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Balance of payments
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The balance of payments budget deficit has always been a popular topic of casual discussion at dinner parties among friends. The figures are a watched and followed closely by stockbrokers, fund managers, bonds and currency traders as well as investors. While business leaders, economists and policy makers spend the weekend debating the relevance of these newly acquired numbers on the Sunday business show. Even movie star Arnold Schwarzenegger who is running for governor of California was quoted in the Courier-Mail (30 August. 2003, p.23) saying that he was disgusted at the massive budget deficit blamed on mismanagement by politicians. Clearly the Balance of payment is very important to the citizens of the country. But is having a budget deficit really that bad? This essay will begin by firstly explaining the composite construct of the Australian Balance OF Payments (BOP). Secondly we will compare and contrasts the United States (US) system of accounts with the Australian BOP. Thirdly, we will use the recent 10 year BOP data to compare the performance, direction and implications for these countries. It will be shown that by just quoting a budget deficit, it is not enough to see the overall picture of where the economy is heading. It is not in the scope of this essay to prove existing economic theory on the BOP, as this is not an economic paper. Cumby and Levich (1994, p. 113) describes the balance of payments (BOP) as “the name given to the record of transactions between the residents of one country and the rest of the world over a period of time.” In Australia the BOP is made up of two general main categories: the current account and the capital and financial account. The current account records all international goods and services. The Australian BOP current account consists of 3 sub-accounts states McLennan (1998, p. 25). The first is goods and services, second is income and the third account current transfers. With in each one they are further sub-categorized in to smaller accounts. It is usually a one year timeframe that all short term transactions are recorded in the current account. Figure 1 shows the current account with the 3 board categories. According to McLennan (1998, p. 25) the goods account comprise most movable goods that change ownership between an Australian resident and a non-resident. This account is further broken down into, general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers, and non-monetary gold for a more in-depth analyses. Services account is where services are provided or received between an Australian resident and non-residents. It is also broken down into smaller more informative sub-accounts providing specific information on our major service sectors. In the income account is where all transactions of income are kept. These include everything from dividend payments received by a resident from a non-resident foreign company to an Australian receiving an income form a foreign based firm. Again the accounts are also further divided into its relevant sub-accounts. The last account in the current account is the current transfer account. Transfers are considered to be the provision of resources to a non-resident country with no expectations of an economic return. These include foreign food aid other donations supplied to non-residents. McLennan (1998, p. 27) stressed that current transfers needs to be distinguished form capital transfer which is located in the capital account. The distinction is that if the aid is consumed within 12 months of being received then it is considered a current transfer, while if it is longer than 12 months it will be classified as a capital transfer and will be located in the capital account.
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