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3rd largest current account deficit? (Read 12987 times)
enviro
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3rd largest current account deficit?
Jan 4th, 2007 at 12:51pm
 
Traditionally, the absence of an export oriented manufacturing industry has been considered a key weakness of the Australian economy. More recently, rising prices for Australia's commodity exports and increasing tourism has to some extent alleviated this criticism. Nevertheless, Australia has developed the world's third largest current account deficit in absolute terms (in relative terms over 7% of GDP). This has been considered problematic by some economists, especially as it has coincided with high prices for Australia's exports and low interest rates which keeps the cost of servicing the foreign debt unusually low.

http://en.wikipedia.org/wiki/Australia

I wondered why taxes were low..
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« Last Edit: Mar 3rd, 2007 at 10:58am by enviro »  
 
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enviro
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Re: 3rd largest current account deficit?
Reply #1 - Mar 3rd, 2007 at 11:23am
 
Does anyone know how accurate Wikipedia is? Also how independant it is?
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Re: 3rd largest current account deficit?
Reply #2 - Mar 3rd, 2007 at 11:31am
 
Anyone can edit wikipedia's articles, but they have strong internal mechanisms for keeping articles neutral and correct. Someone did a study a while back comparing wikipedia to a regular encyclopedia. They found them to be roughly equivalent, with both containing about the same number of errors. I use it fairly regularly these days.
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Re: 3rd largest current account deficit?
Reply #3 - Mar 3rd, 2007 at 2:21pm
 
Is this thread about the accuracy of wikipedia, or about the current account deficit?

Wikipedia is a good reference point, but you shouldn't rely on it as fact. On marginal topics, it is largely incomplete. Controversial topics are often controlled by powerful interest groups.

As I see it, wikipedia is more like a thesis, created when an initial contributor posts information to on a topic in which they have an interest. You would expect this view to be biased, so other contributors then make amendments. In theory, peer review results in the information becoming more accurate.

The biggest problem with wikipedia is that it is not accepted by academics. The review process is performed by people who are not recognised as experts in their field. This is why it cannot be directly quoted for research purposes.

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Re: 3rd largest current account deficit?
Reply #4 - Mar 3rd, 2007 at 3:44pm
 
Quote:
I wondered why taxes were low..


Tax has nothing to do with the current account deficit (CAD).

Australia currently runs a budget surplus, which means that collections (taxes) are higher than outlays.

The CAD is predominantly due to private operations, so the government has no real direct influence over the figure.

A CAD indicates that Australia imports more than it exports. This problem is compounded because imports are largely financed by overseas debt. An analogy is that you are earning more income, so the bank lets you borrow more because you are able to service the debt. No problem while the interest rates are low, but if they increase, or income starts to drop, crunch time will follow close behind.
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Re: 3rd largest current account deficit?
Reply #5 - Mar 3rd, 2007 at 5:43pm
 
I don't get why the CAD is a problem anyway. If it gets skewed, then the exchange rate should adjust and make our exports more or less competitive, thus correcting it.
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Re: 3rd largest current account deficit?
Reply #6 - Mar 5th, 2007 at 4:50am
 
There are a few problems with such a high CAD, mostly caused by Australia's high amount of foreign debt.

The AUD is often held as a speculative currency. If there is a sell off, the currency devalues. A devaluation will result in:
- making the servicing of foreign debt more difficult
- exports will earn less, especially on the sale of resources
- imports will become more expensive, therefore placing pressure on inflation
- business confidence will reduce, therefore resulting in a contraction in spending
- jobs will become less secure, compounding contraction in spending

In short, the economy will go into recession.
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Re: 3rd largest current account deficit?
Reply #7 - Mar 5th, 2007 at 9:35am
 
exports will earn less, especially on the sale of resources

Wouldn't they earn more?

business confidence will reduce, therefore resulting in a contraction in spending

If exporting becomes more lucrative, confidence will increase.
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Re: 3rd largest current account deficit?
Reply #8 - Mar 5th, 2007 at 1:09pm
 
Quote:
exports will earn less, especially on the sale of resources. Wouldn't they earn more?


No, here is why...

Assume the exchange rate is AUD1.00=USD0.70, and the price of iron ore is AUD50.00 per tonne. Due to capacity constraints, Australia can produce only 1,000 tonnes of ore a year. The total income from iron ore exports is AUD50,000, or USD35,000.

If the exchange rate drops to AUD1.00=USD0.60, Australia will now receive USD30,000 for the same amount of exports.

The numbers are only examples, but the capacity constraints are a reality.
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Re: 3rd largest current account deficit?
Reply #9 - Mar 5th, 2007 at 1:21pm
 
But we would get paid the price that is set on the international market - ie in $US, so we would get paid more if the exchange rate dropped.
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Re: 3rd largest current account deficit?
Reply #10 - Mar 6th, 2007 at 2:31pm
 
Very good point Freediver. This would also mean that we could lower our prices and be more competitive on the market than other countries. The only problem is we would have to increase mining in this country which would have long term environmental effects and reduction of rescource deposits.

Farmers have always wanted a lower dollar value like 60 cents to the US dollar but I could never work out why. Because most of our needs for the country is imported so everything will go up in price locally.

Summary:

If the dollar comes down, the locally targeted business suffers but, businesses that export, grow.

If the dollar increases then export reduces and locally targeted businesses grow.

Most Australian residents are employed by locally targeted business's which means an unemployment increase. This is why having a good rate like 70 cents is of more benefit to the country.

I think the rule of thumb is stay between 65c and 75c. This way the impact on imports and exports wouldn't be enough to cripple either industry.
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Re: 3rd largest current account deficit?
Reply #11 - Mar 6th, 2007 at 2:57pm
 
I think that the exchange rate adjusts automatically due to market forces to tend to equalise the total value of exports and imports.

Likewise, our currency is only traded so heavily because it is so stable. That trade tends to destabilise it, but only to a certain level because then people stop trading it.

A business that produces locally and sells locally won't be affected directly either way - though they might be affected by the price of competing goods.

What a high value for our dollar really means is that our labour is worth more than the labour of a foreigner. We are more productive and sell low quanitities of high value goods in exchange for a high volume of what are (to us) cheap goods. It means that our imports and exports are matched even though our exporters are disadvantaged. We cannot compete in the 'cheap labour' market because our workers are paid so much. So while a high dollar may hurt our farmers and miners, it is a sign of a strong economy, provided it is has a real basis and is not some temporary glitch.
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Re: 3rd largest current account deficit?
Reply #12 - Mar 6th, 2007 at 5:36pm
 
Quote:
But we would get paid the price that is set on the international market - ie in $US, so we would get paid more if the exchange rate dropped.


Very true, I overlooked that fact. Probably not a good example, as I expect most transactions are hedged for currency risk.

Regardless of the export issue, a low AUD is bad for Australia because of the amount of debt we hold.
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Re: 3rd largest current account deficit?
Reply #13 - Mar 6th, 2007 at 5:46pm
 
The profitability of exporting is far more sensitive to exchange rates than our ability to repay loans.
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Re: 3rd largest current account deficit?
Reply #14 - Mar 6th, 2007 at 5:58pm
 
Aushole - you have rather ruined any credibility you had over your insane suggestion that we earn less on exports if the Aus dollar falls. Even though you spelt it out in an example you still failed to see it. You must never have ever spoken to an exporter.
With regard to your other assertion about the effect of a low dollar of our debt - well you are wrong there too. As the OECD recently pointed out, Australia has been very clever in being able to borrow most of the money denominated in its own currency - AU$. The balance that banks have borrowed in foreign currency has been protected by hedging. So changes in exchange rate have little effect. Australia also has some overseas investment lendings (much less than it owes) and this amount increases (in AU$ terms) with a lower Aus dollar.
Most countries naturally want a lower currency and it usually brings benefits. But people want AU$. The US would like a bigger devaluation than is currently happening. It owes US$ but is owed foreign currencies. In this situation the US external debt would be wiped out with about a 25% devaluation and its balance of trade would improve. But people want US$ still so the rate stays up.
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