Economics

Economics Define define Analyse the impact of changes in the global economy on Australia’s current account deficit & net foreign debt Define Global economy - The interdependence of all countries in the world which produce goods and services, which contribute to global GDP, GNI. Countries that make up the global economy are grouped by advanced economies (Australia, Japan, USA – over $20,000 GDP per capita), developing or less developed countries. All of these economies are affected by changes in the global economy. Any changes in the global economy will have an impact on all countries belonging to the global economy. If there are changes in the international business cycle, there will be repercussions with global foreign trade. There will be changes in global world output/demand. If global world economic growth is faster than Australia’s economic growth, exports will increase faster than imports. The balance of payments on the current account would be expected to improve and move in to surplus. If Australia's domestic growth is faster than world growth, Australia will then import more than it exports, resulting in our CAD deteriorating. Higher levels of world growth leads to an increase in commodity pricing and appreciating exchange rates for countries like Australia. Lower world growth leads to lower commodity prices and a depreciating exchange rate for the Australian economy. Changes in global financial flows would also impact the Australian economy. A rise in foreign investor confidence would lead to a rise in capital inflows. A country experiences a current account deficit when it imports more than it exports. Australia’s CAD is heavily influenced by changes in domestic and global economic growth. Stronger domestic growth increases the demand for imports, whilst stronger world growth leads to a greater demand for exports. CAD is also influenced by exchange rate movements, the cost of servicing Australia’s net foreign debt. Net foreign debt refers to the level of outstanding loans owed by Australian residents to overseas residents minus the level of outstanding loans owed by overseas residents to Australian residents. During the late 90’s, the world economy slowed, which led to a decrease in Australia’s exports. However, Australia’s domestic economy grew faster than the world economy, which led to a rise in imports. This caused Australia’s CAD to deteriorate. CAD worsened because of increased import spending on consumer and capital goods, falling commodity prices due to a decline in global demand. Australia’s net foreign debt has continued to grow over the past decades, reaching $360 billion continued debt in growth of equity borrowings has continued to finance foreign account deficits constant current account deficits throughout the 80’s, 90’s and 00’s, we have become reliant on foreign money, and over the last 2 decades Australian banks have doubled their share of Australia’s gross foreign debt. Australia’s stock of foreign debt is almost entirely non-government, and most of it is handled by banks