Economics CAD essay PDF

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The Current Account Deficit refers to one of the two components of the balance of payments and is comprised of the balance of goods and services (X - M), primary Y and secondary Y. It’s prolonged deficit state is primarily catalysed by low domestic savings, leading to an increased need for foreign borrowing to facilitate spending, consequently leading to a debt trap scenario whereby more money is continually borrowed to fund debt-servicing. Counterposingly, the CAD has experienced significant increases, within the cyclical components of the BOGS, with the US-China trade war spurring increased demand for Aus X, leading to increases in economic growth. However, this is still hindered by Australia’s structural issue with it’s X composition, being mainly comprised of commodities which are heavily influenced by global economic performance. This subsequently means the CAD’s performance can be rather volatile due to fluctuations in foreign D which shifts in accordance to the international business cycle’s performance -- making Australia’s CAD highly susceptible to the contagion effect. Australia’s economic performance in 2019 has stagnated quite substantially, sitting at 1.3%, which is significantly below the 4% target band. However, Australia’s main semblance of respite is seen within the unprecedented increase of the current account to a surplus of 5.9 billion, the first CAS in 44 years (since 1975), a result of the 19.6 billion BOGS surplus and decreases in the PY outflows to only -1.3% of GDP. This was likely a consequence of the US-China trade disputes, whereby China reallocated their X-spending’s direction towards Australia as a retaliation to Trump’s imposition of 15% tariffs on more than ⅔’s of China’s exported goods. These improvements in the BOGs are reflective of the 2011 global commodity boom, where it was once again China’s influence upon Aus’ BOGS that spurred significant improvements in the nation’s economic performance (to 4.4% in 2012). One of the major causes of a sustained CAD, though currently it sits at a surplus of 1.3% of GDP, is the structural issue within the PY. Essentially, Australia has an extremely low domestic/national savings ratio of 5% (5c for every $1), which leads to the savings-investment gap, which refers to the deficit between current aggregate savings and the level of savings required to provide funds for business investment. This means that to finance the nation’s need for expansion, the government must increase their overseas borrowings, which leads to increases in foreign debt, 2 140 000 AUD million as of June 2019 slightly increasing from 2 115 000 in the previous quarter, and subsequently increases in debt servicing in the long run (currently -6.2% of GDP since 2018). To facilitate this, the RBA may employ a tightening stance for monetary policy, the RBA’s manipulation of the cash rate to influence consumption and foreign demand with a tightening stance serving to increase the cash rate and interest rates through the transmission mechanism. This attracts foreign investment within KAFA, as the interest rate differential incentifies increased investment due to increased returns for investment, comparatively to nations such as Japan who employ 0-interest rate policies. Accordingly, 15% of total Australian investment is from foreign sources each year and are recorded on the financial account as credits. This leads to a great net foreign liabilities (NFL), which stands at 60% of GDP, with the NFL outflows (repayments) being recorded as debits on the PY component of the current account leading to a persistent deficit (the PY comprises 10% of GDP). Moreover, the superannuation scheme was implemented in 1990 as a means of combating the structural issue of savings by attempting to impose a mandatory 9.5% saving for all Y earned through labour

(wages + salaries). ADD LINK. Alternatively, particularly in 2019, the BOGS (19.9 billion) has been a significant contributor to the increase of economic performance with overall net exports set to contribute 0.2 percentage points to GDP growth; however due to Australia’s structural issue within the composition of trade, the BOGS are highly cyclical (around 1.5% of GDP currently) and responsive to ‘changes in both domestic and world growth’ (stimulus), with the conflicts between China and the US being a significant catalyst of increases within the BOGS. However, Aus’ X are 60% comprised of mining commodities, which also contributed 0.6% of the 1.3% economic growth rate, which are STMS therefore determined by world prices which are volatile in that a downturn in economic conditions leads to a decrease in D for M thus decreases world prices. Moreover, Aus’ M spending is rather significant due to our deficit in ETMS, which tend to have higher P due to the increased value added, which is exemplified within Aus’ trade relationship with Japan (JAEPA 2015), who serve as the 2nd largest M source for Australia, where the g/s Aus X are what they essentially trade back after transforming it into a final good, thus is worth more. Furthermore, with the decreases in both world economic growth (3.3%) and within Australia (1.3%, with a recession being predicted for subsequent years), a downturn in the BOGS is expected in the LR due to Aus’ sustained lack of X-competitiveness and decreased D (spurred by decreased confidence in global economy), with this traction already beginning to halter as the global economy treads towards experiencing a synchronised slowdown at levels equivalent to that of the GFC. ADD LINK....