Measurement and Performance

Economists keep track of the balance on current account, and in general the pattern is relatively predictable. You can see from the graph below that when represented as a percentage of GDP the CAD follows a cyclical pattern. There is a very good reason for this occurrence.

Consider this; when the balance on current account expands, it suggests that we are putting more Australian dollars on to the foreign exchange market in order to purchase imports. This will increase the supply of our currency on the international market. An increase in supply will result in a depreciation of the dollar.

As the dollar depreciates, our exports will become more attractive. It will also mean that it is more expensive for us to purchase imported goods and services. During this period, we would expect to see the balance on current account improve. However, this situation can’t last....

With more people purchasing our exports, the demand for the Australian dollar will increase again. This will cause the currency to appreciate, and so we will see exports fall and imports increase once again. This cycle is continued, and the very obvious trend that we see above is the result.

There are, as always, exceptions to this pattern. For example, even a brief analysis will show you that the Australian dollar appreciated in 2005/06, and at the same time the size of the CAD expanded. Based on the explanation above, it is reasonable for you to expect that the dollar should have depreciated during this period. This apparent contradiction was able to occur because of the ease with which we found funds for the financial account during this period. As a result, the increasing demand for the Australia dollar at this time outweighed the increase in supply due to the higher demand for imports. The CAD expanded, and the dollar appreciated at the same time.

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