BOP and FOREIGN DEBT (1 Viewer)

[P.T.F.E]

what is the relationship between the persistant CAD and high levels of net foreign liabilities.

any points i should include if answering this as an extented respose?

THANKS

 

[LordPc]

from what i remember, a high CAD is usually because of a lot of foreign investment into australia. interest, dividends and profits are then paid to overseas investors which pushes up net income. but all this borrowing from overseas isnt really paid back, it just builds up and up which increases net foreign liabilities

so high CAD -> high net income -> high levels of interests on debt -> high and ever increasing net foreign liabilities

not sure if that is 100% accurate cause BoP is worst part of economics, but the answer is something like that

 

[gnrlies]

what is the relationship between the persistant CAD and high levels of net foreign liabilities.

any points i should include if answering this as an extented respose?

THANKS

well by nature one implies the other remembering of course that it is the balance of payments. So if the cad and net foreign liabilities are stable but persistent, this is just simply accounting. For example if you spend more than you earn, you need to borrow.

But in reality the relationship is more complex. For example increasing foreign liabilities usually require increasing servicing costs (interest and dividends). This is recorded as a further increase in the CAD and as you can see debt sustainability can become a problem. In general this is not an issue for Australia as we have had lower debt servicing ratios despite increases in the CAD.

 

[P.T.F.E]

thanks thats what i needed a push in the right direction, now i know what i have to research.
thanks to you both.