What is the Balance of Payments?

The Balance of Payments is a systematic record of all transactions between Australia and the rest of the world. Think of it as when you purchase an item you get a receipt, except in this case it's a receipt of all the transactions between Australia and the world.

Structure of the Current Account

The structure of the current account is divided into goods, services, income and transfers.

Goods

Goods credits - the value (quantity * price) of all exports of goods from Australia.
Goods debits - the value (quantity * price) of all imports of goods into Australia.
Balance on Merchandise Trade (Net Goods) is the sum of goods credits minus the sum of goods debits.

Services

Services credits - the value (quantity * price) of all services exports from Australia. (Where money has entered Australia in return for a service, e.g. providing education for overseas students)
Service debits - the value (quantity * price) of all services imports into Australia. (Where money has left Australia in return for a service, e.g. a holiday)
Net Services is the sum of services credits minus the sum of services debits.

Income

Income credits - where money has entered Australia in the form of wages/salaries, rent, interest or profits/dividends.
Income debits - where money has left Australia in the form of wages/salaries, rent, interest or profits/dividends.
Net Income is the sum of income and transfer credits minus the sum of income and transfers debits.

Transfers

Transfers are when money is received but there is no exchange for goods or services, e.g. pension payments.

Transfer credits are when transfer payments enter Australia from overseas residents
Transfer debits are when transfer payments leave Australia to pay overseas residents

Balance on Current Account

The Balance on the Current Account is the sum of the balance of trade and net income.

Balance on trade is the sum of the balance of merchandise trade and net goods.
The difference between the current account and the capital and financial account is balanced by an exchange rate and hence, always equals to 0.

Structure of the Capital and Financial Account

The structure of the capital and financial account is divided into two sections, capital transfers and financial account.

Capital Transfers

Capital transfers credits are the value of assets bought into Australia from immigration.

Capital transfers debits are the value of assets that leave Australia from emigration.

Balance on the capital account

Balance on the capital account is the value of capital transfers credits minus the value of capital transfers debits

Financial Account

Foreign investment is the value of all money entering Australia from overseas borrowings (foreign debt) or sale of domestic assets (foreign equity)
Australian investment abroad is the value of all money leaving Australia to accumulate overseas assets or lending of money to overseas residents
Balance on Financial Account is the value of foreign investment minus the value of Australian Investment abroad

Balance on the Capital and Financial Account

Balance on the Capital and Financial Account is the sum of the balance on the capital account and balance on the financial account.

The difference between the current account and the capital and financial account is balanced by an exchange rate and hence, always equals to 0.

Concept of the Current Account Balance

The current account balance can either be in surplus or deficit.

Surplus - where the current account balance is positive
Deficit - where the current account balance is negative

The current account balance can be used the to determine Australia's external position to the world. Australia has had persistent current account deficits which indicate that Australia is sending more money overseas than it is receiving from overseas residents from its economic activities. The shortfall in the current account means that Australia is a borrower of finance from overseas residents Some may argue foreign investment is unsustainable alike paying off a debt with more credit.

However, foreign investment has its advantages:

Australia's small population means we cannot produce enough savings, while other countries produce too many savings, meaning foreign investment is just a match of borrowers with lenders;
Foreign investment allows Australia is to achieve a higher rate of investment, hence higher rate of economic growth; and
While a majority of gains in foreign investment is sent abroad in the form of income debits, a portion is still kept in Australia and reinvested into the economy.

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