Question

1. What are the main component accounts of the current account? Give one debit and one credit example for each component account for Australia
2. What are the main components of the financial accounts? Give one debit and one credit example for each component account for Australia.
3. The surge in Foreign Direct Investment in the 1980s is related to the globalisation of business with the FDI seen to benefit both source and host countries. Discuss the major benefits of FDI to MNEs.

Answer 1

A)  A current account is in balance when the country's residents have enough to fund all purchases in the country. Residents include the people, businesses, and government. Funds include income and savings. Purchases include all consumer spending as well as business growth and government infrastructure spending.

The Four Current Account Components

The Bureau of Economic Analysis divides the current account into four components: trade, net income, direct transfers of capital, and asset income.

1. Trade: Trade in goods and services is the largest component of the current account.

2. Net Income: This is income received by the country’s residents minus income paid to foreigners. The country’s residents receive income from two sources. The first is earned on foreign assets owned by a nation's residents and businesses. That includes interest and dividends earned on investments held overseas. The second source is income earned by a country's residents who work overseas.

3. Direct Transfers: This includes remittances from workers to their home country.A third direct transfer is foreign direct investments. That's when a country's residents or businesses invest in ventures overseas. To count as FDI, it has to be more than 10% of the foreign company's capital.

4. Asset Income: This is composed of increases or decreases in assets like bank deposits, central bank and government reserves, securities, and real estate. For example, if a country’s assets do well, asset income will be high. U.S. assets owned by foreigners are subtracted from asset income.

The top exports of Australia are Iron Ore ($48.2B), Coal Briquettes ($47B), Gold ($29.1B), Petroleum Gas($20.3B) are examples of credit to Australian current account.  Australia was a net importer of Agriculture, forestry and fisheries and Manufactures products from the EU are examples of debits to Australian current account.

B) The financial account measures a country's capital flows regarding international ownership of assets. It provides a record of the capital that enters and leaves the country during a specific time period, like a quarter or a year. The owners of these assets can be government agencies, the central bank, domestic businesses, domestic banks, and local residents.The financial account groups international buying and selling operations with assets, which are types of capital that affect savings and income. Commodities (gold and foreign currency), direct investments, securities (bonds and stocks) and physical capital (factories and machinery) are some of them.The foreign ownership of domestic assets includes privately owned assets and foreign official assets (owned by a foreign government). This subaccount includes operations like deposits owned by foreigners in domestic banks, stocks and bonds owned by foreigners, foreign investment, and local currency owned by foreigners. These operations represent an inflow of capital into the country and are credit operations in the financial account.The foreign assets of domestic ownership can be broken down into government assets, private assets, and central bank reserves. For example, this includes investments made in other countries, deposits at foreign banks, or gold held in foreign reserve banks. The operations of buying foreign assets become a debit in the financial account because they represent capital leaving the country to be invested somewhere else.

C) foreign direct investment (FDI) is defined as an inflow of cash and non cash into the host country from foreign countries. It contributes notable improvement to the economic growth of the developing countries. It influences both tangible and intangible assets such as employment, income, price, production, export, import, balance of payments, and general welfare of the host country. One of the major achievements of FDI inflow is that it may result in importing technology, skills, training, knowledge, capital, physical capital, and other important assets. In addition, the host country may get economic benefits from the spillover effect of multinational enterprises (MNEs). For developing countries, FDI is one of the most effective ways to develop good relationships with the rest of the world. In developing countries, FDI by MNEs plays an important role in their entry into advanced technologies. MNEs are one of the major technologically modern organizations, accounting for an essential sector of the world’s research and development (R&D) investment (Borensztein et al., 1998). Another possible benefit of FDI is capital accumulation. FDI also evidently affects the balance of payments through increasing capital flow, enhancing production, and increase in exports. It helps create prospective commercial surplus and economic growth. Moreover, FDI access by MNEs helps to enhance an international network to increase the possibility for trade. MNEs could contribute to economic growth by