The balance of payments (BOP) is the systematic record of all transactions between Australia and the rest of the world over a period. It has a clear nested structure, and because it uses double-entry recording, the whole account always balances.
The current account
The current account (CA) records income flows. Its main components are the trade balance (exports − imports of goods and services), the net primary income balance (interest and dividends on investment, and wages) and the net secondary income balance (transfers). For Australia, a persistent net primary income deficit — interest and dividends paid to foreign investors — is a major reason the CA is typically in deficit.
The capital and financial account
This records flows of assets and liabilities — foreign investment into Australia and Australian investment abroad. Because of double-entry recording, a current account deficit is matched by a net capital inflow (a financial account surplus): the CA and the capital & financial account sum to zero.
Work through a stylised BOP table together.
Discuss
If Australia's investment consistently exceeds its saving, what does that imply for the current account, and why might that be sustainable rather than alarming?
Use the following data for a hypothetical year (A$ billion): goods & services exports 410, goods & services imports 360, net primary income −65, net secondary income −5.
1. Calculate the balance on goods and services.
2. Calculate the current account balance and state whether it is a surplus or deficit.
3. Account for the current account outcome — which component is the main driver, and why is this typical of Australia?
4. Using the double-entry rule, state what must be happening in the capital and financial account, and by approximately how much.
5. Explain the link between the current account deficit and the savings–investment gap.