Components of Balance of Payment

 (This illustration demonstrate trading between Australia and overseas)

Current Account

Goods – exports (credits)

Goods are tangibles. In this case, sold to overseas nations and produced in Australia.

Goods – imports (debits)

Goods are tangibles. In this case, produced overseas and purchased by Australians.

�� Services include transport, travel, insurance charges, telephone calls, tourist

accommodation, education, computer information services and the like.

�� In this case, provided by Australians and sold to overseas nations.

Service – imports (debits)

As above, but provided by other nations and purchased by Australians.

Balance on goods and services = net goods + net services

Income credits

Incomes paid to Australians from overseas sources:

�� Earnings on investment i.e. income (rent, profits, dividends)

�� Royalties

�� Interest

Income debits

As above, but incomes paid by Australians to overseas sources

Net income = credits – debits

Current transfer credits

Transfers of funds into Australia for things such as:

�� payouts on insurance claims

�� aid from overseas governments/nations (unless being used to build capital, thus

creating capital accumulation)

�� pensions received from foreign governments to Australian residents

�� money sent from overseas relatives

�� gifts from charities in other countries

�� work remittances from people working overseas.

Current transfer debits

As above, but transfers of funds out of Australia.

Net current transfers = credits – debits

Balance on Current Account = Balance on goods and services +
Net income +
Net transfers

Capital and Financial Account

Capital Account

Capital transfers – credits

Money coming in to Australia for things like:

�� people migrating and bringing money with them

�� aid from overseas where addition is made to the capital stock of the recipient

�� purchase and sale of intellectual property rights, including patents, copyrights,

trademarks, franchises, works of art

�� selling embassy land

�� debt forgiveness (cancellation of debts owed by Australians)

�� movements of government savings offshore (into Australian reserves).

Capital transfers…debits

As for credits, but money going out of Australia

Total on capital account = credits – debits

Financial Accounts

Direct Investment

(Buying assets abroad or lending to firms offshore which they control)

Includes:

�� foreign transactions to fund new investment in Australia or overseas

�� purchase of more than 10% of shares in an existing Australian company

�� movement of equity savings

�� reinvestment of profits

�� loans to affiliated enterprises

�� claims on affiliated enterprises.

Portfolio Investment

(That is, commercial dealings involving savings movements across national

boundaries into assets which do not give the provider of the savings significant

control of the user of these savings)

Includes buying land, shares and marketable securities such as Treasury Bonds,

Treasury Notes, certificates of deposit, debentures, unsecured notes (corporate

bonds), other money market instruments, and financial derivatives such as interest

rate or exchange rate swaps which can be easily sold in existing companies.

Other Investment

(That is, commercial dealings involving savings but which are not based on securities

or which do not give significant control or involve affiliated companies)

Includes:

�� trade credits (short term loans made on trade deals)

�� loans made to intermediaries, including financial leases

�� currency movements and deposits moving between national financial systems.

Reserve Assets

(That is, money being moved by the RBA)

Includes:

�� monetary gold

�� Special Drawing Rights (“paper gold”. Created by the IMF to improve the foreign

reserves of member nations)

�� IMF transactions.

Total on financial account = total of the above