23115 Chapter Notes - Chapter 11: Foreign Exchange Market, Foreign Direct Investment, Xm Satellite Radio
External Sector
Balance of Trade
An open economy buys and sells goods and services in the world product markets, buys and sells
assets in the world assets market, and makes and receives transfer payments to and from other
countries
Balance of Trade: NX = X - M
•Balanced trade: exports = imports
•Trade deficit: exports < imports
•Trade surplus: exports > imports
Australia’s balance of trade is influenced by domestic demand, international prices, exchange
rates, government policies and the cost of transportation.
Trade of assets involves financial (shares and bonds) and physical assets (facilities and property),
with two components of capital inflow (purchase of foreign assets by domestic entities) and capital
outflow (purchase of domestic assets by foreign entities).
Net Foreign Investment = Capital Outflow - Capital Inflow (NFI = Ko - Ki)
ABS refers to two forms of foreign investment:
•Foreign Direct Investment: more than 10% owned e.g. when an Australian company opens up a
branch in India
•Foreign Portfolio Investment: less than 10% owned e.g. when an Australian buys shares in an
Indian corporation
Net Foreign Investment is influenced by foreign and domestic interest rates, the difference being
the interest rate differential, as well as the relative rates of return (dividend yields), exchange rates,
government policies, and potential risks and rewards of investment.
Transfers are donations or gifts such as foreign aid
Balance of Payments = Total incoming payments from overseas - Total outgoing payments to
overseas
The balance of payments is divided into the current account, and the capital and financial account,
incoming payments known as credits and outgoing payments known as debits
Exchange Rates
The exchange rate is the rate of exchange between two national currencies
Australian dollars are supplied to the foreign exchange market in exchange for imported products,
and income payments, as well as in the form of capital outflow and RBA sales of the AUD
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