Australlian Balance of Payments - Structure

Australian Balance of Payments and
International Investment Position
Definitions and Structure
WACE Economics - Unit 3
Slideshow 5.1 (Updated Jan 2019)
© Andrew Tibbitt 2019

Definitions
The Balance of Payments Accounts are a record of financial flows between
Australia and Rest of the World over a period of time. The International
Investment Position shows the value of Australia’s net foreign liabilities at
a given moment of time.
The main financial flows
The main financial flows between Australia and the rest of the world
involve payments for or revenue from:
Foreign Trade Incomes Foreign Investment
Credits and Debits
Financial flows into Australia are
recorded with a plus (+) sign and
are described as CREDIT entries.
Financial flows out of Australia are
recorded with a minus (-) sign and
are described as DEBIT entries

Surplus and Deficit
SURPLUS:
CREDITS exceed DEBITS in the main
account or in separate sub-accounts.
For example:
Exports of goods and services = $300b
Imports of goods and services = $280b
Balance on goods and services = $20b =
SURPLUS
DEFICIT:
CREDITS less than DEBITS in the main
account or in separate sub-accounts.
For example:
Exports of goods and services = $275b
Imports of goods and services = $310b
Balance on goods and services = -$35b =
DEFICIT

Structure
There are two main accounts in the Balance of Payments Accounts
Current Account Capital and Financial Account

Structure
Overall the balance of payments must balance. The current account
balance mirrors the capital and financial account balance making the
overall balance zero.
-$40b +$40b
Current Account + Capital and
Financial Account = ZERO
For example:

Structure
Overall the balance of payments must balance. The current account
balance mirrors the capital and financial account balance making the
overall balance zero. For example:
The overall accounts balance because:
The accounts use a double-entry bookkeeping system of
debits and credits
The accounts include an item that estimates the net value of
errors and omissions
The floating exchange rate constantly adjusts to equilibrium
values in the foreign exchange markets so demand (credits)
and supply (debits) are equal.

Structure
The CURRENT ACCOUNT ACCOUNT
includes financial flows linked to
TRADE and INCOMES.
Trade
Incomes
The CAPITAL AND FINANCIAL
ACCOUNT includes financial flows
linked to FOREIGN INVESTMENT
Foreign Investment

Structure
Trade flows involve payments for
imports and revenue from the
export of GOODS and SERVICES
Trade
Foreign Investment
Goods
Services
Goods: Things that you can load onto an aircraft or ship or
drop on your foot e.g. iron ore, coal and LNG.
Services: Things that you can’t load onto an aircraft or ship or
drop on your foot e.g. education and travel.

Structure
Income flows are classified as
PRIMARY or SECONDARY flows
Trade
Incomes
Foreign Investment
Goods
Services
Primary Incomes
Secondary Incomes

Structure
PRIMARY INCOMES are INTEREST,
DIVIDENDS and RETAINED PROFITS
from foreign investment and
REMITTANCES
Trade
Incomes
Foreign Investment
Goods
Services
Primary Incomes
Secondary Incomes
Interest, Dividends, Profits, Remittances

Structure
SECONDARY INCOMES include
FOREIGN AID and TRANSFERS. These
flows are one-way or ‘unrequited’.
Trade
Incomes
Foreign Investment
Goods
Services
Primary Incomes
Secondary Incomes
Foreign Aid, Transfers
Unrequited = nothing received in
return. For example, foreign aid
may be provided to meet
humanitarian needs and nothing is
expected in return (in a tangible
form anyway).

Structure
Trade
Incomes
Foreign investment is recorded as
DIRECT, PORTFOLIO, FINANCIAL
DERIVATIVES and OTHER INVESTMENT
or RESERVE BANK ASSETS
Foreign Investment
Goods
Services
Primary Incomes
Secondary Incomes
Direct investment
Portfolio investment
Financial derivatives
Reserve Bank
Other investment
Foreign Direct Investment = 10% or
more ownership of asset
Foreign Portfolio Investment = less
than 10% ownership of asset
Financial Derivates = contracts that
derive their value from the
performance of an underlying entity
e.g asset or interest rate
Other investment = not included in
the list above
Reserve Bank Assets = flows
between Central Banks (e.g. RBA
and Federal Reserve)

Structure
Trade
Incomes
The CAPITAL ACCOUNT records
movements of capital in and out of
Australia e.g. by migrants
Foreign Investment
Goods
Services
Primary Incomes
Secondary Incomes
Direct investment
Reserve Bank
Capital flows
Financial derivatives
Other investment

Structure
Trade
Incomes
An entry for ERRORS and OMISSIONS
(sometimes called the balancing item)
is added to this account.
Foreign Investment
Goods
Services
Primary Incomes
Secondary Incomes
Direct investment
Derivatives
Reserve Bank
Other
Errors and Omissions
Capital flows

Current Account - Performance
Balance on goods and services
(Trade balance) (+$2.9b)
Current Account Balance (-$12.8b)
Net primary income (-$15.5b)
Source: Australian Bureau of Statistics Cat. 5302
Translation: In Jun Qtr 2018
the current account deficit
was $12.8b. There was a
trade surplus of $2.9b but this
was offset by a net primary
income outflow of $15.5b.

Data about Australia’s International Investment Position is included
in the Australian Bureau of Statistic Catalogue Number 5302.0 -
Balance of Payments and International Investment Position.
The IIP is a statement of Australia’s net foreign liability position.
The total of net foreign liabilities is the sum of net foreign debt (the
balance of what is owed to non-residents) and net foreign equity
(the balance of assets that have been bought by non-residents).
These amounts are not flows over a period of time but are levels
(or stocks) at a moment in time.
Changes in these levels, however, are directly linked to the current
account balance. For example if the current account deficit was
$10b this would be mirrored by a foreign investment inflow of $10b
(either through borrowing, or the sale of assets). This, in turn,
would add to foreign liabilities and change the IIP.

Level of net foreign debt ($1,036.4b)
IIP (net foreign liabilities) ($953.4b)
Level of net foreign equity ($82.9b)
Our overseas equity has a higher
value than the value of foreign owned
equity in Australia
Source: Australian Bureau of Statistics Cat. 5302

Levels at end of
period
Mar Qtr 2018
$m
Jun Qtr 2018
$m
Change
Mar Qtr to Jun Qtr
% change
International
Investment Position
933,929 953,430 2
Net equity position -87,217 -82,978 5
Net foreign debt 1,021,146 1,036,408 1
Translation: At the end of the June Quarter 2018 (i.e. 31st August
2018), net foreign debt was $1,036.4b but the value of net equity
was $82.9b (i.e. we had a negative liability) giving an overall
International Investment Position (IIP) of $953.4b

End of slide show
See Video 5.2
Balance of Payments - Performance

Australlian Balance of Payments - Structure

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