Balance Of Payment Analysis Assignment Paper (Essay Sample)

Balance of Payments Analysis
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Balance of Payments Analysis
The Balance of Payment of Australia consists of records for all financial transactions undertaken by individuals, corporations, and the government with other foreign countries; the recorded entries may involve purchase of commodities or transfer of capital to balance the account. A trade surplus may occur if the value of Australia’s exports exceeds the import and the converse yields trade deficits. The former position is favorable and a persistent trade surplus lowers international debt; a deficit, in contrast, signals depletion of capital reserves of a country.
Australia’s structure of Balance of Payment has a current account, which records transactions pertaining to exchange of goods and services produced in a given period. The current account balance for Australia is on a continuous decline over the past decades as signaled in the graph below.
It also has a capital account that records transactions involving movement of short term and long run capital, which witnessed continuous growth as indicated in the figure below.
The money account, on the other hand, articulates government financial transactions essential in offsetting net outflow of money, such as use of foreign exchange reserves.
The balance of payment for Australia was adverse between 2015 and 2016 but the situation currently is favorable as signalled by the upward trend in the Balance of Payment Curve. The export volume of australia witnessed a gradual rise as indicated in the figure below. Ores and mineral fuels constituted a significant proportion of exports reported in 2016 and the major exporting countries are China, Japan, South Korea, and US.
Australia witnessed an increase in import volume over the past 3 decades as indicated by the trend in the graph below. Machinery, vehicles, electronics, and fuel distillation products are the main imports that come from countries such as China, US, Japan, Thailand, and Germany.
The correlation between the Australian and US dollar is strong, both in the positive and negative direction; fluctuation in the exchange rate follows a similar path since inception of the former currency in 1966.
Depreciation of the local currency is advantageous to exporting firms due to the resulting competitive advantage as it makes commodities cheap to the consumer, which complements the trade balance; however, the above is adverse for entities that import raw materials and inputs as it increases production cost as it yields a deficit in the balance of payment. Appreciation of the Australian currency, on the other hand, makes imports cheaper to the domestic consumer and exports become expensive in foreign markets. The interaction of export demand and import supply curves determines the exchange rate of Australia, and they are subject to shifts occasioned by changes in market conditions; appreciation of the currency results from an increase in demand for exports and a decline in the desire for imports, and the converse is true for depreciation of the Australian dollar.
Inflation has an influence on the exchange rate; high inflation levels in a country compared to other international trading partners lowers the aggregate demand for commodities in a country, which leads to a decline in demand for the local currency leading to trade deficits. The graphs below signal the nature of correlation between interest rates and inflation in Australia. The trend of the decline in Australia’s interest and inflation rates is directly proportional.
Formation of the International Monetary Fund (IMF) in the middle of the 20th century supported the growth of international trade. It stabilizes exchange rates between currencies and offers short-term assistance to countries experiencing issues in their balance of payment with amounts contributed by members. To achieve the above objectives, countries should foster growth of world trade, which yields full convertibility of currencies; additionally, they should adopt a peg system of exchange rates. The government, in 1974, pegged the Australian dollar over the Trade Weighted Index (TWI) as the Australian dollar became a flexible currency before adopting a crawling peg in 1976, which guaranteed regular adjustment of the exchange rate level.