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International Monetary Economics Individual Assignment – Semester 2/2018

Lecturer: Lee Woocheol Student: Nguyen Dang Khoa Student ID: s3634006 Class: Tuesday, 3PM – 6PM Word count: 934

Contents Graphs & Trends...........................................................................................................................................1 Net International Investment Position .....................................................................................................1 Total Current Account Balance.................................................................................................................2 Gross domestic savings & investment ......................................................................................................3 Discussion .....................................................................................................................................................3 Reference List ...............................................................................................................................................5

Graphs & Trends Net International Investment Position

Australia's Net International Investment, 1988 - 2017, Quarterly

Sep-1988 Sep-1989 Sep-1990 Sep-1991 Sep-1992 Sep-1993 Sep-1994 Sep-1995 Sep-1996 Sep-1997 Sep-1998 Sep-1999 Sep-2000 Sep-2001 Sep-2002 Sep-2003 Sep-2004 Sep-2005 Sep-2006 Sep-2007 Sep-2008 Sep-2009 Sep-2010 Sep-2011 Sep-2012 Sep-2013 Sep-2014 Sep-2015 Sep-2016 Sep-2017

$Millions 1200000 1000000 800000 600000 400000 200000 0

Australian Bureau of Statistics, INTERNATIONAL INVESTMENT POSITION: HISTORICAL SUMMARY – QUARTER. Net international investment position (NIIP) is the difference between a nation’s foreign assets and its foreign liabilities. Australia’s Net International Investment liability had been steadily rising from 1988 until Q3/2016, reached its peak at around $1,000 billion (643% increased from 1988’s figure), a deeply negative NIIP which classifies Australia as a debtor nation. From that point forward it has been slightly decreasing with the latest record of $954.6 billion liability at 31 March 2018.

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Total Current Account Balance

Australia's Current Account Balance, BoP, current US$, 1989-2017 $Millions

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0 -10000 -20000 -30000 -40000 -50000 -60000 -70000 -80000

OECD Data, Balance of payments BPM6 One of the 2 components of the balance of payment, the current account of a country indicates the net difference between that country’s import and export of goods and services. Australia has been experiencing a current account deficit in the past 30 years, averaged 4% of its GDP during that time according to Australia Government Treasury. From 1986 to 2001 CAD fluctuated between 10 and 20 billion $. From the last quarter of 2001 onward it had been increasing rapidly, peaked at $63.7 billion in 2012. The current account deficit has been narrowing ever since 2015 with the country recorded its lowest CAD since 2001 in the first quarter of 2017 (Reuters, 2017).

Gross domestic savings & investment

Australia Gross Domestic Invesment & Savings, 1987-2017, current $US $Million 500000 450000 400000 350000 300000 250000 200000 150000

Gross Savings Gross Invesment

2

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

100000 50000 0

The World Bank, World Bank national accounts data, and OECD National Accounts data files. The patterns of fluctuation of Australia’s gross domestic savings and gross domestic investment are almost identical. Both slightly went up during the first 15 years (changes in gross savings during this time was really small). Both rapidly and steadily increased from 2001 to 2008. Both declined during the financial crisis and picked up upward trends in 2009, the year that Australia economy started its recovery from the recession. Both reached its 30 years respective peak in 2013 ($437 billion for Investment and $376 billion for Savings). Both experienced a dramatic decline from 2013 to 2016 and finally both savings and investment are currently on an upward trend. Overall in the past 30 years Australia has always had a higher gross domestic investment than gross domestic savings

Discussion The Current Account indicates the balance of trade in goods and services. It consists of 4 major components:    

Trade in goods Trade in services Primary incomes Secondary incomes

It’s determined by net export plus net international investment balance. Australia’s has been experiencing negative current account for the last 30 years because it has a deeply negative net external debt position. Because of the upward trends of the net international investment liability, Australia’s CAD has been generally widening in that period of time. However we can see in the graph that despite the constant increasing of NIIP there was few points of time when current account deficit got reduced. Those abnormalities can be attributed to the economy’s rebalancing of growth toward net export, the other component that makes up total current account. According to the IMF, the commodity currency adjustment mechanism after the mining investment bust has shifted growth toward net exports, with investment weakness also weighing on imports (IMF,2017). However in 2015 CAD got widened again due to temporary macroeconomics factors like weather related export declines and exceptional imports. Current account balance can also be determined using gross savings and gross investment. The fact that Australia has experienced higher domestic investment than its domestic savings in the past 30 years is the reason why its current account has been deficit during the same period. A lower saving rate usually means people are spending more resulted in a higher consumption which eventually leads to imbalance in the balance of trade toward imports. GNP (Gross national product) = GDP (Gross domestic product) + NIIP (Net international investment position) 3

GNP = C + I + G + NX + NIIP GNP = C + I + G + CA CA = (GNP – C – G) - I National savings = GNP – (C+G) therefore CA = S – I. Because Australia’s gross domestic investment has been higher than its domestic savings, the current account was always negative in the past 30 years. Since domestic savings was never sufficient to finance domestic investment the economy needed capital inflow from outside of the country. Those capital inflows had to match the deficit in the current account and were credited in the financial account which kept Australia’s equilibrium in its national income. The relationship between Australia’s gross domestic saving, gross domestic investment and current account can be observed in the graph below

$Million

Australia's Savings, Investment & Current Account. 1987-2017, current $US

500000 400000 300000 Gross Savings Gross Invesment

0 -100000

Current Account

19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 20 11 20 13 20 15 20 17

200000 100000

In the first 15 years there wasn’t much differences between gross savings and gross domestic investment hence current account was approx. 0 (still negative because gross investment > gross savings). From 2003 onward current account deficit has been continuously increasing as the difference between savings and investment got bigger. Because both these figure share the same pattern of changes during this time there was almost no fluctuation in the current account index.

Reference List 1. Australia Government Treasury, 2006. ‘Economic Roundup Summer 2006’, Australia

Government, 21March, viewed on 23rd July 2018,

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2. Reuters, 2017. ‘Australia posts lowest current account deficit since 2001, still disappoints’, Sydney Morning Herald, 6June, viewed 23rd July 2018,

3. Australian Bureau of Statistics, 2017. ‘5302.0 - Balance of Payments and International Investment Position, Australia, Sep 2017’ , Australian Bureau of Statistics, 5December, viewed 23rd July 2018, < http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/5302.0Explanatory%20Notes1Sep %202017?OpenDocument>. 4. International Monetary Fund, 2017. ‘IMF Executive Board Concludes 2016 Article IV Consultation with Australia’, International Monetary Fund, 9February, viewed 23rd July 2018,

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