Causes of the CAD (1 Viewer)

[inedible]

What are a few causes for our persistent and large CAD? (I know this is in topic three my school's social science faculty is weird)

 

[nutcracker]

you know you can get this straight out of any textbook?
but in short:
- low national savings
- narrow export base
- cyclical factors like relative economic growth
- capacity constraints
- international competitiveness

 

[twistedrebel]

its topic 3, and nutcracker has summarised it well

 

[moll.]

you know you can get this straight out of any textbook?
but in short:
- low national savings
- narrow export base
- cyclical factors like relative economic growth
- capacity constraints
- international competitiveness

Cyclical factors are an indirect, root cause, not a direct cause of a CAD. It's what a boom/bust does to the world economy that causes the change in CAD, not the boom/bust itself.
Also, what do you mean by international competitiveness?
By far the simplest explanation, however, is that Australia imports expensive, value-added and manufactured items whilst all we've ever really had to export are cheap, primary products (minerals, food, textiles etc). This causes a persistent negetive balance of trade which over time has resulted in the simultaneous importing of billions of dollars in investment that is needed to fund these trade defecits. This in turn has resulted in a further worsening of the CAD as we pay interest and dividends on this financing.
It's a rather vicious cycle that you'll notice we only ever seem to recover from during a world (or local) recession when domestic demand for manufactures drops (people don't run out to buy a new LCD TV every year during a bust) and our exports don't fall by comparatively as much, leaving us with a short-lived trade surplus. [Note: it's not the recession itself which causes this, but instead the associated drop in imports]

 

[nutcracker]

Cyclical factors are an indirect, root cause, not a direct cause of a CAD. It's what a boom/bust does to the world economy that causes the change in CAD, not the boom/bust itself.
Also, what do you mean by international competitiveness?

yup, i realise it's an indirect cause; i just didn't bother expanding on it because as i said, it's all in the textbook.
by international competitiveness i mean the various factors that affect the international competitiveness of a good/service which in turn affects the BOGS - including inflation (which relates to the pace of wage rises compared to improvements in productivity) & exchange rates. (again, i just didn't bother expanding).

 

[Chromatic]

- Deficit Budgets (such as the 1980's)
- High Inflation (such as the 1980's)
- Various "Recessional" (If there is such a word ) Occassions such as the 2008 Financial Crisis, 2001 - 2003 Economic Slowdown, and 1997 Asian Crisis
- Depreciation of the Australian Dollar
- The "Balance of Payments" constraint (look it up)

... those are the main ones really

 

[nutcracker]

- Deficit Budgets (such as the 1980's)
- High Inflation (such as the 1980's)
- Various "Recessional" (If there is such a word ) Occassions such as the 2008 Financial Crisis, 2001 - 2003 Economic Slowdown, and 1997 Asian Crisis
- Depreciation of the Australian Dollar
- The "Balance of Payments" constraint (look it up)

... those are the main ones really

actually, that's not necessarily a bad thing, it has a two-way effect on the CAD. whilst a depreciation leads to a revaluing of debt and hence higher debt servicing costs in the Net Income component of the CAD, it can also improve the international competitiveness of goods and services, leading to an improvement of the BOGS.

 

[Chromatic]

actually, that's not necessarily a bad thing, it has a two-way effect on the CAD. whilst a depreciation leads to a revaluing of debt and hence higher debt servicing costs in the Net Income component of the CAD, it can also improve the international competitiveness of goods and services, leading to an improvement of the BOGS.

You're spot on! I'm just saying it CAN have a bad effect on the CAD because Imports are more expensive... increasing debt servicing costs, increasing capital inflow, and ultimately increasing the CAD

 

[nutcracker]

ahh okay. sorry for the misunderstanding

 

[Chromatic]

ahh okay. sorry for the misunderstanding

No worries I'm actually glad you mentioned its a 2-way effect because I didnt know, now i can mention that in future essays

 

[nutcracker]

No worries I'm actually glad you mentioned its a 2-way effect because I didnt know, now i can mention that in future essays

lol awesome x)
waitt, i didn't actually read part of your previous response properly -> when you said that it makes imports more expensive, that's true but theoretically, it shouldn't affect the CAD negatively because when domestic goods are cheaper relative to imports, consumers are more likely to purchase domestic goods, hence improving the CAD through lowered import expenditure. (the theory that the trade balance initially deteriorates then improves under a depreciation follows the 'J Curve' theory which is now rather out-dated because with new communication technology and the like, things like contracts can be changed instantaneously when there are unfavourable exchange rate movements).

 

[Chromatic]

lol awesome x)
waitt, i didn't actually read part of your previous response properly -> when you said that it makes imports more expensive, that's true but theoretically, it shouldn't affect the CAD negatively because when domestic goods are cheaper relative to imports, consumers are more likely to purchase domestic goods, hence improving the CAD through lowered import expenditure. (the theory that the trade balance initially deteriorates then improves under a depreciation follows the 'J Curve' theory which is now rather out-dated because with new communication technology and the like, things like contracts can be changed instantaneously when there are unfavourable exchange rate movements).

There are still necessary imports which will need to be bought no matter what, and there is probably quite a bit of them at that