QCE Economics - Unit 3 - International trade
Balance of Payments and Foreign Investment | QCE Economics
Learn the current account, capital and financial account, balance of trade, foreign debt and foreign investment for QCE Economics Unit 3.
Updated 2026-05-18 - 4 min read
QCAA official coverage - Economics 2025 v1.4
Exact syllabus points covered
- Comprehend and describe key concepts using economic terminology, including balance of payments, balance of trade, capital and financial account, current account deficit, current account, foreign investment, foreign debt and external stability.
- Comprehend, explain and classify a country's international transactions into current and capital account statements.
- Comprehend and explain the significance of foreign investment to Australian economic development, e.g. to finance mining booms.
- Select data and information to analyse and evaluate patterns of Australia's balance of payments including the current account and balance of trade over the last 5 or 10 years, including the percentage change.
- Select data and information to analyse and evaluate cyclical and structural causes and effects of Australian current and capital account trends.
- Select data and information to analyse and evaluate the significance of movements within the balance of payments on the domestic economy, from a variety of perspectives, e.g. import and export suppliers, and buyers.
- Select data and information to analyse and evaluate the significance of Australia's foreign debt position and foreign investment longitudinally.
The balance of payments records transactions between residents of Australia and the rest of the world over a period of time. It is a structured way to answer: what money is flowing in, what money is flowing out, and what does that reveal about external stability?
The two main accounts
The balance of payments has two major sections.
| Account | What it records | Examples | |---|---|---| | Current account | Trade in goods and services, income flows and transfers | iron ore exports, imported vehicles, dividends paid to foreign investors, remittances | | Capital and financial account | Capital transfers and financial investment flows | foreign direct investment, portfolio investment, loans, reserve asset changes |
For QCE, the current account and the capital and financial account are usually analysed together because one side often helps finance the other.
Current account
The current account includes:
- goods exports and imports
- services exports and imports
- primary income, such as wages, interest, rent, profit and dividends
- secondary income, such as transfers and aid
The balance of trade is exports minus imports of goods and services:
$ \text{Balance of trade}=X-M $
A trade surplus occurs when exports exceed imports. A trade deficit occurs when imports exceed exports.
The current account balance is broader than the balance of trade because it also includes income and transfers.
Capital and financial account
The capital and financial account records investment and financial flows. Foreign investment can be:
- direct investment, where an investor has a significant influence over a business
- portfolio investment, such as shares and bonds
- loans and deposits
- reserve asset transactions
Foreign investment can support Australian development by financing projects that domestic saving alone may not fund. Mining booms, infrastructure and business expansion often require large capital inflows.
Foreign debt and external stability
Foreign debt is money owed by Australian residents to overseas lenders. It matters for external stability because servicing debt requires interest payments, and foreign-currency debt can become more expensive if the AUD depreciates.
Foreign liabilities are not automatically bad. If foreign capital funds productive investment, future output and income may rise. The risk is higher when borrowing funds consumption, unproductive assets or projects that do not generate enough future income.
Cyclical and structural causes
Balance of payments trends can be cyclical or structural.
| Type | Meaning | Example | |---|---|---| | Cyclical | Caused by the stage of the economic cycle | During strong domestic growth, imports may rise because households and firms spend more | | Structural | Caused by long-term features of the economy | Persistent income deficits because foreign ownership of Australian assets leads to dividend and interest payments overseas |
Terms of trade movements are also important. If export prices rise relative to import prices, export receipts can improve the trade balance. If commodity prices fall, the trade balance can weaken even if export volumes do not change much.
Evaluating balance of payments movements
Always ask: who is affected?
- Exporters benefit from strong overseas demand and favourable exchange rates.
- Importers benefit from a stronger AUD and cheaper overseas inputs.
- Consumers may benefit from cheaper imports.
- Domestic firms may face stronger competition from imports.
- Governments may worry about external stability if foreign debt servicing becomes difficult.