Question: Examine the cyclical and structural factors that impact on Australia’s Balance of Payments. Discuss the strategies that the government uses to improve Australia’s external balance position.
Answer: The balance of payments is the sum of all transaction that Australia has with the rest of the world. These figures are presented in two accounts- the current account and the capital and financial account. The capital and financial account are comprised of reversible transactions while the current account covers external transactions that are non- reversible. The balance of payments always balances but since the 1980s, Australia has persistently experienced a large Current Account Deficit (CAD). Before the 1980s, the CAD averaged at around 2.5% of GDP. During the 1990s its average grew to just over 4% and at this present moment the CAD has ticked over 7%. Cyclical and structural factors are the main reasons of this balance position and many strategies are being implemented by the government to improve our position and most notably of CAD.
A number of cyclical factors impact on both our current and capital and financial accounts. Firstly, rates of economic growth in Australia compared to the rest of the world will impact on both our accounts. For example, during the Asian crisis of 1997, our exports of both minerals and agricultural goods slumped to ASEAN and Japan who are both very import importers of these products. As a result, the current account declined and we had to lower our prices in order to distribute these goods elsewhere. Fluctuations in commodity prices are significant in that these fluctuations directly affect our current account. Preferences in goods and or services change frequently and these can boost or heavily decline credit or debit on the current account. For example, during the movie “Finding Nemo”, thousands of clown fish were distributed overseas to buyers who were desperate to get their hands on a real live “Nemo”. This novelty...