- Net secondary income
- Credit transaction: An Australian resident receives an instalment of the pension they are entitled to from the UK government (having worked in that country previously)
- Debit transaction: The Australian government funds the building of a school in Indonesia
- Using the data provided in Table 8.5, outline how the balance on current account would have been calculated.
The balance on current account is the value of all four sub-accounts of the current account added together. In the case of the data, the sub-accounts of the balance on merchandise trade and net services have already been added together to determine the ‘balance on goods and services’. The value of the balance on goods and services for June 2022 was $43,085m, and this is added to the net primary income and the net secondary income values, -$23,950 and -$811 respectively. The total of this calculation provides the balance on current account of $18,324 million.
BOGS + Net primary income + net secondary income = Balance on current account
$43,085m + -$23,950m + -$811m = $18,324m
- Identify the value of the Capital and Financial Account balance based on what you have learned about the relationship between the current account and the capital and financial account.
Because the balance of the capital and finance account will directly offset the value of the balance on current account, such that the balance of payments equals zero, the Capital and Financial Account balance will be a -$18,324 million (a deficit of $18,324 million).
- Examine Chart 8.5. Describe what appears to the visual relationship between the current account balance and the balance on goods and services.
The visual relationship between the current account balance and the balance on goods and services (BOGS) is that the current account balance fluctuates in line with the BOGS. In general, when the BOGS is trending upwards so is the balance on current account. In fact, when the BOGS is in a large enough surplus, the balance on current account also moves into surplus, despite a persistent deficit in the net primary incomes sub account.
- Explain why the current account balance is consistently below the value of the balance on goods and services.
The current account balance is consistently below the value of the balance on goods and services (BOGS) because of Australia’s persistent deficit in the net primary incomes (NPY) account. Because Australia has consistently paid out more debits on the NPY account than credits are received on that account, even when Australia’s trade balance (BOGS) is in significant surplus, the deficit value of the NPY balance means that the current account balance will always be below the BOGS.
- Using the extract from the ABS release above, in your own words explain two main reasons for the latest current account figures.
According to the ABS extract on p. 217, one main reason for the latest current account figures (a surplus of over $18 billion) are higher prices for Australia’s commodity exports resulting in a substantial increase in the terms of trade (which increased credits relative to debits on the BOMT account of the CA). A second reason for the result was the high dividend payments to non-residents as a result of higher profits due to high commodity prices (which increased debits relative to credit on the NPY account of the CA).