Australia's Current Account Deficit

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The record of all transactions between Australia and the rest of the world is known as the current account. The constituents of these transactions include goods and services, interest repayments on loans, and remitted profits by overseas owned companies, all of which play a role in the determination of whether the account is in a deficit or surplus state. For many countries a major problem is that a current account deficit severely effects foreign debt and can lead to the degradation in the economy.

Traditionally, Australias main exports have been agricultural commodities. However, in recent times the trend for Australias exports have leant to minerals and fuels. There are major problems in relying on these export areas, as the fluctuations in the world prices can be extreme and unpredictable. This was illustrated in the 180s when the wool prices changed dramatically.

Due to Australias lack in technology in contrast to other countries such as the USA and Japan, the main imports are manufactured goods. Unlike the commodities that are exported from Australia, manufactured goods tend to maintain or increase their world price.

The terms of trade index measures the relationship between the price of a countrys exports and the price of its imports. In order to evaluate the terms of trade index

Custom Essays on Australia's Current Account Deficit

Export price Index

= Import Price Index X 100

The export price index measures relative changes in the prices received for exports and the import price index measures relative changes in the prices received for imports over a period.

By completing this evaluation, you are able to indicate as to whether there has been a degradation or enhancement to the terms of trade within the concerned country.

Hence as the name suggests, an enhancement occurs when a country can purchase more imports with the same quantity of exports and vice versa.

As the prices for Australias exports ie-primary commodities, have been either diminishing or increasing at a much slower rate than that of prices of manufactured goods being imported into Australia, the terms of trade for this country have been abrading. This circumstance has been occurring since the 150s and has resulted in the pressurisation of Australia to produce more exports just to pay for the same level of imports. Thus playing a role in the current account deficit.

Foreign debt refers to liabilities owed by Australian residents to overseas residents. Australia has borrowed substantial amounts of money from foreign countries in order to account for the current account deficit and has hence accumulated over the years. This capital inflow will ensure a rising current account deficit in the future, this occurs because increased overseas borrowing is going to result in increased interest and dividend payments on the outstanding loans.

During the 180s Australias foreign debt rose substantially in money terms, it was $1 billion. By 187 it had risen by 0 per cent. This was due to the persistent current account deficits.

High levels of foreign debt require servicing. These interest repayments add to the current account deficit, which then requires further overseas borrowing, increasing the level of interest repayments. This is known as the passive accumulation of debt.

In order to avoid an increase in interest repayments, Australia must earn more export income. Thus Australia must improve its international competitiveness to improve their economic position, this means moving away from its dependence on primary commodities. Primary products are known as simply transformed manufactures (STMs) ie the very basic production processes that add very little value to raw materials. Examples of these are Iron, steel and copper.

This movement will lean towards elaborately transformed manufactures (ETMs) ie more complicated production processes that add substantial value to raw materials. Some examples of these are cars, machinery and computers.

The attempts to increase the productivity of the Australian economy through structural change are called microeconomic reform. This will result in a more efficient allocation of resources within the industries of Australia.

There have been many initiatives that have been undertaken to improve Australias economy these include

„h There has been a great emphasis on improving the level of education and training within the workforce

„h Levels of protection to local industries have been reduced

„h The infrastructure of the economy has been improved

„h Substantial taxation reform has been undertaken

Structural adjustment is the changing pattern of production within an economy. These changes take place due to changes in demand, the introduction of new technology, and government policies. The role of government is vital as they can determine the changes in the concerned economy. They may do this through various methods such as tax, subsidies and tariffs.

Structural change is aimed at improving international competitiveness. In doing so, the Australian economy will be able to improve their terms of trade. International competitiveness is determined by

„h The cost of labour and labour productivity

„h The cost of inputs

„h Inflation rate

„h Exchange rate

„h Quality of the product

„h Marketing skills

„h Credit facilities

„h Reliability of the suppliers

Therefore if all of these factors are taken into account and the appropriate action is taken, Australia will be able to obtain a surplus in the current account. Thus the opportunity will arise to pay the foreign debt and spend more on the infrastructure of the nation to better enhance the living standards.

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