causes of CAD (1 Viewer)

[Nelly_04]

will anyone be able to help list down ALL the factors which cause Australia's high CAD. I know they are in textbooks, but they are all in different sections and i'm getting slightly confused

thanks

 

[i-color]

here are a few...
1. Australia have always been net capital importers, and thus our BOGS is always negative making our CAD always negative. (ie we import more than we export)

2. Because Australia's CAD has always been high, we've almost fallen into the debt trap scenario, where we're borrowing more money from overseas to fund our current CAD. This causes an even higher CAD...and this ccycle just keeps continuing until our CAD blows out.

3. We have also always attracted more foreign savings and investment thatn we have sent overseas, making our KAFA account in surplus. This must be funded by paying interest which gets recorded in the current account, causing income component of Current account to be in deficit --> high CAD

4. Australia has traditionally been an agricultural exporter, and agricultural prices tend to fluctuate excessively in the short term. This makes our BOGS highly volatile, and because ag. prices tend to be usually lower, our BOGS is almost always negative, causing our current account ot be in deficit

these are the main ones...one of the more minor ones may be concerning the AUD...bu tyeah these are the main ones

 

[Nelly_04]

thank you very much i-color

for the appreciation/ depreciation cause, can u plz tell if this is right:

depreciation of $A will make imports more expensive and exports cheaper. In the short term, this may affect adversely on the BOP, but in the long term, ppl will buy more of our Australian goods since they are cheaper, and this will improve the CAD.

 

[George W. Bush]

The depreciation of the Australian dollar will make imported goods in Australia more expensive, and Australia's exports cheaper. It will not, however, add to Australia's net income component of the BoP, as the benefits of greater value from overseas investments basically cancel out the adverse effects for repaying overseas e.g. AFC.

 

[i-color]

mm yeah, depreciation of AUD will make imports more expensive and exports cheaper. Because Australia is a net capital importer, and our imports are relatively price inelastic, it will in the short run negatively affect our BOGS. However in the long run it should improve the CAD as BOGS moves back into surplus.

 

[Beats]

About the BoP - where would you classify this: "Australian citizen receives interest on a loan to a British company" - is it the income component of the current account or the financial account? I'm seriously lost.

 

[grimreaper]

Originally posted by Beats
About the BoP - where would you classify this: "Australian citizen receives interest on a loan to a British company" - is it the income component of the current account or the financial account? I'm seriously lost.

income component of the current account

 

[George W. Bush]

Originally posted by Beats
About the BoP - where would you classify this: "Australian citizen receives interest on a loan to a British company" - is it the income component of the current account or the financial account? I'm seriously lost.

Basically, you can think of it as anything with no implications beyond the current accounting period goes in the current account.

 

[CaR]

ohh...
so the Capital & the Financial Account only take account of purchases & assets and the current account is...that---^ '

am i getting this right?!

 

[i-color]

mmm I don't think you should really go into accounting for it...basically all flows of money and finance and Capital/assets go in the KAFA

and any import/exports, interests paid and earned etc go in the current account.

 

[wildtiger]

Yikes.

This thread was basically what the essay question of our last assessment.

It was one of those walk-in-and-write things, i dont think i've ever bs-ed as much in my life for four pages before =P

 

[Nick]

Originally posted by George W. Bush
The depreciation of the Australian dollar will make imported goods in Australia more expensive, and Australia's exports cheaper. It will not, however, add to Australia's net income component of the BoP, as the benefits of greater value from overseas investments basically cancel out the adverse effects for repaying overseas e.g. AFC.

of course it will increase the net income deficit, since you have to pay more australian dollars to service the debt

and since that is the largest part of hte CAD, it has a pretty big effect.
there isnt nearly as much australian investment OS compared to foreign investment in australia

 

[George W. Bush]

You are incorrect.

If you were correct, during the AFC when the AUD depriciated something like 20%, the Net Income component of the CAD would have skyrocketed. Instead, it fell by 3%.