Discuss the Economic Implcations for the Australian Economy of Australia's Continuing Current Account Deficits.
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 investment has fallen as a share of GDP in the past year or two, dropping to 27 per cent in 2011. This is due to the falling of business investment despite the strong mining investment. Although public investment spending has recovered from its decline in earlier decades but it has dropped a bit recently. Households’ spending has also fallen back in recent years. On the other hand, the level of nation’s saving is just a bit under 25 per cent of national income (GDP), its highest since the 1980s. This is because saving by companies has been slowly trending up over the decades and at present it is at a record level of about 14 per cent of GDP. Government saving was very weak in the 1970s and 1980s but, following the deep recession of the early 1990s, strengthened to about 5 per cent of GDP. It is now back to zero as a consequence of the global financial crisis. The rate of household saving fell steadily through the 1970s to the 1990s, but began increasing sharply in the 2000s and is now back up to about 10 per cent of GDP. The decline in the CAD is therefore resulting from the decrease in the national investment and the increase in the national saving.
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The balance of payments is the sum of all transactions that Australia has with the
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 investment has fallen as a share of GDP in the past year or two, dropping to 27 per cent in 2011. This is due to the falling of business investment despite the strong mining investment. Although public investment spending has recovered from its decline in earlier decades but it has dropped a bit recently. Households’ spending has also fallen back in recent years. On the other hand, the level of nation’s saving is just a bit under 25 per cent of national income (GDP), its highest since the 1980s. This is because saving by companies has been slowly trending up over the decades and at present it is at a record level of about 14 per cent of GDP. Government saving was very weak in the 1970s and 1980s but, following the deep recession of the early 1990s, strengthened to about 5 per cent of GDP. It is now back to zero as a consequence of the global financial crisis. The rate of household saving fell steadily through the 1970s to the 1990s, but began increasing sharply in the 2000s and is now back up to about 10 per cent of GDP. The decline in the CAD is therefore resulting from the decrease in the national investment and the increase in the national saving.
….
The balance of payments is the sum of all transactions that Australia has with the