Discuss the Economic Implcations for the Australian Economy of Australia's Continuing Current Account Deficits.

2216 Words Feb 21st, 2013 9 Pages
Discuss the economic implications for the Australian economy of Australia’s continuing current account deficits
Australia has a long history of large and persistent current account deficits. During the 1960s the current account deficit averaged the equivalent of 2 per cent of gross domestic product. The CAD rose considerably, due to the floating of the Australian dollar and the opening of the capital account in 1980s, and by 1990s CAD has sustained around an average of about 4.5 per cent of GDP. However, in recent years the deficit has been falling and in 2011 it was just 2.25 per cent.
The decline in the CAD has been affected by what is happening to the nation’s levels of saving and investment. The level of Australia’s national
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September 2011, when the terms of trade had peaked, due to the foreign buyers for coal, iron ore and gas. However in the March quarter there was a 9.8% decline. Afterwards, the terms of trade dropped into another 7%, resulting in a massive decline. The fall in the terms of trade affects the Australian economy greatly. It affects the Australian economy by lowering the living standards.

Domestic economic growth affects the BOGS greatly. The higher the growth, the more demand for imports. The BOGS worsens due to an upturn in the domestic business cycle, which leads to higher consumption and higher disposable income. During the GFC, the slowdown in growth led to a decrease in spending on imports, which resulted in the BOGS having a surplus of 0.5% in 2008-2009.

International competitiveness also affects the BOGS. This is also called the 'Dutch Disease', where the growth in one export results in a higher exchange rate, This allows them to shake off the international competitors. Economies can be competitive due to selling products with higher quality or lower price than their competitors.

The International business cycle has phases of upswings and recessions. Upswings are when GDP, consumption levels, investment expenditure rise, and there is a decrease of unemployment. Higher growth overseas means more demand for our exports because the exchange rate

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