Balance of Payments - Unit 2
Australia's Balance of Payments
What is the 'Balance of Payments'?
The Balance of Payments is defined as a record of all financial flows between Australia and the rest of the world over a given period of time (usually a year.)
It is made up of two accounts plus a third section for errors and omissions:
Current Account: This section records the financial flows that relate to goods, services, incomes and transfers.
Capital and Financial Account: This account records the movement of capital and foreign investment.
The most important feature of The Balance of Payments is that it MUST HAVE A FINAL BALANCE OF 0.
The table above is statistics from September 2021. These statistics are VITAL for tests and exams.
Credits and Debits
When it comes to the balance of payments calculations - FOLLOW THE MONEY! A credit means that money is entering Australia, even if goods are being sold overseas. A debit transaction is the opposite, when Australia pays for something overseas and money is exiting the country, it is recorded as a debit.
When all of the debits and credit transactions are added within the current account. If the final figure is positive the account is in surplus. However, if the figure is negative it records a deficit. The same is true in the capital and financial account.
These figures are extremely important in determining a countries external position in the world. Australia used to record persistent current account deficits which indicated that Australia was sending more money overseas than it was receiving. This meant that Australia was a borrower of finance from overseas residents. However, in 2019, Australia recorded a current surplus as a result of a trade surplus due to increased prices of exported iron and coal.